Does your business need umbrella coverage? (Image via FreeFoto)

When it comes to buying the insurance you need to protect your small business, the wide range of options can be confusing and overwhelming.  There are so many different types of policies and different level of coverage that it isn’t always easy to know if you have all the coverage you need, if you are underinsured, or if you have policies that provide coverage for risks you don’t face.  One of the most common questions small business owners ask about the coverage they need is about umbrella coverage and whether or not they need it.

Surprisingly, although it is the type of insurance almost everyone and almost every business should have, it is not as well understood as the other common coverage types like auto, liability, and worker’s comp.  This can have serious, long lasting consequences for business owners of all types.  To understand why Umbrella coverage is so critical to small businesses, you need to first understand what it is and what it does.

Umbrella insurance is a kind of liability coverage.  These policies extend, like an umbrella, over most of your other liability policies like your business auto and your general liability.  If there is a claim that breaches the upper limit of one of your base policies, the Umbrella policy provides coverage over and above that limit.  For example, if you or one of your employees were at fault in an auto accident where your company’s car caused damage in excess of the $50,000 property damage limit on your business auto policy, your company would be responsible for paying every dollar over that limit out of pocket.  The insurance company pays $50,000, you pay the rest.   Now, if your business has a $5M Umbrella policy, the insurance company for your base policy would pay for any damages up to $50,000 and then the Umbrella carrier would pay for any damages from $50,001 to $5M.  To break this down, having that Umbrella policy in place could mean the difference between your company paying nothing and your company being responsible for millions of dollars of damages.

When looked at from this perspective, it is clear why many businesses must have an Umbrella policy in place to protect the viability of the business.  In order to determine if your business needs this type of coverage, here are some things to consider.

If your business requires you or any employee to operate a motor vehicle as part of doing business, you must have an umbrella policy over your business auto policy.  Car accidents can lead to incredibly expensive liability lawsuits and even minor accidents can result in medical bills that exceed your business auto policy limits.  Don’t take the risk; if your business has auto coverage, you need an umbrella policy.

If your business has assets, you need umbrella coverage.  It doesn’t take much these days for someone to file a lawsuit and even if you win, the cost of defending yourself can wipe out your available cash and even your businesses assets.  If you lose, the situation can quickly compromise your entire business.  Umbrella coverage protects you from the high costs associated with getting sued.

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What impact does your credit score have on what you pay for insurance? (image via Flickr)

In a nutshell, yes.  Insurance companies use a variety of factors to develop a risk profile for you when they are underwriting your insurance policy and determining your rate.  One of these factors may be your personal credit history and not because they are weighing the likelihood that you will pay for your policy.

Insurance rates are based in part on how much risk the insurance company believes they will be taking on by underwriting your policy.  In order to determine that risk level, they rely on real world statistics and actuarial tables built from those statistics.  By looking at large amounts of data, the insurance industry can make certain assumptions about you based on specific characteristics like your gender, age, marital status, etc.  This is how insurance companies determine that teenage boys are more likely to be in accidents than teenage girls and that married people are less likely to file an insurance claim than single people.

When it comes to your credit, the statistics can tell the insurance company some important things about how much of a risk you are.  The industry has demonstrated that there is a very strong relationship between credit history and risk level meaning that just looking at a person’s credit history can be used as an objective measurement of their insurance risk.  The bottom line is that people who pay their bills on time and are good stewards of their finances are more careful and conscientious with their cars and homes, which makes them a lower risk from an insurance perspective.

This means that the insurance company is using your credit history in a very different way than your bank might.  When your bank looks at your credit, they are assessing your income, assets, debts, and financial history to determine how likely it is that you actually meet the financial obligation of a loan or line of credit.  They are looking at your individual details to make a decision about your ability to pay.  The insurance company is looking at your credit as an objective way to assess how risky you are from an insurance standpoint.  They are looking at your individual details as compared to other people.  The bank cares about where you work, how long you have been there, how much you make, and how much you owe.  The insurance company only cares about how your credit history informs your risk profile based on the actuarial data.

Using information like your credit history to determine your insurance rates is one way that insurance companies guarantee that they are offering their products at fair prices.  The use of statistics and actuarial information in determining risk helps remove any subjective decision making from the process.  Insurance companies can offer better prices to a broader range of consumers by using factors like their credit history.

The score used by the insurance company however, is different than your standard credit score used by banks and other financial institutions.  In order to determine your insurance score, the credit bureaus use a formula that looks at things like the number of accounts you have, how good you have been at paying your bills, how stable your finances are, any negative factors like liens and bankruptcies, and how much you currently owe.  Unlike your regular credit score, occasional late payments have less of an impact on your insurance score than patterns of financial irresponsibility.

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