Purpose of Umbrella Policies
An umbrella insurance policy is so named because it acts as an "umbrella," covering other policies with additional coverage. Personal umbrella policies add excess liability coverage in $1 million increments to the existing limits of an auto and home insurance policy. In other words, an auto policy with $500,000 liability coverage would have a total $1.5 million limit with a $1 million umbrella policy. Commercial umbrellas do the same with business auto and commercial property policies.
Multiple Covered Items
Though a personal umbrella policy typically requires at least one auto and home insurance policy underneath it, many people own more than one car or multiple homes. Each additional auto or home policy that exists raises the cost of the umbrella policy because the excess liability applies equally to all the underlying policies. This same principle applies to commercial umbrellas and additional business auto or property policies. Typically, insurers insist that all policies a person or business owns must be included under an umbrella policy.
Normally, a distinct line exists between personal and business umbrella insurance policies. A commercial umbrella cannot have a personal auto policy underneath it, nor can a personal umbrella protect a commercial auto. However, small rental properties are the exception. If you own multiple homes and rent the extra ones to others for profit, they are technically used for business but can be included under a personal umbrella policy. In this way, a personal umbrella can be partially used for business purposes.
Tax law at the time of publication allows insurance premiums used for business purposes to be deducted from taxable income if the expense is "ordinary and necessary." Because landlords often have assets of high value as a result of owning multiple properties and umbrella insurance is helpful in protecting those assets, the cost of the insurance is often deductible. However, tax law requires that expenses only partially for business use can be only partially deducted. If half the items covered by your umbrella policy are rental properties, only half the premiums are deductible. Commercial umbrellas may be entirely tax-deductible.