Does umbrella insurance cover product liability claims?

Complete Guide to Product Liability Coverage Under Commercial Umbrella Insurance

Why This Question Matters for Colorado and Utah Residents

For businesses manufacturing, distributing, or selling products in Colorado and Utah, product liability risk is real and rising. With average settlements exceeding $4.5 million locally, even businesses with robust product liability policies in place can be left exposed if claims surpass those underlying policy limits. Recent years have also seen more severe weather events (like catastrophic hailstorms in the Front Range) and complex litigation, further elevating the risks for local companies. Understanding whether umbrella coverage truly closes these gaps is essential for:

• Major Financial Protection: Average product liability settlements in this region often exceed standard policy limits, so umbrella coverage may mean the difference between recovery and business failure.
• Contractual Compliance: Many Colorado and Utah client contracts now demand higher liability limits, sometimes beyond what base product liability policies provide.
• Peace of Mind vs. Real-World Gaps: Only 38% of small businesses in Colorado carry umbrella policies—leaving many exposed without realizing their true level of risk.

What Most People Get Wrong

Many assume that umbrella insurance always covers any type of claim once the underlying product liability limit is exhausted. However, most commercial umbrella policies work only when there’s a primary policy in place and in force—if your underlying product liability excludes certain events, your umbrella often will, too. Additionally, some umbrella policies in Colorado and Utah have “drop-down” limitations—meaning they may not fill in gaps if a key exclusion exists in your base policy (for example, for product recall costs, cyber-related losses, or knowingly defective products).

Some business owners neglect to increase their umbrella limits as their operations grow or expand into new territories or markets, assuming their original coverage will adapt automatically. This misalignment can leave both business and personal assets at risk if a major claim arises.

The Complete Picture

If your business manufactures, sells, or distributes products, an umbrella insurance policy is designed to extend the coverage limits of your product liability insurance. For example, if a defective product led to injuries and your underlying policy had a $2M limit, but damages and defense costs totaled $4.5M (a common settlement amount in Colorado/Utah), the umbrella policy would respond to the portion above your primary policy (subject to policy terms and exclusions).

Be sure to review both your base product liability terms and the umbrella policy language. Complex claims—like those involving multiple parties, cross-jurisdictional lawsuits, or incidents involving products distributed across state lines—are increasingly common. It's also important to note that umbrella policies generally do not cover product recall costs or intentional violations, and can have gaps if underlying coverages are missing or not properly aligned. Work closely with a knowledgeable advisor to make sure your umbrella truly closes the coverage gap for your business, especially given current regional regulatory requirements and litigation trends.

Making the Right Decision for Colorado and Utah Residents

Question 1: Does my umbrella policy match my current business risk and size?

As your business grows or shifts, your underlying liability—and your coverage needs—can change significantly. Think through:

• Have your revenues, customer locations (CO, UT, multi-state), or product lines expanded in the last year?
• Does your current product liability and umbrella structure reflect your total exposure, or just your starting point?

Question 2: Have I reviewed my exclusions and drop-down coverage with an expert?

Not every umbrella fills every gap. Product recalls and certain technology-related claims (e.g., cyber liability, Internet of Things products) often require separate or endorsed coverage, especially in highly litigious counties like Denver, Larimer, or Salt Lake.

Question 3: Am I contractually obliged to carry higher limits?

Many contracts, leases, or partnerships in Colorado and Utah specify minimum umbrella or excess liability limits (often $2M–$5M+). Failure to comply can cost you business or make you ineligible to bid on larger jobs. Review all key agreements and get written confirmation of required coverages.