An umbrella policy sits above the liability policies a business already holds and pays once their limits are exhausted.
What it sits above
Usually general liability, commercial auto, and the employer's liability part of workers compensation.
It does not cover anything those policies exclude. It extends limits; it does not widen scope. A risk excluded underneath is excluded above.
Why it is bought
Primary limits are set at a level that covers the ordinary claim. The claim that ends a business is not the ordinary one: a serious road accident involving a company vehicle, or an injury to a member of the public with lasting consequences.
Those reach figures well beyond a standard limit, and the amount above the limit is owed by the business itself.
Cost relative to limits
Umbrella cover is generally inexpensive per unit of limit, because it only pays after the underlying policy is exhausted, which is rare.
Where it is required
Larger commercial customers and general contractors frequently require a minimum total limit before awarding work, and an umbrella is the usual way that requirement is met.
What it does not do
Protect personal assets where the business structure does not. That is a function of entity type, and insurance does not substitute for it.