Before we can get into why we need umbrella coverage, it's probably a good idea to take a quick look at what it is and what it does.

An umbrella policy is a liability policy that places a layer of insurance on top of your current liability coverages  including  General Liability,  Auto Liability, Employer Liability etc.  

Liability policies commonly provide 1,000,000 of coverage for " Bodily Injury or Property damage " arising from your operations, your use of a motor vehicle, your products etc.

The question of whether or not you need umbrella coverage centers around whether you think one million is enough to protect your assets from the type of claims that your business is likely to generate.

$1,000,000 may seem like a lot of money but when you consider the consequences of an auto accident involving damage to a building with people in it for example. 1,000,000 dollars will be consumed very quickly.

Two very important  questions are these: do you have assets, and or do you have a future within which you expect to earn income?  The value of both will be added to your liability insurance in the event of a substantial claim.

When purchasing insurance it’s good to have some governing principles to use in order to avoid emotional or uninformed decisions.
To establish these principles I think it will help to start with a brief explanation of how insurance premiums are determined.
Insurance providers first look at what they call pure loss costs. This is just what it sounds like; the cost to pay for the event being insured against, i.e. house fires. So we add up the cost of all the house fires in a given area, divide that by the total number of houses and we end up with a “fire damage” cost per house. To that figure we add an administrative load that includes the cost to pay for adjusters to settle the claims, the underwriters who evaluate each risk, the rent on the insurance company offices, commission for the agent, a profit for the shareholders and finally we get the premium. That’s the idea, albeit grossly oversimplified.
Let’s look at a small thing, for example a ten dollar, fancy schmancy Starbucks, keep-it-warm-for-a-long-time-in-the-car coffee mug. To rate that, the Insurance company is going to try to estimate how many of those mugs are in a given area and how many do we lose – the pure loss rate per cup . Then, we add the cost to get an adjuster to evaluate claims, pay the rent, the agent and the shareholders and by the time we’re done we’ve got an annual premium of $197.49 per year to insure a ten dollar cup. Not such a good deal.
In short, over time its best to insure only those exposures that you can’t (or would rather not) handle on your own. The premium for any risk that you transfer to an insurance company is going to include all of the items I mentioned earlier in addition to the pure loss cost. Obviously if you only pay the pure loss cost you save money. Each person or family has a different capacity or willingness to absorb the pure loss costs that they will incur. Consider your finances and attitudes toward uncertainty and establish your own personal threshold for risk before you buy insurance.
You’ll be glad you did.