Excess Liability Policies

The Excess Liability policy has many similarities to the Umbrella policy. However, the differences are in breadth of coverage, pricing, and policy provisions. Excess Liability policies can be written for both personal and commercial risks, but this article focuses more on the commercial application.

An Excess Liability (EL) policy works in a similar fashion as an Umbrella policy; it provides an extra tier of liability coverage for large losses. The EL policy is typically written for a combined occurrence/aggregate limit of $1,000,000, and it would step in after an underlying liability policy limit is maxed out.

Example:

Let's imagine your business has a General Liability limit of $1mil occurrence, $2mil aggregate. Your Excess Liability policy has a combined occurrence/aggregate limit of $1mil. If your company sustained a $1.5mil General Liability loss, your General Liability policy would cover the first $1mil of the loss, and then your Excess Liability would cover the $.5mil left over. If any other losses happened during the policy term, the General Liability policy would have up to $1mil of coverage left, and the Excess Liability would have $.5mil left to go over the General Liability policy, or any other liability policy. (A similar situation could be played out with automobile liability coverage.)

What makes the Excess Liability policy different from the Umbrella policy?

The main difference between an Umbrella policy and an Excess Liability policy is in the breadth of coverage of each. The Excess Liability policy typically follows the wording of the underlying liability policy exactly, while the Umbrella policy has its own coverages and exclusions. So for an Excess Liability policy, if the General Liability policy excludes claims of mental anguish, so does the EL policy (this is called a 'follow-form' Excess Liability policy). Typically, an Umbrella policy would cover claims involving mental trauma on a first-dollar basis (as a standard General Liability policy typically only covers direct bodily injury and damage to property of others). 

To summarize, the Excess Liability policy literally just adds X amount of liability dollars above your underlying liability policies, while the Umbrella policy both adds a layer of liability protection and broadens coverage. Because of this, underwriting standards will be higher for Umbrella policies than Excess Liability policies, and an Excess Liability policy will be cheaper than an Umbrella policy. 

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

Umbrella Policies: Safety for a Rainy Day

What is an Umbrella? Can both a business and an individual have an umbrella? What all does it do? Why should I consider getting one? How expensive is it?

What is an Umbrella Policy?

The Umbrella Policy is very straight-forwardly named, as it covers the underlying policies. Most Umbrella policies can go over all of your underlying lines of liability coverages. By purchasing an Umbrella policy, you are giving yourself an extra layer of liability coverage in the event of a large loss. It is a very important risk management tool for both businesses and individuals, as the extra coverage picks up where the General Liability, Auto policy, etc. stops, often for no additional deductible/retention. For businesses, they would purchase a Commercial Umbrella policy, and for an individual/household, they would purchase a Personal Umbrella policy. Let’s look at an example with ABC Company’s insurance to illustrate my point:

Let’s say ABC Company has a General Liability policy of $1 million per occurrence, $2 million aggregate, and they also have a Commercial Umbrella policy on top with $1 million coverage. Next, imagine they have a General Liability loss of $1.5 million. Their General Liability will only pay $1 million of that (because of the $1 million per occurrence) but their umbrella steps in and covers the excess $.5 million. In the end, every penny of the loss was paid by ABC Company’s insurance. However, in the absence of that Umbrella policy, they would have had to cover the $.5 million out of pocket.

A liability loss in the millions is not something that only happens to big businesses though. Losses of this magnitude happen to businesses of all sizes, and even happens to households. Also, the biggest risk you take all day will most likely be getting in a car. Huge liability claims come out of auto accidents, and both the Commercial and Personal Umbrella policies can go over your Auto policy as well. A Commercial Umbrella policy can keep you and your employees safe while driving too. Back to the example with ABC Company, most people/businesses could not easily cover that $.5 million on their own. In these situations, it’s always better to have too much insurance, instead of not enough!

Do the Commercial and Personal Umbrellas cover all underlying policies?

No, there are certain situations that the Personal and Commercial Umbrellas won’t cover everything. Sometimes a separate, special Umbrella will need to be purchased to go over certain liabilities, such as a Professional Umbrella policy to cover a business’s Professional Liability. This Umbrella policy was designed to cover the added perils that professionals face, providing extended coverage for their endeavors. Also, Workers' Compensation cannot be covered by an Umbrella policy. Your agent should know when an Umbrella policy is necessary.

Do the Umbrella policies cover anything extra?

Yes, both the Commercial and Personal Umbrella policies broaden coverage. The broadened coverage usually has to do with policy definitions. For example, the Cincinnati Insurance Companies' Commercial Umbrella policy extends the term 'bodily injury' to include "disability, humiliation, shock, fright, mental anguish or mental injury, whether or not they're a result of physical injury." The General Liability policy only covers direct physical injuries. Umbrella policies can also fully reimburse your lost income from appearing in court or gathering information after a claim, where your underlying policies might only provide a fixed amount of coverage. It may also cover supplementary payments (pre-judgement interest, post-judgement interest, bail bonds, etc.) entirely or at higher amounts than underlying policies. Ask your agent for full details.

So What Does an Umbrella Policy Cost?

While each situation is different, a general figure to go by is approximately $250 a year for a Personal Umbrella policy, and $500 a year for a Commercial Umbrella Policy for one million dollars of coverage. Although that might seem like a lot, if the situation arises where you need it, you'll definitely think of it as money well spent!

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.