Excess and umbrella liability are common terms in the general liability, commercial auto, and employer’s liability insurance industries. Because the two policy types can fit perfectly into different branches of the insurance industry, many people confused them one for another. While they are sometimes used interchangeably, a closer look at the two will clearly show that excess and umbrella policies are not one or the same.
Excess Liability Insurance Defined
Excess liability, in its purest form, provides coverage above the limits of an underlying liability policy. Its primary purpose is to add some layers of protection if the underlying policy is exhausted. If for instance you have an insurance policy that only covers $500,000 damages, and there is a lawsuit where you are liable of $700,000 loss, you will be allowed to file claims for the excess liability of the remaining $200,000.
Umbrella Insurance Defined
Umbrella insurance is a type of policy that provides coverage beyond and above the standard liability limits. It serves almost the same purpose as excess liability insurance, but with some more inclusions.
To enjoy an umbrella insurance coverage beyond the underlying policy, you will need to pay self-insured retention (SIR). A SIR is the dollar amount agreed upon in liability insurance which you must pay before an insurance company responds to the loss. Once you have paid to the tune of the SIR, your insurer will take on the rest.
What is an Underlying Policy By the Way?
The underlying policy is the insurance coverage set at the initial stage of a policy to protect against specified risks and losses. Secondary policy provisions like excess liability and umbrella policy come into play when the damage is more than the established coverage.
What Are the Key Differences Between Excess and Umbrella Policies?
The major difference between the two is as follows:
It provides you with additional limits to the underlying policy without affecting the actual terms of the contract. For example, if your excess liability is for general liability insurance, you cannot use it for another policy. Keep in mind though that this may not be the case if a policy includes additional exclusions.
On the broader (plus side, if you will), umbrella insurance can provide additional coverage in cases outside the scope of the underlying policy.
Why You Need an Umbrella or Excess Liability Insurance
With the increased rate of lawsuits emanating from liability and damages, there has not been a time when extra coverage is more needed. Lawyers are now charging hundreds of dollars per hour. Furthermore, there are financial responsibility laws that hold people accountable for damages and injuries caused by their businesses or properties, in almost all the 50 states. Most basic insurance policies have limits. Without extra coverage, your business could experience a bankruptcy as a result of loss from just one lawsuit. You may also lose your personal assets along the line. It is, therefore, a necessity to have some levels of buffers in your risk management approach.