There are two insurance-related questions every business owner and executive should consider on an annual basis:
- Are our policy limits high enough to protect us against a major claim?
- Do our policies cover all of our risk exposures or are there gaps in coverage?
The truth of the matter is that there are countless circumstances that could cause your company to “max out” its primary commercial insurance coverages – leaving you responsible for any remaining costs. This is where commercial umbrella liability insurance or excess liability insurance comes into play.
Commercial Umbrella Liability vs Excess Liability Insurance
While the terms are often (mistakenly) used interchangeably, commercial umbrella liability and excess liability are two related but distinct types of policies. Both extend the underlying policy limits, but the details of the coverage can have significant differences.
Commercial Umbrella Liability Insurance often expands the underlying policy’s limits and scope. In other words, it can broaden the coverage, fill in gaps left by the underlying policies, and increase the amount of financial protection offered by your other policies.
Excess Liability Insurance increases the underlying policy limits but does not expand the coverage (in fact, it’s more common for it to narrow the scope with additional exclusions). Excess liability’s purpose is to expand the maximum amount of coverage provided in the underlying policy – plain and simple.
Here’s an example:
You carefully crafted your commercial auto insurance to cover both your fleet and non-owned vehicles – since your employees often drive their own cars while conducting company business. To be safe, you’re also considering additional coverage with commercial umbrella liability or excess liability insurance.
Here are some scenarios you’re considering. An employee is at-fault in a major accident where multiple people were injured, including a surgeon who may not be able to work again. The settlement is guaranteed to exceed your auto insurance policy limits. In this case, either an umbrella or excess liability policy could provide the additional coverage you need.
But – what would happen if that same accident happened during a business trip overseas? If your auto policy doesn’t cover international claims, then an excess liability policy wouldn’t either. However, a commercial umbrella liability policy might (depending on the policy’s terms).
The Relationship with Underlying Policies
The major difference between the two types of coverage is based on their relationship with the underlying insurance. A commercial umbrella liability policy is based on its own policy form – as opposed to simply following the form(s) of the underlying policy (like excess liability insurance). In other words, umbrella insurance is its own policy and will have its own coverage details, terms, and exclusions. Excess liability solely increases the original policy’s maximum limits, and any coverage disputes are handled with the primary insurance provider.
As its own policy, commercial umbrella liability insurance has its own deductible – called the self-insured retention (SIR) – which, when planned correctly, coincides with the maximum limit of the underlying policy.
Consider this example:
Your company has a general liability policy with a $1M limit, and you purchase a $3M umbrella policy with a $1M SIR (deductible).
A customer gets severely injured because of your work, and the medical bills, settlement, and legal costs add up to $1.5M. Your primary insurance pays the first $1M – satisfying the umbrella’s SIR – and then the umbrella policy pays the remaining $500,000. Nice and tidy.
However, if (after purchasing your umbrella policy) you decided to lower your general liability coverage to $750,000 in an effort to save on monthly premiums, you’d be facing a different situation. The general liability insurance would handle the first $750,000 – your new policy limit – but that doesn’t satisfy the umbrella policy’s $1M SIR. You’d be responsible for paying that $250,000 difference before the umbrella insurance provider would pay out the final $500,000.
Commercial umbrella liability insurance is often more expensive than excess liability insurance, so it’s important to weigh your actual risk exposures with the necessary levels of coverage. It’s important to speak with an expert.
What’s Best: Commercial Umbrella Liability or Excess Liability Coverage?
The best-suited coverage depends on your real needs. At Swarts, Manning & Associates, we provide a unique perspective on all of your commercial coverage options, and we help to determine which carrier best fits your business needs. We strive to find you the broadest coverage at the best available rate. Give us a call to get started: (833) 878-2820.
Each week, Swarts, Manning & Associates covers relevant topics for your business. Stay tuned to hear more discussions about managing your insurance and industry-specific tips.
