Commercial Umbrella vs Excess Liability Insurance Explained

commercial umbrella vs excess liability

What’s the difference between a commercial umbrella vs excess liability insurance policy? Which one is better? How are they different and how are they similar? I’m going to explain that, coming right up.

Hi, I’m Gordon Coyle, welcome back to my channel where I discuss all things related to insurance and risk on the minds of business owners.

At the end of this video and post, I’m going to give some common mistakes business owners and insurance agents make when it comes to both umbrella and excess insurance policies.

So you may be looking at proposals of insurance and one includes excess liability insurance and another one includes an umbrella liability quote, and you’re wondering what’s the difference? Is one better than the other?

Let’s start off defining broadly the two coverage forms.

What is Commercial Umbrella Insurance?

Commercial Umbrella Insurance is a policy form that provides increased limits of liability protection over and above a schedule of underlying insurance policies and can provide broader protection than what’s covered in those underlying policies.

An umbrella policy is designed to pick up protection where the underlying liability policy leaves off and fill in some gaps and limitations of the underlying policies.

What is Commercial Excess Insurance?

A commercial excess policy also provides increased limits of liability protection over one or more underlying policy forms.

In most cases, the excess policy will “follow” the underlying policy form.

If it’s not covered in the underlying policy it’s not covered in the excess policy.

Further, the excess policy is generally not as broad as an umbrella policy.

What is Underlying Insurance?

I’ve used the term underlying or underlying insurance several times so far, so I think it makes sense to describe that as well.

Underlying insurance is the actual policies that are described in the umbrella or excess policy known as the schedule of the underlying insurance.

For example, a small business owner may have a BOP policy that includes general liability, and non-owned and hired auto liability plus they have a workers’ compensation policy which provides for something called employers liability.

The schedule of underlying insurance in this case will note the general liability, the non-owned auto liability, and the employer’s liability with the policy numbers and dates.

A critical element of both Umbrella and Excess policies is that if the underlying insurance schedule omits a policy that should be on the schedule, there’s going to be a problem and I’ll discuss that further in a moment.

How is Commercial Umbrella vs Excess Liability Policies Different?

In a nutshell, commercial excess insurance provides additional limits to an underlying policy or policies, while an umbrella insurance policy can expand coverage to include claims and losses outside the scope of the underlying policies.

Which is better? An excess policy or umbrella policy?

Generally speaking, an umbrella policy is a better choice for most business owners, but there are times when an excess policy is the only coverage form available to provide additional limits of protection.

In fact, a business may have both an excess and an umbrella policy in its coverage portfolio.

This happens when standard coverages such as general liability, auto liability, and employers liability exist and an umbrella policy is written over those policies, but there’s also say a management or professional policy – known as D&O or E&O, and the business needs higher limits over those – “non-standard” types of policy forms and an excess liability policy is written over them.

How Does an Umbrella or Excess Policy Work?

As I’ve mentioned, both policies in their most basic sense provide an extra layer or limit of liability protection over the policies found in the underlying policy schedule.

Let’s use an example to illustrate this. If your company had a customer slip and fall inside your store, office, or premises and badly injured themselves and sued for $1.5 million and won, your general liability policy would pay out the claim first, and say that policy had a limit of $1 million.

The umbrella or excess policy would kick in and pay the $500,000 shortfall.

Who Needs Excess or Umbrella Liability Protection?

In my opinion, all business owners should consider purchasing excess or umbrella protection – it’s typically very affordable and provides what I call “sleep insurance” – knowing you’ve got extra protection helps you sleep at night.

The other thing I want to mention is that many insurance agents will often only quote $1,000,000 limits on an umbrella policy.

If you have a lot to lose in a lawsuit, you should be looking at higher limits of protection.

In fact, on your renewals you should be asking to see options for $3, $5, or even $10 million, depending on the size of your business.

Common Mistakes When It Comes To Umbrella & Excess Policies

There are several mistakes that I see when we audit insurance programs for prospective customers when it comes to Umbrella and Excess Policies.

The first is when it comes to autos and a couple of things happen here.

When a business elects to insure their autos with a different insurer than the one that covers all their other policies, because it’s cheaper, it’s common for the insurer providing the business owners, workers comp, and umbrella to NOT include auto in the underlying schedule of policies.

Since the primary insurer doesn’t control the auto policy they don’t know if the minimum required limits of liability exist or who the drivers are so they often refuse to provide umbrella protection over the auto liability exposure and this is a big problem as the auto exposure is usually where big liability claims happen.

The second situation and this is a mistake made by insurance agents, is that the business policies include general liability, non-owned and hired auto liability, and employers liability, and they write an umbrella policy over all of those coverages.

That’s fine, except the business owner has a private vehicle leased by and registered to the business but it’s insured on their personal auto policy. Since it’s an owned vehicle it’s not covered by the non-owned coverage extension in the business owner’s policy and therefore not covered by the umbrella policy.

Finally, we commonly see certain coverages not included in the underlying schedule of policies that should be included.

This is just sloppy behavior by agents and brokers and really shouldn’t happen.

Bottom Line

Here’s the bottom line, Excess or Umbrella liability insurance policies are both similar but also very different, and structuring extra protection over underlying policies is critically important.

If you’re looking for a team of dedicated experts to work with you on your business insurance, I’d love an opportunity to chat and see if we’d be a good fit for you and your business.

Thanks!

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