If you’re confused about the difference between umbrella and excess liability insurance, you’re not alone. Both umbrella and excess liability coverage can be applied in certain circumstances to General Liability insurance, employer’s liability insurance, and commercial auto insurance when the limits of a policy have been reached.
As such, these terms are often used interchangeably, even by insurance carriers themselves—but while they are closely linked, they are not one and the same.
To help you untangle this web, we’ve laid out a guide to what these terms refer to, how the policies work in practice, and how all of this relates back to your business insurance coverage. While this should provide a general framework for selecting and interpreting your coverage, it is also vitally important that you read carefully through the provisions of your umbrella or excess liability policy to determine how your coverage works in practice.
What is Excess Liability Insurance?
It’s all in the name: an excess liability insurance policy provides coverage that exceeds the limits of an underlying liability policy or policies.
For example, if you have a General Liability policy for $2 million, you might opt to take out an excess liability policy for an additional $500,000 or $1 million. This coverage would kick in in the event that a claim was made for damages exceeding the $2 million covered by your primary policy.
It’s important to note that excess liability coverage can sit over more than one underlying policy. For example, an excess policy could sit over both your Professional Liability and General Liability coverage. In addition, excess liability policies may exactly match the terms of the underlying policies, or in some cases they can be more restrictive and include more exclusions than the policies they sit on top of.
As a guiding principle, it is a good idea to assess the risks associated with each aspect of your business and cover your bases accordingly.
What is Umbrella Insurance?
Are you with us so far? Good, because this is where it gets a little tricky.
Umbrella insurance is not synonymous with excess liability insurance, but it is a type of excess insurance and functions in almost the same way, with a few notable exceptions.
An umbrella liability policy is designed to provide protection for small business owners against catastrophic losses. Like excess liability insurance, umbrella insurance can be applied to multiple underlying liability policies (i.e. General Liability, Professional Liability, and worker’s comp). It can also drop down when one of these underlying policy’s aggregate limits are exhausted, and in some cases it can cover claims that are not included in the underlying policies at all.
In the latter scenario, you would be required to pay a self-insured retention (SIR), which is essentially the same concept as a deductible for health insurance: this is the amount you would be responsible for paying out-of-pocket before the insurance company responds to the loss. However, unlike a deductible, SIRs usually do not reduce the limits of insurance. For example, if you have an umbrella policy with a $50,000 SIR and a $1 million limit, the entire limit would sit on top of the SIR and not be reduced.
The Key Differences Between Excess and Umbrella Insurance
To summarize, here are the key differences between excess and umbrella liability that you should be aware of:
- Excess liability provides additional limits to your underlying policy, but does not affect the actual terms of your policy (except in the case that it includes additional exclusions).
- By contrast, umbrella insurance can provide broader coverage than that afforded by your underlying policy.
What Does it Mean to Stack Insurance Limits?
An exploration of excess and umbrella liability insurance would be incomplete without addressing the related concept of stacking limits.
As in the examples above, stacked limits come into play when a business owner is insured with multiple policies. When damage is incurred over two or more policy periods, stacking is the practice of applying the policy limit of each policy to the loss.
However, many insurers include anti-stacking language in their policies to prevent stacking of coverage for insureds with multiple policies. For example, the policies arranged by Thimble include an anti-stacking clause which applies in certain states and prevents your limits from stacking. Multiple policies will not respond to a single occurrence. Make sure to review your insurance policy carefully to determine whether stacking is permitted under your coverage.