What's the Difference Between Excess and Umbrella Insurance?
When policies do not cover the claim or scope of an incident, policyholders are often responsible for paying any remaining costs out of pocket.
Contractors can protect themselves against these losses with excess and umbrella liability insurance—both of which increase policy limits, but involve several key differences.
Excess insurance does not expand policy terms, but covers higher limits in case of catastrophic claims or loss. Umbrella insurance, a form of excess insurance, does expand terms and provides broader coverage for losses not outlined in the underlying policy.
- While excess insurance does not affect the terms of your underlying policy, it provides increased coverage limits.
- Umbrella insurance is a broader type of excess insurance that does expand policy scope to cover situations outside the terms outlined in the underlying policy.
Understanding Underlying Policies
An underlying policy is the initial insurance established to protect against risks and address associated losses.
Each policy has its own unique scope of protected risks and financial limits. Any liabilities from an incident exceeding or not included in its terms become the responsibility of the policyholder—not the insurance company.
For example, let’s say Billie the Builder’s underlying policy covers job site injuries, with damages up to $1 million. In which of the following scenarios would the contractor be completely covered?
- Scenario 1: An accident occurs on the job site that the contractor is responsible for. Damages are assessed at $700,000.
- Scenario 2: An accident occurs on the job site that the contractor is responsible for. Damages are assessed at $1.4 million.
- Scenario 3: An accident occurs off the job site that the contractor is responsible for. Damages are assessed at $700,000.
Billie the Builder is only fully covered in Scenario 1.
In Scenario 2, while the scope of the incident is covered by the policy, the $1 million limit means the contractor would be responsible for the excess $400,000.
In Scenario 3, the contractor would be responsible for the full $700,000 assessment because the location of the accident was not covered by the scope of the policy—an inclusion gap. No matter the financial cap of the policy, the claim would not be covered.
Fortunately, there are ways contractors can protect themselves against the types of losses in Scenarios 2 and 3: Excess and umbrella insurance.
What Is Excess Insurance?
Excess insurance provides higher financial limits beyond those covered by the underlying policy. This type of insurance kicks in after the limits of the primary insurance policy are exhausted, and essentially provides additional coverage for the same risks covered by the primary policy.
Unlike umbrella policies, excess insurance does not expand the terms, or scope, of the underlying policy, but rather, extends limits to safeguard against unforeseen, catastrophic claims and loss.
For example, excess insurance helps contractors avoid the situation outlined in Scenario 2 (above). By expanding their limits to cover job site accidents up to $2 million, Billie the Builder would not be responsible for the excess $400,000 payment.
Excess coverage is generally less expensive than umbrella insurance since it follows the terms of the primary policies.
This additional layer of protection ensures that businesses can confidently navigate situations where the liabilities extend beyond the confines of their primary insurance, offering a robust financial safeguard against unforeseen and significant claims.
What Is Umbrella Insurance?
A form of excess liability insurance, umbrella insurance broadens policy scope, while expanding coverage to claims that exceed the limits of the underlying policy.
Umbrella insurance can extend coverage over multiple primary policies and typically offers higher liability limits compared to primary insurance policies.
For instance, an umbrella policy may cover auto liability in a foreign country even though the commercial auto policy does not extend its territory to these countries.
Therefore, umbrella insurance helps close any outstanding liability gaps.
In the examples above, umbrella insurance would have helped Billie the Builder to protect themselves in Scenario 3: They could have purchased an umbrella policy that covered incidents occurring off the job site.
Of course, before insurers will address any of these losses, the insured must often pay a self-insured retention (SIR) fee—an amount the policyholder pays before insurance companies will respond to an incident.
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