It is easy to confuse excess liability insurance and commercial umbrella insurance – and many people do – but they are two different types of insurance solutions available to businesses.
Before considering these types of insurance, a business should first have business liability insurance. Sometimes referred to as general liability insurance, it helps protect businesses from claims that result from injuries or damages to individuals or property. Liability insurance helps protect the company’s assets, as well as its ability to continue to grow in the event of a claim or lawsuit.
Every business is unique, and so are its risks, so there are additional types of liability insurance, including commercial auto liability insurance and employers’ liability insurance. No matter what coverage you have, there could be claims so large they exceed the business’s liability insurance coverages. This is when it is beneficial to have excess liability or commercial umbrella insurance.
Both excess liability insurance and commercial umbrella policies offer coverage above the limits of an underlying coverage. The main difference between them is that umbrella insurance can broaden or extend your coverage, whereas excess insurance offers coverage that is above the limits of a liability policy and does not broaden your coverage the way an umbrella insurance policy does.
Excess Liability Insurance
Excess liability insurance offers protection that exceeds the limits of a basic liability policy. It provides higher limits, with the same terms and conditions as the underlying policy. The Excess liability coverage follows the primary liability coverage and is activated when the underlying policy limit is exhausted as a result of a large claim.
A few reasons to consider an excess liability insurance policy:
- The limits available for the primary liability policy may not be enough to appropriately cover the company’s risk exposure.
- The business may be taking on a project for a client and the contract requires liability insurance limits that exceed the company’s primary liability policy.
Excess liability policies can provide an extra cushion of protection on top of an existing policy for large or potentially catastrophic claims and help protect the future of a business by ensuring it is not bankrupted by a single event or claim.
Excess liability coverage is not for every type of business. It is beneficial for businesses whose risks are somewhat narrow but may have a lot to lose in the event of a claim or lawsuit. If a business has a lot of assets or property, or works in a high-risk industry, excess liability coverage may be valuable.
Commercial Umbrella Insurance
A commercial umbrella policy can be applied to multiple underlying liability policies such as commercial general liability, automobile, and employers’ liability, but can also include other policies, such as foreign liability, media liability, and aircraft liability, among others. Commercial umbrella insurance helps ensure outstanding liability gaps are closed by providing additional coverage for liability exposures not provided by the underlying insurance policies. Umbrella insurance is activated when one of the underlying policies reaches its coverage limit. It also extends the coverage beyond bodily injury and property damage to include personal and advertising injury.
A commercial umbrella policy serves several important purposes:
- It provides excess limits when the limits of underlying liability policies are exhausted by a large claim or lawsuit.
- It picks up where the underlying policy leaves off when the aggregate limit of the underlying policy is exhausted by a large claim.
- It can provide protection against some claims that are not covered by the underlying policies.
A commercial umbrella policy is right for businesses that want to safeguard their assets against almost any type of catastrophic or large claim.
Protection from Catastrophic and Large Losses
Many small businesses learn about excess liability or commercial umbrella insurance when they are must meet a client’s contractual requirements for a certain amount of coverage. While these types of insurance meet the requirements for higher limits, the additional protection also provides some peace of mind for business owners against the chance that a large lawsuit could bankrupt them.
It is important to evaluate the risks related to the work a company does. For example, a business with a lot of foot traffic, or one that involves work with heavy equipment or dangerous machinery may face greater liability risks and may find the additional protection more valuable.
Examples of How Excess Liability and Commercial Umbrella Insurance Work
It may be easier to understand the differences between excess liability and commercial umbrella insurance with an example.
A small business has a general liability insurance policy which provides $1 million in coverage, and has an excess liability policy that extends the coverage of the policy with an additional $1 million limit. A claim is filed, and the business is found liable for $1.5 million in damages. Since the business’s general liability policy only covers $1 million, the excess liability coverage would pay the remaining $500,000 – but only if the excess coverage was on that one underlying policy.
If the same business has a commercial umbrella policy, and damages were $2.5 million, but $500,000 of those damages references assault (which is not covered under the underlying policy), the umbrella insurance would help cover those damages.
Excess Liability vs Commercial Umbrella Insurance Costs
Both excess liability and commercial umbrella policies are usually sold in increments of $1 million and are much less costly than the primary insurance since coverages follow the primary protection. Additionally, the cost per million in coverage typically decreases as the amount of coverage increases.
Depending upon the size of the company and its risks, businesses usually carry excess liability or umbrella coverage limits of at least $1 million, and as much as $25 million or more. Both policies are relatively low-cost additions to business insurance that can help to safeguard a company’s assets and protect against large claims that could potentially bankrupt the business.
Which coverage is right for a business?
Both excess liability and commercial umbrella policies are designed as an added layer of coverage above your primary insurance policies. Therefore, it is important to review your policies with an insurance professional to understand what is covered, and to what extent.
The most important thing is to evaluate the types of business risks involved and make sure the right base business liability protections are in place, including general liability, commercial auto liability, and employers’ liability. If there are areas where the business risks might exceed the coverage of those policies, then an excess liability or business umbrella policy would be the solution.
While the differences between excess liability and business umbrella coverage can be confusing, it ultimately comes down to the breadth of risks a business might face. If the risks are somewhat narrow, an excess liability policy would be a more affordable option. However, if the business’s risks are broader, an umbrella policy would provide more protection.