Umbrella or excess? The difference that decides a claim

Ask a room of business owners whether they have umbrella or excess liability and most will answer with confidence. Ask what the difference is and the room goes quiet. Insurance professionals often use the words loosely as well. The distinction is real, though, and it can determine whether a large claim is paid.

The short version

An umbrella policy sits above your underlying liability policies and provides additional limit. It may also cover some claims the underlying policies do not, subject to a retention. An excess policy provides additional limit over an underlying policy but generally covers only what that underlying policy covers. Umbrella can be broader. Excess is usually a straight extension of limit.

Neither term is defined by law, and carriers write their forms differently. The label on the declarations page tells you less than the wording behind it.

What an umbrella may do that excess does not

• Drop down. If the underlying limit is exhausted or the underlying policy does not cover a particular loss, some umbrella forms will respond from the first dollar above a self-insured retention.
• Broaden cover. Some umbrellas cover claims, such as certain personal injury offenses, that underlying policies exclude or do not address.
• Cover different underlying policies. One umbrella can sit over general liability, auto liability and employer’s liability together.

Excess forms generally do none of these things. They apply only when the underlying policy is exhausted through payment of covered losses, and they follow the terms of what lies beneath.

Where the difference decides a claim

Imagine a contractor whose general liability policy excludes a certain type of claim. If the contractor holds an umbrella that covers that type of claim, subject to a retention, the umbrella may respond even though the primary does not. If the contractor holds a follow-form excess policy instead, it will most likely decline as well, because the underlying policy did not cover the loss.

The same contractor, the same claim and two different outcomes, based on a word on the declarations page. It is why we read the form, not the label.

Common surprises

• An “umbrella” that is really an excess policy in everything but name.
• An umbrella that excludes coverage found in the primary, such as a specific hazard or a category of professional work.
• A self-insured retention that applies when the umbrella drops down, often larger than the client expects.
• Additional insured status that applies to the primary but not to the layers above it.
• Different definitions of who is insured in the underlying and umbrella policies.

How to choose

There is no universally better answer. A small business with simple operations often does well with a single umbrella over its main liability policies. A larger company, or one with a large contract value, frequently builds a layered program with a primary umbrella and several excess layers above it. The lower layers do most of the work of broadening cover, and the upper layers supply limit at a lower price.

When we design a program, we choose the form of each layer for a reason. The first umbrella layer typically has the broadest terms, and higher excess layers follow it. We then review the whole stack to confirm that endorsements and additional insured terms flow upward.

Questions to ask your broker

• Is this policy an umbrella or a follow-form excess, and how do you know from the wording?
• Does it drop down, and what retention applies?
• Which underlying policies does it sit above, and are there any it does not?
• What does it exclude that the underlying policies cover?
• Do additional insured and waiver endorsements apply to this layer?

Those five questions take ten minutes and reveal whether you have the cover you think you have. If the answers are unclear, send us the policy and we will read the form and give you a plain-language summary.