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14.3 Umbrella and Excess Liability Insurance

Excess Liability insurance provides an additional layer of protection above the limits of an underlying primary liability policy for covered third-party claims. Commercial Umbrella Liability is a type of excess coverage designed to protect against catastrophic losses while often providing broader coverage than the underlying policy. To purchase a Commercial Umbrella or Excess Liability policy, the insured must have primary underlying liability insurance in place.

Underlying Insurance​

Underlying insurance is the primary insurance that covers the same risk as a Commercial Umbrella or Excess Liability policy and responds before the umbrella or excess coverage. Common required underlying policies include:

  • Commercial General Liability (CGL): Covers liability arising from the business's premises, operations, products, and completed operations.
  • Employers Liability: Covers claims by employees for injuries that fall outside Workers' Compensation laws.
  • Commercial Auto Liability: Covers liability arising from owned, hired, leased, or non-owned vehicles used in the business.
  • Liquor Liability: Required for businesses that manufacture, distribute, sell, serve, or furnish alcoholic beverages and are subject to liquor liability laws.

In most cases, a Commercial Umbrella or Excess Liability policy requires at least $1 million of underlying liability insurance. If an underlying policy is cancelled, nonrenewed, not replaced, or the underlying insurer becomes insolvent, the umbrella policy responds as if the underlying coverage were still in effect. As a result, the umbrella insurer generally pays only damages exceeding the first $1 million.

Example

A court awards $2 million in damages against an insured. The first $1 million is the responsibility of the underlying insurance or, if no underlying coverage exists, the insured. The Commercial Umbrella Liability insurer pays only the amount above the first $1 million, even if the required underlying insurance is not in force.

Coverages​

There is no standard Commercial Umbrella or Excess Liability policy. Each insurer develops its own policy form, including its Insuring Agreement, Definitions, Exclusions, Conditions, and underlying insurance requirements and limits. As a result, coverages and policy provisions can vary significantly among insurers.

A Commercial Umbrella or Excess Liability policy typically provides:

  • Coverage A: Bodily injury and property damage liability for which the insured is legally liable, including a defense, which may be provided inside or outside the policy limits, depending on the policy.
  • Coverage B: Personal and advertising injury liability.
  • Additional coverages may be available based on the insured's needs.

For all covered claims, the required underlying primary insurance must respond before the umbrella or excess policy applies.

Coverage under a Commercial Umbrella or Excess Liability policy generally applies worldwide. Policies commonly include the following limits:

  • Aggregate limit
  • Each occurrence limit
  • Per person limit for personal and advertising injury

Common Limits​

Commercial Umbrella and Excess Liability policies are commonly available with limits ranging from $1 million to $10 million. Higher limits may also be available, typically up to $25 million or $50 million.

Common Exclusions​

Because Commercial Umbrella and Excess Liability policies are not standardized, their exclusions can vary significantly among insurers. Most policies include exclusions that mirror those in the underlying liability policies, particularly when the same insurer provides both the primary and umbrella/excess coverage.

Common exclusions in Commercial Umbrella and Excess Liability policies include:

  • Professional services (such as exposures covered by Errors and Omissions (E&O), Directors and Officers (D&O), or Medical Malpractice insurance)
  • Employment Practices Liability (EPL)
  • Product recall
  • Workers' Compensation and Employers Liability
  • War and terrorism
  • Expected or intentional injury
  • Contractual liability, except liability arising from an insured contract

Self-Insured Retention​

Like a Personal Umbrella policy, a Commercial Umbrella Liability policy includes a self-insured retention (SIR). The SIR is a form of cost-sharing that applies when the umbrella policy drops down to provide primary coverage because the underlying policy does not cover the loss.

Employee Benefits Liability Coverage Endorsement​

Employee Benefits Liability coverage is similar to Errors and Omissions (E&O) insurance but is available as an endorsement to a Commercial Umbrella Liability policy. It covers amounts the insured is legally obligated to pay, in excess of the underlying policy limits, for liability arising from an act, error, or omission by the insured or any person for whom the insured is legally responsible.

Coverage applies only when the act, error, or omission is negligently committed in the administration of the insured's employee benefit program. An employee benefit program may include:

  • Group life, health, dental, vision, or hearing insurance
  • Profit-sharing, employee savings, employee stock ownership (ESOP), or pension plans
  • Unemployment insurance, Social Security, Workers' Compensation, or disability benefits
  • Vacation plans, leave of absence programs, or transportation or health club subsidies
  • Any other similar employee benefit plan listed on the endorsement

This definition also includes employee benefit programs offered through a cafeteria plan, which allows employees to pay for certain benefits using pre-tax dollars.

Administration of an employee benefit program includes:

  • Providing information about eligibility to employees, their dependents, and beneficiaries.
  • Maintaining program records.
  • Enrolling employees in the program or continuing their participation in the program.

Employee Benefits Liability coverage is written on a Claims-Made basis. The act, error, or omission must occur between the retroactive date and the end of the policy period, and the resulting claim must be made during the policy period or an extended reporting period.

Employee Benefits Liability coverage excludes claims arising from:

  • Fraudulent or criminal acts
  • Failure to perform a contract
  • Insufficiency of funds