Key Takeaways
- UMBRELLA policies provide EXCESS coverage above underlying policies AND may provide DROP-DOWN coverage for claims not covered by underlying policies
- EXCESS policies provide ONLY excess limits above underlying policies—they follow the same terms and conditions as the underlying policy
- Underlying insurance requirements: Umbrella policies require minimum limits on underlying policies (CGL, auto, employers liability)
- SELF-INSURED RETENTION (SIR) is the deductible on umbrella policies for claims where the umbrella drops down to cover
- Umbrella policies typically provide $1-25 million in additional limits at relatively low cost compared to increasing primary limits
Commercial Umbrella and Excess Liability
Umbrella vs. Excess Liability
Both provide additional liability limits, but there are important differences:
| Feature | Umbrella | Excess |
|---|---|---|
| Coverage Scope | May be BROADER than underlying | FOLLOWS underlying exactly |
| Drop-Down | YES—covers some claims underlying doesn't | NO—only pays above underlying |
| Own Terms | Has its own policy language | Follows form of underlying |
| SIR | Applies when dropping down | Usually no SIR |
| Cost | Typically higher | Typically lower |
Quick Answer: An umbrella provides excess limits PLUS drop-down coverage for claims not covered by underlying policies. An excess policy only provides additional limits above the underlying—it follows the underlying policy's terms exactly.
How Umbrella Coverage Works
1. Excess Over Underlying Limits
When the underlying policy limit is exhausted, the umbrella pays above it.
Example:
- CGL limit: $1,000,000
- Umbrella: $5,000,000
- Claim: $3,500,000
- CGL pays $1,000,000 → Umbrella pays $2,500,000
2. Drop-Down Coverage
When the underlying policy excludes a covered claim, the umbrella "drops down."
Example:
- CGL excludes personal injury (libel)
- Umbrella covers personal injury
- Claim for defamation: $500,000
- Umbrella pays $500,000 (minus SIR)
3. Self-Insured Retention (SIR)
Definition: The deductible that applies when the umbrella drops down (no underlying coverage).
Typical SIR: $10,000 - $25,000
How It Works:
- Claim covered by umbrella but not underlying
- Insured pays SIR first
- Umbrella pays remainder up to limit
Underlying Insurance Requirements
Umbrella policies require minimum limits on underlying policies:
| Underlying Policy | Typical Minimum Required |
|---|---|
| CGL | $1,000,000 per occurrence / $2,000,000 aggregate |
| Business Auto | $1,000,000 CSL |
| Employers Liability | $500,000 / $500,000 / $500,000 |
Gap Coverage: If underlying limits are less than required, the umbrella may not respond—or may only pay excess of required amount.
When to Use Umbrella vs. Excess
Use Umbrella When:
- Broader coverage needed beyond underlying
- Want drop-down protection for excluded claims
- Underlying policies have gaps
- Need catastrophic protection
Use Excess When:
- Only need higher limits (same coverage)
- Want to follow underlying terms exactly
- Lower premium is priority
- Underlying coverage is comprehensive
Typical Umbrella Limits
| Limit | Annual Premium (Typical) |
|---|---|
| $1 million | $500 - $1,500 |
| $5 million | $1,500 - $4,000 |
| $10 million | $3,000 - $8,000 |
| $25 million | $8,000 - $20,000 |
Note: Umbrella premiums are relatively low because claims are rare (underlying pays first).
What is the key difference between an umbrella policy and an excess policy?
What is a Self-Insured Retention (SIR) in an umbrella policy?
12.1 Producer Licensing
Chapter 12: Insurance Regulations and Ethics