11.7 Excess and Umbrella Liability

Quick Answer: A true excess policy attaches above a scheduled underlying limit and covers only what the underlying policy covers — it is a higher limit, nothing more. An umbrella does three things: it raises limits, it broadens coverage by responding to some losses the underlying policies exclude, and it replaces underlying limits exhausted by other claims. When an umbrella responds to a loss the underlying policy does not cover, it drops down subject to a self-insured retention (SIR), commonly $10,000 to $25,000. Failing to maintain the required underlying limits does not void the umbrella — but the umbrella responds as though those limits were still in place, and the insured absorbs the gap.

Catastrophic liability verdicts routinely exceed primary limits. An all-lines adjuster handling a serious bodily injury file must know which layer owes what and who controls the defense.

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The Three Layers

                              LIABILITY TOWER
   ┌───────────────────────────────────────────────────────────────┐
   │  EXCESS LAYER (e.g., $10,000,000 xs $5,000,000)               │
   │  Attaches only after the umbrella limit is exhausted          │
   └───────────────────────────────────────────────────────────────┘
   ┌───────────────────────────────────────────────────────────────┐
   │  UMBRELLA (e.g., $5,000,000)                                  │
   │  1. Excess over scheduled underlying limits                   │
   │  2. Broader than underlying — drops down subject to the SIR   │
   │  3. Replaces underlying limits exhausted by other claims      │
   └───────────────────────────────────────────────────────────────┘
   ┌───────────────────────────────────────────────────────────────┐
   │  PRIMARY / UNDERLYING (CGL, business auto, employers          │
   │  liability, sometimes watercraft or liquor liability)         │
   │  Named on the SCHEDULE OF UNDERLYING INSURANCE                │
   └───────────────────────────────────────────────────────────────┘

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True Excess Liability

A true excess or excess liability policy is a limit extender and nothing else.

• It attaches at a specified attachment point — the exhausted underlying limit.
• Most are written as following form: the excess policy adopts the terms, conditions, definitions and exclusions of the scheduled underlying policy. If the primary excludes it, the excess excludes it.
• Some are written on stand-alone excess wording with their own exclusions, which can be narrower than the primary. An adjuster must read both.
• There is no self-insured retention and no drop-down. If the underlying policy does not respond, the excess policy does not respond either.

A buffer layer is a small excess policy purchased to bridge a gap where an umbrella requires a higher attachment point than the primary provides.

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Umbrella Liability

An umbrella is broader and more useful, and its three functions are the most tested content in this topic.

Function 1 — Excess Over Underlying

Above the scheduled underlying limits, the umbrella simply provides more limit for the same covered loss. A $1,000,000 CGL and a $5,000,000 umbrella respond to a $3,500,000 covered judgment as $1,000,000 primary and $2,500,000 umbrella.

Function 2 — Broader Than Underlying (the Drop-Down)

The umbrella insures certain exposures the underlying policies exclude. Common examples on a personal umbrella are personal injury offenses such as libel, slander, false arrest and invasion of privacy; on a commercial umbrella, contractual liability, worldwide territory, or watercraft and non-owned aircraft exposures the CGL restricts.

When the umbrella responds to a loss the underlying policy does not cover, the insured must first satisfy a self-insured retention — the umbrella's deductible, commonly $10,000 to $25,000 on a commercial umbrella and $250 to $1,000 on a personal umbrella. The SIR applies only to drop-down losses; it never applies where the underlying policy responds.

Function 3 — Replacing Exhausted Underlying Limits

If unrelated claims exhaust the CGL's general aggregate during the policy year, the umbrella "drops down" and functions as primary for a later claim — usually without the SIR, because the loss is of a type the underlying policy did cover.

Exam Trap: The Three Umbrella Situations and the SIR

Memorize the pattern by asking one question: would the underlying policy have covered this loss?

• Yes, and limits remain → underlying pays to its limit, umbrella pays the excess. No SIR.
• Yes, but the aggregate is exhausted → umbrella pays from the first dollar. No SIR.
• No, the underlying excludes it but the umbrella covers it → umbrella pays after the insured satisfies the SIR.

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The Schedule of Underlying Insurance

Every umbrella lists the policies and minimum limits the insured must keep in force — typically CGL at $1,000,000 per occurrence and $2,000,000 aggregate, business auto at $1,000,000 combined single limit, and employers liability at $500,000 or $1,000,000.

The maintenance of underlying insurance condition provides that if the insured fails to maintain those limits — by letting a policy lapse, by buying lower limits, or by exhausting them without notice — the umbrella is not voided, but it responds only as if the required underlying insurance were still in effect. The insured personally absorbs the difference.

Example. The umbrella requires a $1,000,000 CGL. The insured quietly reduces the CGL to $500,000. A $2,000,000 covered judgment is entered. The CGL pays $500,000, the umbrella pays $1,000,000 (the excess above the required $1,000,000, not above the $500,000 actually carried), and the insured personally owes the $500,000 gap.

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Defense, Notice and Other Coordination Rules

• Duty to defend. The primary carrier owes the defense while its limit remains. The umbrella generally owes a defense only where no underlying policy applies — the drop-down situation — and otherwise has the right, but not the duty, to associate in the defense of a claim that could reach its layer.
• Defense cost treatment. On a drop-down, umbrella defense costs are usually paid in addition to the limit. On some excess forms defense costs erode the limit; read the form.
• Notice. Umbrella and excess forms require notice of any occurrence likely to involve their layer. An adjuster on a serious injury file must put the excess market on notice early; late notice is a live coverage defense in the excess world.
• Exhaustion. The umbrella attaches when the underlying limit is exhausted by payment of judgments or settlements. Where the primary settles below its limit, the excess carrier may argue the underlying was not properly exhausted, so a funded settlement in which the insured contributes the gap is the usual workaround.
• Common exclusions on both. Workers' compensation obligations; damage to the insured's own product or work; recall; ERISA and employment-related practices unless bought back; professional liability unless scheduled; pollution beyond narrow exceptions; nuclear; war; and intentional or expected injury.

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Personal Umbrella Points for Florida Files

• Personal umbrellas typically require underlying homeowners liability of $300,000 and auto liability of 250/500/100 or a comparable combined single limit.
• Because Florida does not require bodily injury liability to register a vehicle, a Florida personal umbrella applicant frequently has to buy up auto liability first to satisfy the schedule of underlying insurance. An adjuster who finds an umbrella over a bare 10/20/10 auto policy has probably found a maintenance-of-underlying problem.
• Most personal umbrellas offer uninsured and underinsured motorist coverage only if specifically purchased and only if underlying UM is carried at the required limit; it is never automatic.