15.2 Commercial Umbrella and Excess Liability
Key Takeaways
- An umbrella adds limits, drops down when underlying limits are exhausted by claims, and can broaden coverage for some excluded claims subject to a self-insured retention.
- Excess (follow-form) liability only adds limits and adopts underlying terms; it does not broaden coverage or drop down for excluded claims.
- The schedule of underlying insurance (CGL, auto, employers liability) sets required attachment limits; if the insured fails to maintain them, the insured covers the gap.
- The SIR applies only to claims the underlying does NOT cover; when the underlying responds, no SIR is charged.
- Total recovery is capped at underlying-plus-umbrella limits; above that, the insured is uninsured.
Commercial Umbrella and Excess Liability
A commercial umbrella does three jobs: it provides additional limits above scheduled underlying policies, it drops down to act as primary where an underlying policy is exhausted, and it provides broader coverage for some claims the underlying policy does not cover at all (subject to a self-insured retention). Excess liability, by contrast, generally only adds limits and follows form to the underlying policy - it does not broaden coverage or drop down for excluded claims.
The insurer requires schedule of underlying insurance: typically CGL, business auto, and employers liability (Coverage B of workers comp). The umbrella attaches above stated required underlying limits - for example $1,000,000 CGL occurrence, $1,000,000 auto CSL, and $1,000,000/$1,000,000/$500,000 employers liability. If the insured lets underlying limits lapse below those amounts, the insured - not the umbrella - is responsible for the difference.
Attachment, SIR, and the drop-down trap
Three numbers control where an umbrella pays:
- Underlying limit - the top of the primary policy (the attachment point for covered-by-both claims).
- Self-insured retention (SIR) - the deductible the insured pays for claims the umbrella covers but the underlying does not (often $10,000 or $25,000).
- Umbrella limit - the maximum the umbrella adds on top.
A frequent exam trap: the umbrella does not pay above an underlying limit that was reduced by paid claims unless the policy includes a maintenance/aggregate-erosion provision. Many forms state that if the underlying aggregate is reduced or exhausted by payment of claims, the umbrella drops down and responds as though it were the underlying - but only up to its own limit. Conversely, if the insured simply failed to buy the required underlying limit, the umbrella treats the underlying as if it were in force at the required amount and the insured eats the gap.
Worked layered-limits example
A contractor carries CGL with a $1,000,000 per-occurrence limit and a $5,000,000 commercial umbrella with a $10,000 SIR. Compare two claims.
| Claim | Type | CGL pays | SIR | Umbrella pays | Insured pays |
|---|---|---|---|---|---|
| $3,000,000 bodily injury (covered by both) | Covered underlying | $1,000,000 | n/a | $2,000,000 | $0 |
| $500,000 claim covered only by umbrella | Underlying excludes | $0 | $10,000 | $490,000 | $10,000 SIR |
| $7,500,000 covered by both | Covered underlying | $1,000,000 | n/a | $5,000,000 (limit) | $1,500,000 |
For the first claim, the CGL pays its $1,000,000 limit and the umbrella pays the remaining $2,000,000 - no SIR because the underlying responded. For the second, the umbrella drops down but the insured first absorbs the $10,000 SIR. For the third, both layers are exhausted and the insured is naked above $6,000,000. The takeaway: SIR applies only when the underlying does not, and total recovery is capped at underlying-plus-umbrella limits.
What distinguishes a commercial umbrella from a true follow-form excess liability policy?
A firm has $1,000,000 CGL and a $5,000,000 umbrella with a $10,000 SIR. A $500,000 claim is covered ONLY by the umbrella (the CGL excludes it). What does the umbrella pay?
Umbrella vs. Excess: The Defining Difference
A true follow-form excess policy simply sits above an underlying policy and pays the same coverage once the underlying limit is exhausted — it grants no broader coverage. A commercial umbrella does two things excess does not: it provides additional limits over scheduled underlying policies (CGL, commercial auto, employers liability) and it can drop down to provide primary coverage for claims the underlying policies do not cover, after the insured satisfies a self-insured retention (SIR). The umbrella is therefore both excess and, for some claims, broadening primary coverage.
Attachment, the SIR, and the Drop-Down Trap
The umbrella attaches above required underlying limits. If the insured fails to maintain those limits (e.g., lets the CGL lapse or carries less than scheduled), the umbrella does not drop down to fill the self-created gap — it pays only what it would have paid had the required underlying been in force, leaving the insured to absorb the difference. For a claim covered by the umbrella but not by any underlying policy, the insured first pays the SIR (e.g., $10,000), then the umbrella responds. Distinguishing 'no underlying coverage' (SIR applies) from 'underlying exhausted' (umbrella sits on top) is the key exam skill.
Worked Layered-Limits Example
A firm carries $1,000,000 CGL and a $5,000,000 umbrella with a $10,000 SIR. A covered liability judgment is $4,000,000 for a claim the CGL covers. The CGL pays its $1,000,000; the umbrella pays the remaining $3,000,000 (well within its $5M limit); the SIR does not apply because the underlying CGL covered the claim. Now suppose a different $200,000 judgment is not covered by the CGL but is covered by the umbrella: the insured pays the $10,000 SIR and the umbrella pays $190,000. Same umbrella, two very different mechanics.
Maintenance Warranty and Scheduling Underlying
Every umbrella contains a maintenance-of-underlying-insurance condition: the insured warrants it will keep the scheduled primary policies in force at the required limits for the term. Breaching this warranty does not void the umbrella, but it caps the umbrella's payment as if the underlying were intact, exposing the insured to the shortfall. The umbrella's schedule of underlying insurance lists each primary policy and its required limit (e.g., CGL $1M/$2M, auto $1M CSL, employers liability $500K). The exam rewards recognizing that the umbrella sits over multiple primary lines simultaneously, not just the CGL.