15.2 Commercial Umbrella and Excess Liability
Key Takeaways
- Umbrellas serve three roles: excess limits, broadened (drop-down) coverage, and defense after underlying aggregates exhaust.
- Follow-form excess only adds limits on identical underlying terms - it never broadens coverage.
- The schedule of underlying insurance sets required primary limits; if the insured carries less, the gap is self-insured.
- A self-insured retention applies only to drop-down claims the underlying does not cover - distinct from a deductible.
- An umbrella drops down when the underlying aggregate is exhausted, but not when the insured underinsured or let the underlying lapse.
Commercial Umbrella and Excess Liability
A commercial umbrella provides three functions: (1) excess limits over scheduled underlying policies, (2) broader (drop-down) coverage for claims excluded by the underlying but covered by the umbrella, and (3) defense and supplementary payments once underlying aggregates exhaust. A straight excess (follow-form) policy does only the first - it adds limits but follows the underlying terms exactly and never broadens coverage. Distinguishing these two is the most tested concept in this section.
Required Underlying Limits
The umbrella's declarations list schedule of underlying insurance - the minimum limits the insured must carry on primary CGL, auto, and employers liability. Typical requirements:
| Underlying Policy | Common Required Limit |
|---|---|
| CGL - per occurrence | $1,000,000 |
| CGL - general aggregate | $2,000,000 |
| Business Auto - CSL | $1,000,000 |
| Employers Liability (WC Part 2) | $500,000 / $500,000 / $500,000 |
If the insured fails to maintain these limits, the umbrella treats the underlying as if it were in force at the required limit - the insured self-insures the gap, not the umbrella.
The Self-Insured Retention (SIR)
When the umbrella broadens coverage (a claim the underlying excludes), there is no underlying limit to exhaust. Instead the insured pays a self-insured retention (SIR) - often $10,000 to $25,000 - before the umbrella responds. The SIR functions like a deductible but applies only to drop-down claims, never to claims also covered by the underlying. Exam trap: a deductible reduces the insurer's payment on a covered claim; an SIR is the insured's own first-dollar obligation on a claim the umbrella alone covers.
Worked Layering Example
An insured carries a $1M/occurrence CGL ($2M aggregate) and a $5M umbrella. A covered liability judgment is $3,500,000.
- The CGL pays its $1,000,000 per-occurrence limit first.
- The umbrella pays the excess: $3,500,000 - $1,000,000 = $2,500,000.
- Total paid = $3.5M; the umbrella's remaining limit drops to $5,000,000 - $2,500,000 = $2,500,000.
If a later claim is excluded by the CGL but covered by the umbrella, the insured first pays the SIR (say $10,000), then the umbrella pays above it up to its remaining limit.
Drop-Down Triggers
A true umbrella drops down in two situations:
- The underlying coverage is broader-excluded (the umbrella covers a loss the primary does not) - subject to the SIR.
- The underlying aggregate is exhausted by other claims, so the umbrella becomes the de facto primary for new occurrences.
Note that maintenance of underlying insurance is a condition: if the underlying aggregate is exhausted, the umbrella drops down, but if the insured simply bought too little or let coverage lapse, the umbrella does NOT drop down to fill that intentional gap.
An insured has a $1M occurrence-limit CGL and a $5M commercial umbrella with a $10,000 SIR. A $3.5M judgment is covered by both the CGL and the umbrella. How much does the umbrella pay?
Which statement best distinguishes a commercial umbrella from a straight (follow-form) excess policy?
Required Underlying Limits and the SIR
A commercial umbrella does three jobs: it provides excess limits over scheduled underlying policies, it drops down to pay when an underlying aggregate is exhausted, and it provides broader primary coverage for some claims the underlying policies exclude (subject to a self-insured retention).
To trigger the umbrella, the insured must carry required underlying limits — commonly CGL $1,000,000/$2,000,000, auto $1,000,000 CSL, and employers liability $500,000 — and maintain them; if the insured lets underlying coverage lapse, the umbrella pays only what it would have paid had the required underlying been in force.
The self-insured retention (SIR) is the amount the insured pays out of pocket for a claim the umbrella covers but the underlying does not (a coverage gap). It functions like a deductible but applies only to umbrella-only (drop-down primary) claims, not to claims already covered by the underlying.
| Function | When it applies |
|---|---|
| Excess | Underlying limit is used up by a single large loss |
| Drop-down | Underlying aggregate is exhausted by prior claims |
| Broader primary | Claim covered by umbrella but not underlying — insured pays the SIR first |
A Worked Layering Example and Drop-Down
Worked layering: A business has $1M CGL each-occurrence and a $5M umbrella over it. A judgment of $4M arises from one occurrence. The CGL pays its $1M limit; the umbrella pays the next $3M, leaving $2M of umbrella capacity unused. Total paid: $4M, fully covered.
Drop-down example: The same CGL has a $2M general aggregate already eroded to $0 by earlier claims. A new $800,000 covered occurrence arrives. Because the underlying aggregate is exhausted, the umbrella drops down and pays the $800,000 (the insured did not let coverage lapse — the aggregate simply ran out). Had the insured failed to carry the required underlying at all, the umbrella would treat the $1M as if it existed and pay only the excess, leaving the insured to fund the "missing" underlying.
Coverage-only gap example: A claim is covered by the umbrella but excluded by the CGL (a covered offense the primary did not insure). The insured pays the SIR (say $10,000) and the umbrella pays the rest. Distinguishing excess (over a paid-out limit), drop-down (over an exhausted aggregate), and broader primary (umbrella-only claims subject to the SIR) is exactly what umbrella questions test, along with the duty to maintain the scheduled underlying limits.