15.2 Commercial Umbrella and Excess Liability

Commercial Umbrella and Excess Liability

A commercial umbrella provides three distinct functions, which exam writers love to test:

1. Excess limits above scheduled underlying policies (CGL, business auto, employers liability).
2. Drop-down coverage when underlying aggregate limits are exhausted by other losses.
3. Broader coverage for some claims not covered by the underlying policy - subject to a self-insured retention (SIR).

An umbrella differs from a pure excess liability policy. Excess liability is purely a higher layer; it follows the terms of the underlying policy ("follow form") and does not broaden coverage or drop down for gaps. The umbrella's third function - paying claims the underlying excluded, after the insured satisfies the SIR - is what makes it an umbrella rather than simple excess.

Underlying Requirements and the SIR

The umbrella requires the insured to maintain scheduled underlying limits (for example, $1,000,000 CGL each occurrence with a $2,000,000 general aggregate, and $1,000,000 combined single limit auto). If the insured fails to maintain those limits, the umbrella still pays only as if the required underlying limits were in force - the insured absorbs the gap.

• For claims covered by underlying insurance, the umbrella sits directly above the underlying limit (no SIR applies).
• For claims not covered by underlying insurance but covered by the umbrella, the insured first pays the self-insured retention (commonly $10,000 or $25,000), then the umbrella responds.

The SIR functions like a deductible but specifically for coverage gaps, not for losses the underlying policy already handles.

Worked Layering Example

An insured carries:

• CGL: $1,000,000 each occurrence / $2,000,000 general aggregate.
• Commercial umbrella: $5,000,000 limit, $10,000 SIR.

Scenario A - covered by underlying. A single bodily injury judgment of $3,500,000 is entered. The CGL pays its $1,000,000 each-occurrence limit; the umbrella pays the next $2,500,000. No SIR applies because the underlying covered the claim.

Scenario B - drop-down. Earlier in the year, two other claims exhausted the $2,000,000 CGL aggregate. A new $1,200,000 covered claim arrives with no underlying limit left. The umbrella drops down and pays the full $1,200,000 (the SIR does not apply because the loss type was covered by underlying - the aggregate is simply gone).

Scenario C - coverage gap. A claim of $400,000 is covered by the umbrella but excluded by the CGL. The insured pays the $10,000 SIR, and the umbrella pays the remaining $390,000.

Common Umbrella Exclusions

Even a broad umbrella is not all-risk liability. Frequently tested exclusions include:

• Workers compensation and statutory obligations (the umbrella covers employers liability excess, not statutory WC).
• Owned-aircraft and most professional liability (E&O) unless scheduled.
• Liability assumed under contract beyond an "insured contract."
• Pollution (typically following the underlying absolute pollution exclusion).
• ERISA and intentional/criminal acts.

Remember the distinction: an umbrella can broaden coverage subject to a SIR; a follow-form excess policy can never be broader than the underlying.

How an Umbrella Sits Over Primary Coverage

A commercial umbrella provides high-limit liability coverage that sits above the insured's primary policies - typically the CGL, commercial auto, and employers liability (Part Two). It performs three jobs: (1) it pays excess over the underlying limits once they are exhausted; (2) it drops down to pay when an underlying aggregate is exhausted; and (3) it provides broader coverage than the primary for some claims, paying losses the primary does not cover after the insured satisfies a self-insured retention (SIR). The umbrella requires the insured to keep stated underlying limits in force.

Umbrella vs. Excess and the Self-Insured Retention

Distinguish a true umbrella from a plain excess liability policy. An excess policy simply adds limits on top of a specified underlying policy and is no broader than that policy ("follow form"). An umbrella is broader - it can cover some claims the primary excludes, paying them subject to a self-insured retention (SIR) (the insured's deductible-like amount for coverage gaps). A worked point: a $2,000,000 claim hits a CGL with a $1,000,000 limit and a $5,000,000 umbrella; the CGL pays $1,000,000 and the umbrella pays the next $1,000,000.

If the same claim were excluded by the CGL but covered by the umbrella, the insured first pays the SIR, then the umbrella responds.

Maintenance of Underlying Limits

The umbrella contains a maintenance of underlying insurance condition: the insured must keep the scheduled primary policies in force at the agreed limits. If the insured lets a primary policy lapse or carries a lower limit than required, the umbrella treats the underlying limit as if it were still in place, leaving the insured to absorb the difference - the umbrella will not "fill in" for a primary the insured failed to maintain. This condition, plus the difference between drop-down (aggregate exhausted) and SIR (coverage gap) behavior, is the most heavily tested umbrella material.

A Worked Drop-Down and SIR Scenario

Work an umbrella problem to lock in the concepts. A business carries a CGL with a $1,000,000 per-occurrence limit and a $2,000,000 aggregate, plus a $5,000,000 umbrella with a $10,000 SIR. Mid-year, prior claims have already exhausted the CGL aggregate when a new $750,000 covered claim arrives. Because the underlying aggregate is gone, the umbrella drops down and pays the $750,000 (after the insured satisfies the SIR only where the loss is not covered by an underlying policy). For a claim the CGL would have covered, the SIR does not apply - the umbrella simply functions as excess once the underlying aggregate is depleted.

Distinguishing drop-down from SIR is the heart of umbrella questions.