15.2 Commercial Umbrella and Excess Liability
Key Takeaways
- Commercial umbrellas do three things: add limits over the primary, drop down when an aggregate is exhausted, and cover some primary-excluded losses subject to a self-insured retention.
- Excess (following-form) policies only add limits and adopt the underlying terms; they do not broaden coverage or drop down for excluded claims.
- Insureds must maintain scheduled underlying limits; failing to do so leaves them responsible for the difference as if the required limits were in force.
- An SIR applies only when the umbrella covers a loss the primary does not, whereas a deductible reduces the insurer's payment on otherwise-covered losses.
Commercial Umbrella and Excess Liability
A commercial umbrella sits above primary liability policies (CGL, commercial auto, employers liability) and does three jobs: it (1) provides additional limits above the primary, (2) drops down to cover claims after an aggregate is exhausted, and (3) covers some losses the primary excludes - in which case the insured pays a self-insured retention (SIR). A pure excess liability policy only does job #1: it follows the primary form and adds limits but provides no broader coverage and no drop-down for excluded claims.
The Three Functions and Underlying Requirements
Umbrella carriers require scheduled underlying limits - the minimum primary limits the insured must keep in force. Typical schedule:
| Underlying policy | Required limit |
|---|---|
| CGL each occurrence | $1,000,000 |
| CGL general aggregate | $2,000,000 |
| Commercial auto CSL | $1,000,000 |
| Employers liability | $500,000 |
If the insured fails to maintain these limits, the umbrella still pays only as if the required underlying were in place - the insured eats the difference. This maintenance-of-underlying trap appears on most exams.
Worked Example: Stacking the Layers
A judgment of $3,500,000 is entered for a covered bodily-injury occurrence. The insured carries CGL with a $1,000,000 each-occurrence limit and a commercial umbrella of $5,000,000.
- Primary CGL pays the first $1,000,000.
- The umbrella pays the next layer: $3,500,000 - $1,000,000 = $2,500,000.
- The umbrella's remaining capacity is $5,000,000 - $2,500,000 = $2,500,000, still available for other claims that policy period.
Now assume the same loss is excluded by the CGL but covered by the umbrella, with a $10,000 SIR. The insured pays the $10,000 retention and the umbrella pays $3,500,000 - $10,000 = $3,490,000, up to its $5,000,000 limit.
SIR vs. Deductible and Key Distinctions
- A self-insured retention applies only when the umbrella drops down for a claim the primary did not cover; the insured pays the SIR before the umbrella responds, and the SIR usually does not erode the umbrella limit.
- A deductible reduces the amount the insurer ultimately pays and is subtracted from the limit.
- Following form vs. stand-alone: a following-form excess policy adopts the underlying terms exactly, so a gap in the primary becomes a gap in the excess. A true umbrella is broader and can fill some of those gaps (subject to the SIR).
Common Traps
- Umbrellas typically exclude the same fundamental items as the CGL: workers' comp, pollution beyond limited exceptions, professional liability, and intentional acts.
- The umbrella's defense is usually in addition to the limit when the primary is exhausted, but supplementary payments handling differs from the CGL - read the form.
- Aggregate erosion: once a primary aggregate is used up, the umbrella drops down per-occurrence, but only after the SIR if the underlying no longer responds.
Umbrella vs. Excess Liability
Both provide high limits above primary coverage, but the exam distinguishes them:
| Feature | Umbrella | Excess |
|---|---|---|
| Limits | Sit above primary (CGL, auto, employers liability) | Sit above a specific underlying policy |
| Breadth | Broader - may cover some claims the primary excludes (drop-down) | Follows form - same scope as the underlying |
| Self-insured retention (SIR) | Applies to gaps the primary does not cover | Usually none |
| Defense | Provided where umbrella is primary (drop-down) | Per underlying |
An umbrella can be broader than the underlying policies: when a covered claim falls within the umbrella but is not covered by any underlying policy, the umbrella drops down and pays after the insured satisfies a self-insured retention (SIR) - typically $10,000-$25,000.
Required Underlying Limits
Umbrellas require the insured to maintain scheduled underlying limits (e.g., CGL $1M/$2M, auto $1M, employers liability $1M). If the insured fails to maintain them, the umbrella pays as if the required underlying were in place, leaving the insured to fund the gap.
Worked Example
A business carries a $1,000,000 CGL and a $5,000,000 commercial umbrella. A catastrophic liability judgment of $4,000,000 is entered. The CGL pays its $1,000,000, and the umbrella pays the remaining $3,000,000 (within its $5M limit). Now suppose a different claim - say a personal-injury offense covered by the umbrella but excluded by the underlying CGL. The umbrella drops down, the insured pays the SIR (e.g., $25,000), and the umbrella covers the rest.
Understanding the layering (primary pays first, umbrella above) plus the drop-down/SIR mechanism for claims the primary excludes is the central umbrella concept.
Self-Insured Retention and Maintenance of Underlying
The self-insured retention (SIR) is the amount the insured pays out-of-pocket when the umbrella drops down to cover a claim that no underlying policy covers - functionally a deductible for gap claims. The umbrella schedules required underlying limits; if the insured lets an underlying policy lapse or carries less than required, the umbrella treats the underlying as if it were still in place at the required limit, leaving the insured to fund the difference. Defense is provided where the umbrella drops down and acts as primary.
The exam also tests the umbrella's broad definition of insured and its coverage of liabilities the underlying may exclude (some personal injury offenses, certain contractual liability), subject to the SIR. Excess policies, by contrast, follow form - they cannot be broader than the underlying and add no new coverage, only higher limits.
An insured has a $1,000,000 CGL per-occurrence limit and a $5,000,000 commercial umbrella. A covered occurrence results in a $3,500,000 judgment. How is it paid?
When does a self-insured retention (SIR) apply under a commercial umbrella policy?