Comparing Coverage: Umbrella and Excess Liability

By Patrick Wraight | June 17, 2019

Liability insurance protects the customer when something happens to someone else. Customers have liability exposures if they do something, sell something, have a place, go to a place or hire someone, among other activities. Liability policies provide money for damages, which is the money that gets paid out to those who are injured in some way and for the expenses associated with the claim (investigation, legal representation, other expenses).

Liability insurance is designed to protect a customer’s assets from being taken from them due to a judgment. If there is a judgment that is rendered against a customer that isn’t covered by the liability policy or exceeds the policy’s limits, what happens? The customer may be required to liquidate assets to raise the money to pay the judgment. That’s what makes umbrella and excess insurance a necessity for many customers.

Umbrella and excess insurance policies are designed to be additional layers of coverage above primary insurance policies, such as a commercial general liability policy or a business auto policy. However similar they are, umbrella and excess policies are not the same.

We will focus on only two coverage forms in this comparison, the ISO CU 00 01 04 13 Commercial Liability Umbrella Coverage Form and the ISO CX 00 01 04 13 Commercial Excess Liability Coverage Form. It’s likely that you’ll see other forms, but this comparison should give you a few points to look for as you’re looking at policy forms, comparing coverages, and helping customers to make informed decisions.

Umbrella and excess insurance policies are designed to be additional layers of coverage above primary insurance policies ... However similar they are, umbrella and excess policies are not the same things.

A commercial umbrella liability policy is designed to provide two types of coverage. The first is coverage above other insurance policies, referred to in this coverage form as “underlying insurance.”

“Underlying insurance” means any policies of insurance listed in the Declarations under the Schedule of “underlying insurance.”

It also provides coverage for liability exposures for which there is no “underlying insurance.” Let’s look at some of the insuring agreement for Coverage A on the CU 00 01.

We will pay on behalf of the insured the “ultimate net loss” in excess of the “retained limit” because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking damages for such “bodily injury” or “property damage” when the “underlying insurance” does not provide coverage or the limits of “underlying insurance” have been exhausted.

This part of the insuring agreement adds two more terms that we don’t see in the commercial general liability policy. These terms will help us to understand what this policy is covering. Let’s look at their meanings now.

“Ultimate net loss” means the total sum, after reduction for recoveries or salvages collectible, that the insured becomes legally obligated to pay as damages by reason of settlement or judgments or any arbitration or other alternate dispute method entered into with our consent or the “underlying insurer’s” consent.

“Retained limit” means the available limits of “underlying insurance” scheduled in the declarations or the “self-insured retention,” whichever applies.

That definition adds one more term that we need to become familiar with.

“Self-insured retention” means the dollar amount listed in the declarations that will be paid by the insured before this insurance becomes applicable only with respect to “occurrences” or offenses not covered by the “underlying insurance.” The “self-insured retention” does not apply to “occurrences” or offenses which would have been covered by “underlying insurance” but for the exhaustion of applicable limits.

This policy is designed to be similar to the underlying commercial general liability (CGL) policy. There are coverages A and B that mirror the ISO CGL policy. So, when a loss is covered on an underlying policy, the loss can be covered by this policy. However, because of what we have just read, we also know that some losses that might not be covered by underlying insurance can be covered here.

Of course, we haven’t fully examined this 18-page coverage form. There are exclusions, conditions and definitions that we haven’t looked at and they should be for a full comparison.

Setting aside the umbrella policy, let’s look at a few items in the excess policy to find out why it’s different. We note that the first difference is in the insuring agreement. The umbrella policy included insuring agreements for coverages A and B, like the CGL policy did. This policy only has one insuring agreement.

We will pay on behalf of the insured the “ultimate net loss” in excess of the “retained limit” because of “injury or damage” to which insurance provided under this Coverage Part applies.

We will have the right and duty to defend the insured against any suit seeking damages for such “injury or damage” when the applicable limits of “controlling underlying insurance” have been exhausted in accordance with the provisions of such “controlling underlying insurance.”

Again, we’ve found terms that we need to define so that we can understand what’s actually being covered here. There are four; let’s take a look.

“Ultimate net loss” means the total sum, after reduction for recoveries, or salvages collectible, that the insured becomes legally obligated to pay as damages by reason of:

a. Settlements, judgments, binding arbitration; or

b. Other binding alternate dispute resolution proceeding entered into with our consent.

“Ultimate net loss” includes defense expenses if the “controlling underlying insurance” specifies that limits are reduced by defense expenses.

In this definition, we discover that there are many different types of insurance policies that could be covered here, including some that include defense costs in the limit of insurance (like cyber liability).

“Retained limit” means the available limits of “controlling underlying insurance” applicable to the claim.

Notice that there is no mention of self-insured retention. This shows that there is not coverage if there is no underlying policy.

“Injury or damage” means any injury or damage, covered in the applicable “controlling underlying insurance” arising from an “event.”

Here we see a broader term than bodily injury, property damage, or personal and advertising injury. These terms are defined in many policies. The term “injury or damage” creates this broad definition meant to work with any definition of damage that exists on an underlying policy.

“Controlling underlying insurance” means any policy of insurance or self-insurance listed in the declarations under the schedule of “controlling underlying insurance.”

Adding the word controlling is important. It is telling us that the underlying insurance controls how coverage applies. If we dug deeper into this excess policy, we would discover a statement to the effect that coverage is never broader than the underlying policy. If you read this coverage form, you would find it is only five pages long and has a limited exclusion section and a limited conditions section.

Umbrella and excess insurance policies are designed to be additional layers of coverage above primary insurance policies … However similar they are, umbrella and excess policies are not the same things.

The difference between these umbrella and excess coverage forms is that the umbrella can be used to cover some losses for which there is no insurance. The excess form then only covers losses that are covered by the other insurance policies that exist as primary insurance. Of course, you need to read the entire policies to find the other ways that they might be similar (but still different) and to discover which one is the best coverage for your customers.

About Patrick Wraight

Patrick Wraight, CIC, CRM, AU, is director of Insurance Journal's Academy of Insurance. He can be reached at pwraight@ijacademy.com.

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Insurance Journal West June 17, 2019
June 17, 2019
Insurance Journal West Magazine

Construction Market & Risks Report; Markets: Umbrellas (Personal & Commercial); Special Supplement: The Florida Issue