Excess and Umbrella Insurance: Key Differences

Insurance can play a pivotal role in helping safeguard assets and managing risks for both businesses and individuals. While primary insurance policies cover certain claims up to a given limit of liability, umbrella and excess insurance add an additional limit of liability to help protect against extraordinary financial losses.

Understanding the distinctions and benefits of these policies can help individuals and businesses make informed decisions about their risk management strategies.

Umbrella and Excess Insurance Basics

Umbrella and excess insurance policies provide additional liability limits, up to their own limit, after the limits of a primary liability policy have been exhausted.  Such primary policies may include homeowners and auto liability insurance, and various types of business liability insurance, such as commercial general liability, professional liability, product liability, and employer's liability insurance.

Liability insurance typically covers third party claims alleging bodily injury, property damage, or other financial loss caused by the insured party.

Umbrella vs Excess Liability

Excess insurance is a policy that provides additional coverage limits beyond that of an existing primary insurance policy.  It “kicks in” after the underlying policy's coverage limits have been exhausted, up to its own limit.

Umbrella insurance is a policy that also provides additional coverage limits beyond that of a primary insurance policy, up to its own limit, but it can also potentially provide broader coverage for additional types of claims not covered by a primary policy.  

Both forms of insurance can be important considerations for individuals and businesses seeking to help protect themselves against significant losses, fostering greater peace of mind and financial stability. However, navigating the nuances between umbrella vs excess liability insurance can be essential to ensuring that the coverage type is aligned with specific needs.

Excess Insurance: Focused Increase of Limits

Excess insurance can typically be viewed as “follow form” of an existing liability insurance policy, meaning it follows the terms of the primary policy but provides additional limits beyond what the primary policy provides.  It does not replace an existing policy but adds higher limits, stepping in when a claim or claims exceed the limits of the primary insurance.  For instance, if a business faces a liability claim exceeding the limits of an existing commercial general liability policy, excess insurance kicks in to cover the additional losses, up to its own limit. Essentially, it acts like an extra layer of protection, providing additional limits for claims which are covered by the primary policy.

Key Benefits of Excess Insurance:

1. Higher Limits: Increases the coverage limits of existing policies, offering added protection against large claims.
2. Cost-Effectiveness: Typically, costs less as compared to umbrella insurance.
3. Specific Enhancement: May be suitable for those seeking increased coverage limits where they know their risk exposure can be significant.

Umbrella Insurance: Increase of Limits with Potentially Expanded Coverage

Umbrella insurance is not a strict “follow form” type of coverage.  While, like excess insurance, it provides additional limits beyond what the primary policy offers, it can also cover claims which are not covered by the primary policy. For example, a typical homeowners policy may not cover claims such as libel, slander, or certain contractual obligations but, depending on the terms and conditions of your umbrella policy, this coverage may cover such claims. This type of insurance generally adds extra coverage, helping to manage risks that may exceed standard policies.

Key Benefits of Umbrella Insurance:

1. Broader Coverage: Depending on the policy, may provide help protect against certain claims typically not covered under standard primary insurance policies.
2. Additional Limits: The additional limits provided by an umbrella policy can offer enhanced peace of mind which can be beneficial for businesses and individuals with complex liability landscapes.

Choosing the Right Excess or Umbrella Policy for Your Needs

Determining whether excess or umbrella insurance is the appropriate choice depends on a number of factors, including specific risk exposure and financial landscape.

For individuals, the distinction between excess and umbrella liability insurance comes down to more than just higher coverage limits. Excess liability insurance provides an additional coverage limit above the limit of an existing primary policy. It only applies once the underlying policy limit is exhausted and does not broaden what is covered and may be a good fit if you have high-value assets such as an expensive car or multiple properties. Umbrella insurance, on the other hand, not only provides higher limits but can also extend coverage to certain claims which may not be covered in a primary policy.

For example, while a homeowners policy may cover certain claims, an umbrella policy could help fill potential gaps—such as covering a broader range of personal injury claims or incidents. In short, an excess policy follows your primary policy’s terms and conditions with an additional limit of liability, while umbrella can offer higher limits and, in some cases, additional coverage for claims that may not be covered under a primary policy.

Businesses, particularly those operating in industries with significant liability exposure, may benefit from exploring umbrella insurance options. On the contrary, companies seeking targeted extensions to their primary policies' limits might find excess insurance more cost-effective and suitable, especially if their primary policy already covers potential or perceived risks.

Working with an insurance professional can help you understand your risks and whether excess liability insurance or umbrella insurance is right for your needs.

Conclusion

Excess and umbrella insurance policies can be important risk management tools to help protect against extraordinary financial losses. While excess insurance typically increases existing coverage limits, umbrella insurance can potentially provide broader coverage beyond what is covered under primary liability policies.

Understanding their unique advantages and differences can enable you or your business to make strategic decisions, helping to ensure the right insurance solution is tailored to your specific needs. Selecting the right insurance depends on assessing your current risk exposures and future potential liabilities, making these policies essential consideration of an overall risk management strategy.

Acrisure can help! We can help you find the right insurance solutions for your personal needs, as well as insurance and business solutions including risk resources to help you build a robust risk management strategy for your business.

Key Takeaways: Excess vs. Umbrella Insurance

• Excess insurance: Provides coverage for claims that exceed the limits of your primary insurance policy. It helps to safeguard your personal or business assets from potentially significant losses. The coverage typically extends only to the same claims that are covered by the primary policy.
• Umbrella insurance: Provides coverage for claims that exceed the limit and, in some instances, the coverage provided by your primary insurance policy.  
• Main difference: Excess = covers claims that exceed the limits of a primary policy; Umbrella = covers claims that exceed the limits of a primary policy plus may also cover claims that are not covered/excluded under a primary policy.
• For individuals: Excess insurance may fit if you own assets valued at more than your policy’s coverage limits; umbrella can protect against high-liability risks that may not be covered by a primary policy.
• For businesses: Excess insurance provides an additional layer of coverage beyond the limits of a primary policy; umbrella insurance may go a step further and cover additional risks that may not be covered under a primary policy.  
• Strategic value: Both policies help reinforce financial security, minimize legal risk, and strengthen long-term risk management.
• Next step: Work with an insurance professional to assess your liability risks and choose the right policy for your needs.