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Understanding the Differences Between Umbrella Insurance and Excess Liability Coverage

Not all policies cover the entire scope of a peril or covered incident. In most cases, when the costs of the incident exceed the policy’s limits or scope of coverage, policyholders have to foot the excess costs out of pocket.

Depending on the incident and the damages, these out-of-pocket costs can become too expensive, overriding the benefits of having an insurance policy. However, getting an umbrella insurance or excess liability coverage helps protect you against such scenarios.

According to data, 20% of homeowners have an umbrella insurance. Excess liability coverage and umbrella insurance help them mitigate risks and ensure continuous coverage for losses and perils not outlined in the underlying policy.

However, these two policies are not strictly the same. Here’s a look into umbrella insurance and excess liability coverage and which one you should choose for your business, operations, or organization.

What is Umbrella Insurance?

Umbrella insurance is a form of excess liability insurance where the policy scope is broadened, and the coverage expanded to cover claims that exceed the limits of the underlying policy. Therefore, umbrella insurance extends coverage of the primary policy with higher liability limits.

For instance, you may have a commercial auto insurance policy that doesn’t cover auto liability in foreign countries. Getting umbrella insurance can help extend the scope of your coverage to these territories.

Therefore, umbrella insurance is used to close any outstanding gaps in your existing insurance policies. However, before the insurer covers these losses, you must pay a self-insured retention (SIR) fee. This fee is typically placed before the insurer responds to an incident.

What is Excess Liability Insurance?

Excess liability insurance boosts your financial limits above the ones offered by your underlying insurance policies. It kicks in when you’ve exceeded your primary insurance policy’s limits, giving you additional coverage for the same risks covered by the primary policy.

Unlike umbrella insurance, which expands the covered perils, excess liability insurance only raises your financial limits for the same risks. Therefore, it doesn’t affect the terms of scope of your policy but instead extends the financial limits to safeguard against catastrophic and unseen losses and claims.

Typically, excess liability insurance costs less than umbrella insurance since it doesn’t affect or change the terms of the underlying policy.

With excess liability insurance, your business can be more confident about its policy limits and the extent of coverage, providing a financial safeguard against significant and unforeseen incidences.

What Are the Underlying Policies?

Excess liability and umbrella insurance don’t exist on their own. Rather, they’re based on underlying insurance policies. These include the following:

·        General Liability

·        Commercial Auto Liability

·        Pollution Liability

·        Worker’s Compensation

·        Professional Liability

·        Coverages specific to an industry

These underlying policies are usually liability coverages. That’s because excess liability insurance and umbrella insurance only provide additional liability protection. They do not cover property policies.

Who Needs Umbrella Insurance and Excess Liability Coverage?

Commercial umbrella insurance and excess liability coverage are important policies for small businesses operating in a high-risk market or trying to get adequate coverage from all their liability policies.

These businesses may be in a high-risk location with high foot traffic, have larger business liabilities due to the nature of the operation, or have contractual requirements to carry high liability protection to work with specific clients.

Typically, most businesses buy a large liability coverage policy and then add an umbrella or excess liability coverage to boost their limits or expand the scope of coverage.

For instance, you can buy a $2 million liability policy for your business, then add an umbrella and excess liability coverage for better protection. Typically, umbrella insurance costs $40 per month for $1 million in additional coverage.

Which One Should You Choose?

Choosing between umbrella insurance and excess liability insurance depends on various factors controlling your business or job. Typically, you can break down the need for umbrella insurance and excess liability coverage into more specific business and job groups.

Excess Liability Coverage

Typically, excess liability coverage is recommended for businesses with a lot of assets to protect. This also applies to businesses or contractors in a market highly prone to costly lawsuits. This includes individuals who can easily face litigations or those who live in homes with a high risk of damage.

Umbrella Insurance Policy

Umbrella insurance policies are typically recommended to businesses or individuals with auto and homeowners insurance policies that don’t offer the full scope of coverage they need. This means that you have unprotected assets even with your underlying policy.

What Your Insurer Offers Matters

While they seem complimentary, not all insurance companies offer excess liability coverage. This may be because the coverage is the same as the underlying policy, with the same exclusions.

Umbrella insurance policies are, therefore, more common since they expand the scope of coverage. For instance, if you have a homeowner’s insurance policy, the insurer can offer you umbrella insurance that extends your coverage and liability to when you’re found responsible for a person’s fall or injury on the property.

Excess liability policies often don’t offer higher limits or coverage for other claims, such as libel or slander, if your homeowner’s insurance policy doesn’t already provide the cover. However, an umbrella insurance policy will be able to cover this broad range of incidents and help you pay for a libel or slander settlement connected to an initial bodily injury claim.

Therefore, before choosing the better policy for your business or job, ensure you’ve gone through the details of each with your insurance agent. Your protection will vary based on various factors, affecting the distinction between the umbrella policy and excess liability coverage you’re being offered.

This will help you avoid taking out excess insurance policies that don’t add benefit to your business based on the details of your underlying policy.

Consult an Expert

Umbrella insurance and excess liability coverage can be great additions to your underlying insurance policies. Depending on your business, getting one of the two may be more than enough. Often, umbrella insurance policies are preferred over excess liability coverage. However, excess liability coverage can be the better option if you’re covered for the full scope of perils but need higher limits to protect all assets.

Talk to an insurance expert and get the guidance you need to make an informed decision.


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