When businesses look at their liability coverage, they often come across two important types of insurance: excess and umbrella policies. While people sometimes use these terms interchangeably, they actually have different roles in protecting a business. Understanding these differences is crucial for business owners to make informed decisions about their coverage.
Both excess and umbrella insurance provide extra protection beyond the limits of primary liability policies, like commercial auto or general liability. They kick in when the primary coverage limits are reached. Typically, these policies start at $1 million and can be adjusted based on the business’s needs. However, they rely on the underlying insurance policies listed in a schedule, which means that the type of primary coverage can impact how the excess or umbrella policy functions.
Here’s a simple example: If a business vehicle is involved in an accident causing $750,000 in property damage, and the commercial auto policy has a $500,000 limit, either an excess or umbrella policy could cover the remaining $250,000, provided the claim meets the terms of the policy.
Despite their similarities, excess and umbrella policies differ significantly in coverage scope. An excess policy generally extends the limits of scheduled underlying policies and follows the same terms and conditions. If something is not covered by the primary policy, the excess policy usually won’t cover it either.
On the other hand, an umbrella policy can offer broader protection. It may increase limits for scheduled policies and sometimes covers situations that the underlying policies do not. However, if the umbrella policy is triggered in such cases, the insured might need to pay a self-insured retention (SIR) first, which is usually around $10,000.
For instance, if a newly acquired vehicle is not listed in the primary auto policy, the primary insurer might refuse to cover a claim related to that vehicle. Depending on the umbrella policy’s terms, there might still be coverage available after the SIR is paid, but this varies by policy.
It’s also important to understand the difference between a self-insured retention and a deductible. An SIR requires the insured to handle the initial part of a claim before the insurer steps in, while a deductible is subtracted from the claim payment, and the insurer manages the claim from the start.
Choosing between an excess or umbrella policy depends on several factors, including the business’s risk profile and existing insurance structure. Excess policies may be more budget-friendly due to their limited scope. In contrast, umbrella policies can offer more flexibility but often come with that upfront SIR cost.
Ultimately, every business is unique, and there’s no one-size-fits-all answer. Business owners should work closely with their insurance agents to review their current coverage and assess their specific risks. With over 145 years of experience, Central Insurance emphasizes a relationship-focused approach, helping businesses find the right coverage to protect themselves as they grow.