Umbrella and Excess Liability Insurance
A hypothetical story about Umbrella and Excess Liability Insurance:
Lindsay owns a high-end salon, catering to a high-end clientele, on the upper east side of New York City. She was getting ready to close the salon on a Friday when she got a call five minutes before closing. The caller, a favorite client, was desperate for a quick trim and style, and begs Lindsay, “Please don’t close, I have a huge event tonight that I need to look my best for.”
The woman ran into the salon in her stilettos, and slipped and fell, hitting her head on an open interior glass door that led to the inside part of the salon. The worst happened, and the woman was permanently paralyzed.
Needless to say, Lindsay received a lawsuit claiming injuries in the amount of $50 million. Her problem is that she only had $5 million in business insurance coverage, and there’s no way she could ever going to come up with the rest.
This is where umbrella and excess liability insurance could have helped Lindsay and saved her from possibly losing her business and her house.
What is Umbrella and Excess Insurance?
You’ll often hear these two terms, umbrella and excess liability insurance. They both mean the same thing — more insurance beyond your basic business insurance coverage — but there are some important differences to be aware of.
Excess insurance is essentially excess liability insurance that sits on top of a single underlying insurance policy. If you have general liability business insurance for $1 million, and you purchase an excess policy for $1 million, then you have $2 million in general coverage.
You could also purchase another excess policy for your commercial auto insurance and a third for your cyber insurance. In essence, you could purchase three separate excess insurance policies for each of your general, commercial auto, and cyber liability policies.
On the other hand, an umbrella insurance policy covers multiple policies at once, not just a single one. So that means an umbrella can cover two, three, five, or even 10 underlying insurance policies. In our previous example, instead of buying three excess policies, you could buy one umbrella policy.
However, it can be difficult to get an umbrella policy because not every industry will allow one policy to cover multiple smaller policies. For example:
In the construction industry, umbrella policies will not go in excess of worker’s compensation insurance and sometimes over commercial auto.
the contract may state they want their contractors to have excess workers compensation coverage, although it is not available
Instead, they’ll offer an umbrella policy that goes above the general liability and/or the property coverage
So most of the time we see business insurance clients asking for excess liability policies because you can buy excess insurance for almost any policy in any industry.
An Important Note About Follow Form Policies
If you’re thinking about an excess liability policy, you need to know about something called Follow Form.
Let’s say you have an excess liability policy and it has certain stipulations, endorsements, exclusions, and things that are covered and not covered. If those things differ from the stipulations in your general liability, then you have a problem. You could be covered for something in your general policy and not in your excess policy, which means you don’t really have excess coverage to begin with.
So it’s important to have the general liability policy rated properly for the business and then purchase an excess policy that is Follow Form. These policies don’t have their own stipulations, they follow the underwriting criteria that the general liability follows.
If you don’t do that, you can run into situations where you’re covered with one type of insurance and not the other, which defeats the purpose of having it in the first place.
Follow Form not only applies to construction insurance, but it applies to when you’re buying any kind of excess liability to fulfill a contract: Because your contract is what’s going to stipulate which coverages and which amounts you have covered. And if you don’t do Follow Form, you could technically be in breach of the contract.
Who Needs Excess Liability Coverage?
In short, everybody.
That’s because the standard limits of liability insurance usually required – $1-$2 million – is typically not enough to cover the risk involved and the potential damages that could occur. So all general liability policies are $1-$2 million, but most contracts require anywhere from $5 million to $20 million in coverage. This is generally true of New York City, Los Angeles, and Chicago, but we’re seeing more big cities adopt these larger requirements. So any time the required limit is higher than $1 million, you need excess coverage.
Remember, excess can cover General Liability, Director and Officers, Commercial Auto, Cyber, all of it. All those policies generally have a $1 million limit, and anything above it, umbrella and excess have it covered.
Now, there are specific industries that gravitate more toward excess coverage. For example, most construction projects require it, but it’s also necessary in landlord-tenant contracts. Most landlords require more than the typical $1 million in coverage just based on the valuations of their buildings, usually around $5 million. Supermarkets, bars, and restaurants, medical facilities, transportation centers, warehouses, manufacturing facilities, and even high-end salons all need at least $5 million in coverage. But if you’re in a rich neighborhood and your clientele has more money, they’re likely going to file bigger lawsuits, like in Lindsay’s case, so you may need more coverage than just the minimum required.
What does Umbrella and Excess Liability Insurance Cover?
Essentially, it can cover everything. If you have commercial auto insurance, it can cover all the stipulations of a commercial auto policy. If you have cyber liability insurance, it can cover all the specific requirements of cyber liability.
That means it can cover things like:
- Slip-and-fall injuries.
- Car accidents
- Worker’s Comp lawsuits.
- Lawsuits over third-party property damage.
However, there are certain things commercial umbrella and excess does not cover…
What does Umbrella/Excess Insurance Not Cover?
There are certain circumstances that insurance companies will not cover or provide umbrella and excess policies, such as certain malpractice, certain professional liability and others.
That’s because those certain insurance companies won’t provide excess coverage from nonrated or low rated non-admitted & admitted (see below) insurance companies.
DurAmerica will cover both admitted and non-admitted companies’ policies.
What’s the difference between admitted and non-admitted companies?
An admitted insurance company is one that is licensed to do business in a state or the United States in general. It’s domiciled in the U.S., and it’s backed by a liquidation fund from the insurance department from that state. So in case of massive claims and failure, the state insurance department can step in and fill the gap to make sure all the claims are paid.
However, for the admitted companies, the wording of every insurance policy must be approved by each state’s insurance department. This means there are strict regulations on what can be said and what can be offered. This also means some types of policies can become ridiculously expensive, and the insurance company can’t do anything without taking away coverage to lower that price.
So, what the insurance industry did was to create non-admitted companies that are domiciled outside the United States and/or are not backed by the state insurance departments as a way to get rid of certain coverages that cause prices to go up.
By getting rid of those certain coverages, they’re able to offer coverage to customers that wouldn’t be able to have it or afford it. Lloyds of London is one of those non-admitted companies. The two places in the world that offer the most non-admitted business are London and Bermuda.
Here’s how non-admitted coverage might work for malpractice insurance. Let’s say we have a doctor, just out of medical school, and she finds an admitted policy. A couple years later, she’s helped hundreds and hundreds of patients and has paid out a couple massive claims. This means her malpractice insurance has gone through the roof, and it’s getting too expensive to have.
The best way she can get coverage is to go through a non-admitted company so they can exclude certain coverages and types of procedures, which means she can continue her work. Her record gets better, her policy costs get lowered to a more manageable level, and she’s able to go back to an admitted company.
This same thing happens in the construction industry. Some companies might say, “we don’t cover roofers” so they can keep their prices low. That means that if roofers want insurance, they need to work with a non-admitted insurance provider. This way, they can get an offer of coverage where there normally wouldn’t be one.
That’s why it’s important to find an umbrella/excess insurance provider who will work with non-admitted companies. Otherwise, you only have access to one side of the marketplace.
Are There Limitations to the Scope of Umbrella/Excess?
In some cases, there are limits to the amount of coverage an insurance company will provide. So it’s necessary to beef up your insurance through something called layering.
Let’s say you have a contract that requires $20 million in coverage. You have $1 million, but you need the other $19 million. However, no insurance provider will give you $19 million. But you can find three companies that will each cover $5 million, and another that will cover $4 million, and now you’ve got your $19 million in excess coverage. That’s layering.
The Big Takeaway
It’s weird to think we live in a day where $1 million is not considered a lot of money. But we’re seeing this more and more as multi-million dollar lawsuits are being filed, far in excess of $1 million. That’s why most contracts, whether it’s a construction sub-contractor, a transportation company, a tech company, and even a landlord-tenant contract, require as much as $5 million in coverage or more.
Since most insurance companies won’t provide general liability insurance for more than $1 million, you need umbrella and excess insurance coverage to protect you from those unthinkable events that result in a $5 million or even a $50 million lawsuit, like Lindsay the salon owner.
Lindsay’s story may be fictional, but it’s based on real-life events that we’ve seen here at DurAmerica. Stories like this bring home the all-too-real possibility that this can happen to anyone, even if they think they have “enough” coverage.
Every business owner needs general liability insurance, but it’s not enough these days to cover every possibility or situation. So every business owner needs to make sure they’re protected with umbrella or excess liability coverage as well.
We’ll help you understand which kind of coverage you need and how much, whether you’ve got a high-end salon catering to very wealthy clientele or middle America in Anytown, USA.
But rather than trying to figure out which policies you need and how to make sure you’re following form and matching everything up, you should speak to a professional insurance agent who specializes in helping business owners cover every endorsement, stipulation, and certification.