Exploring Secondary Coverage: Distinguishing Between Commercial Excess Liability and Umbrella Insurance Coverage

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A common misconception is that excess liability and umbrella insurance policies are interchangeable. In reality, while excess liability and umbrella insurance are both types of secondary insurance that function nearly the same, there are a few notable differences.

The most significant difference between the two is umbrella insurance can broaden coverage and apply to losses not covered by the primary coverages that are in place, while excess insurance only extends the limits of liability of the primary policy or policies. To determine which insurance best meets their needs, it is important for businesses to assess their potential risks, consider the nature of their operations and define the purpose of intended coverage.

Excess Liability Policy

Businesses may opt for excess liability insurance over an umbrella policy for several reasons:

• Cost Efficiency - Excess liability insurance is often more cost-effective than umbrella policies because it primarily focuses on raising the limits of the primary policy. Businesses with well-structured primary coverage may find excess insurance sufficient and more budget friendly.
  
  
• Specific Coverage Needs - Some businesses may have specific coverage requirements where excess liability insurance aligns more closely with their needs. It doesn't introduce additional coverage but increases the limits for existing policy lines.
  
  
• Aligning with Existing Policies - Excess liability insurance may better match the terms and conditions of the existing primary policies, which can be essential for businesses with unique or complex coverage needs.
  
  
• Control over Coverage - Excess liability policies typically maintain the same terms and exclusions as the underlying primary policy, allowing businesses to have more control over their coverage and the scope of protection.
  
  
• Risk Profile - Businesses with a lower risk profile may find that they can adequately address their coverage needs with excess liability insurance without the need for the broader protection provided by an umbrella policy.

Umbrella Policy

Businesses selecting an umbrella policy over excess liability policies may be looking for the following:

• Comprehensive Coverage - Umbrella policies offer broader coverage that can extend to areas not covered by primary policies. This can be valuable for businesses seeking more comprehensive protection against various liability risks.
  
  
• Flexibility - Umbrella policies can often be more flexible in terms of the underlying primary policies they can supplement. They may apply to multiple primary policies, providing a cohesive and integrated approach to coverage.
  
  
• Higher Limits - Umbrella policies typically provide higher limits of coverage, making them suitable for businesses with significant liability exposures, as they can effectively increase the overall protection.
  
  
• Simplicity - Instead of dealing with separate excess liability policies for each primary policy, businesses may prefer the simplicity of a single umbrella policy that offers a holistic solution.
  
  
• Gap Coverage - For businesses concerned about potential gaps in their coverage, umbrella policies can serve as a safety net to bridge any shortfalls in primary policies.
  
  
• Risk Mitigation - In cases where a business's operations pose a diverse range of liability risks, an umbrella policy can offer more comprehensive protection against the variety of claims that may arise.
  
  
• Contractual Requirements - Some contracts or agreements may specify the need for umbrella coverage, making it a requirement for doing business in certain industries or with specific partners.

Now that we've gained insight into the factors influencing the choice of insurance coverage, let's examine some scenarios where a business might exhaust its current insurance protections.

• Major Accident or Catastrophe - A business involved in a significant accident, such as a large-scale environmental incident or a multi-vehicle commercial auto accident, may incur extensive damages that surpass the coverage limits of their primary insurance policies.
  
  
• Employee Injury Claims - If multiple employees sustain severe injuries in the workplace, resulting in extensive workers' compensation claims exceeding the employer's liability coverage, the business may find its coverage exhausted.
  
  
• Product Liability Lawsuits - In cases where a business faces numerous product liability lawsuits due to a defective product causing widespread harm, the costs of legal defense and settlements might surpass general liability coverage limits.
  
  
• High-Cost Legal Disputes - Businesses involved in complex and high-stakes legal disputes, such as class-action lawsuits, may find that the legal expenses and settlement costs exceed the coverage limits of their general liability insurance.

Why Purchase Excess Liability or Umbrella Coverage
Excess liability and umbrella insurance policies play a crucial role by providing supplementary layers of protection to complement your primary insurance coverage. These policies serve as indispensable safeguards, offering your business protection against potentially devastating losses that exceed the limits of your standard liability policy. In today's landscape, where insurance settlements and jury verdicts frequently reach multimillion-dollar figures, the incorporation of excess liability and umbrella policies is an essential element of a comprehensive insurance and risk management strategy.

How Can Alliant Help?
Alliant offers creative and powerful strategies with onsite consulting services to help clients effectively respond to the ever-changing circumstances and regulatory landscape. We offer a team of leading specialists to support key loss drivers and exposures.

Our all-inclusive Risk Management Center (RMC) platform creates effective risk mitigation programs for employee safety and compliance. This unique and robust web-based suite of safety and risk management tools provides a risk reduction and safety center for all departments and locations across client organizations, designed to make risk prevention efforts more impactful, cost effective and easier to manage.