Excess or Umbrella: Which to Choose When You Need Additional Liability Coverage

When you purchase any insurance, you should ask yourself: "Are the limits high enough to protect my family’s financial well-being if a claim is made against me?"

Unfortunately there is no definitive answer. But having more liability insurance coverage is never a bad thing. Two common choices are excess liability insurance and a personal umbrella policy. 

Below, we review the differences between the two so you can make an informed decision.

The Basics: Umbrella vs. Excess

First things first: What is the difference between an umbrella policy and an excess policy? 

• Excess liability policy.  This type of policy does nothing to the terms of your other insurance policies, but raises the limit of liability you have available for a claim (reserved coverage if a claim exceeds your current limits). 
• Umbrella policy. In addition to acting as an excess liability policy, an umbrella policy provides additional coverage for types of losses that otherwise would not be paid. 

Additional coverage under an umbrella policy might include:

• Auto coverage for anywhere in the world
• Personal injury coverage for claims such as libel or slander
• Coverage for specific claims due to  your role as a director or officer of an organization

The bottom line: You can think of an umbrella policy as an excess liability policy, but with a few more bells and whistles. 

Umbrella Policies Extend Limits and Coverage on Existing ("Underlying") Policies

Umbrella policies extend limits and coverage on some, or all, of the insurance policies you currently have. Such policies typically include:

• Homeowners 
• Auto 
• Condo
• Watercraft, ATV or other specialized policies 

The policies covered by the umbrella are called “underlying” policies.

Umbrella Policies Only Cover Underlying Policies If Certain Rules Are Met

Most umbrellas will only cover underlying policies if certain rules are met. An example might be in relation to the financial strength of the insurance company that holds the underlying  policy and the coverage limits of that policy.

For example, to obtain an umbrella policy, you might have to prove that the limits of the underlying policies that it covers (such as your homeowners and auto insurance) are not less than a specified dollar amount. Should you change those limits mid-term, you risk changing the way your umbrella will apply toward a loss.

An Umbrella Policy in Action

Let's assume you purchase a $1 million umbrella policy. The umbrella provider specifies that it will cover your homeowners policy, provided it includes a personal liability limit of at least $300,000 (i.e., that's a rule). 

You currently have $300,000 of personal liability on your homeowners policy and show a copy of it to the umbrella provider as proof. A few months after the umbrella policy takes effect, you call your homeowners insurance company and request that your personal liability limit be lowered to $100,000 to lower your premium.

A few weeks later, someone suffers a serious injury, you're liable, and they file a claim. Your policy limit of $100,000 is used up, but there are still bills to pay. You turn to the umbrella policy for coverage, which you bought for up to $1 million. 

However, since you lowered your personal liability limit, the umbrella provider may not pay a dime until the required minimum of $300,000 has been met. In this case, you would be out of pocket for $200,000. This is the difference between your personal liability limit ($100,000) and the required minimum specified by the umbrella provider ($300,000). 

In fact, some personal umbrella policies may not respond at all once the terms have been breached.

The Bottom Line

It’s important to remember that excess and umbrella polices differ depending on which insurance company you choose to work with. It's more important to stay within the rules of whichever you choose for additional coverage to make sure you're actually protected.

Understanding how such policies relate to your underlying policies can be tricky. A call to your Trusted Choice® independent insurance agent will help you determine which policy is right for you and what you need to do to be sure it works come time for a claim.