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Commercial umbrella insurance vs. excess liability insurance

Though the terms are sometimes used interchangeably, commercial umbrella and excess liability insurance have several key differences.

What are commercial umbrella insurance and excess liability insurance?

They may sound like they’re similar, but commercial umbrella insurance and excess liability insurance are not the same policy.

  • Excess liability insurance provides additional coverage after an underlying liability policy has reached its limit. It covers any claims that would have been covered in the underlying policy. However, it excludes any claims the underlying policy did not cover.
  • Commercial umbrella insurance is a type of excess insurance. Like excess liability insurance, it covers additional liability that exceeds your underlying policy’s limits. Plus, it can sometimes cover claims that wouldn’t be covered by the underlying policy.

Excess insurance is usually cheaper than increasing the limits on your policy. Both commercial umbrella and excess liability coverage can be applied to the following policies when their limits are reached:

Both policies protect small businesses from catastrophic losses. By adding more coverage when your liability policies are maxed, umbrella and excess liability insurance reduce the chance of an escalating lawsuit bankrupting your business.

What’s the difference between excess liability insurance and umbrella liability insurance?

Both policies cover the leftover liability that your underlying policies don't cover. So how do you distinguish between the two?

Commercial umbrella insurance is a type of excess insurance. It works almost the same way as excess liability insurance, except an umbrella policy can:

  • Be applied to multiple underlying liability policies.
  • Drop down when an underlying policy’s aggregate limits are exhausted.
  • Cover claims not included in the underlying policies.

Umbrella liability insurance can cover different coverage terms, conditions, and exclusions that aren’t in your underlying policy. Excess liability insurance will likely have the same coverage terms, conditions, and exclusions as the underlying policy.

With umbrella insurance, your company will need to pay any losses that the underlying policy doesn't cover first. On the other hand, excess liability insurance won't provide coverage beyond what's included in the underlying policy.

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Which insurance policy do you need for your small business?

The answer to that question depends on your needs. If you want protection beyond what's included in the terms of your underlying coverage, consider a commercial umbrella policy. But if you need coverage to extend the limits of your current policies, consider adding an excess liability policy.

Small businesses that benefit from excess liability coverage:

  • Face high liability risks, such as a business location with substantial foot traffic.
  • Must carry high liability limits to work with a particular client.
  • Need greater liability protection and have a limited budget.

How do commercial umbrella and excess liability coverage work?

How do these policies play out? Say you have an excess liability policy that extends the coverage of your general liability insurance. If you’re found liable for $1.5 million in damages, and your general liability policy only covers $1 million, your excess coverage would pay for the remaining $500,000.

But it would only apply to one underlying policy. You wouldn’t be able to apply excess liability coverage that supplements your general liability policy to a claim on a different policy.

Now, let’s say you have a commercial umbrella policy to cover claims beyond those covered by the underlying policy. In that case, you’ll need to pay the self-insured retention (SIR). Similar to a deductible, this is the amount of money you must pay before the insurance company will pay an additional benefit for the loss.

For instance, let’s say your umbrella policy has a $10,000 SIR, and your claim costs $100,000 after the underlying limit is exhausted. You must pay $10,000 toward the claim and then the insurance company will pay the rest.

The bottom line is, you can’t predict the future. The best time to prepare for risks is before mistakes or mishaps occur. Don’t wait too long to get the coverage you need to protect your employees, clients, and company assets.

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