There are times when a commercial insurance policy's general liability limits aren't enough to handle major claims. In these circumstances, business insurance policyholders rely on extra coverage through an excess liability insurance policy or an umbrella insurance policy. Here's a look at excess liability insurance, how it works, what it covers, how it differs from umbrella insurance and how to tell if it's right for your business.
What is excess liability insurance?
Excess liability insurance is a policy you can purchase to increase the limits of another underlying policy. It's most often seen as added coverage for a general liability insurance policy, but it can also increase commercial auto liability policies. Think of excess insurance as a "second-in-line" policy, where a claim would be filed on the excess insurance policy only when the underlying liability insurance has hit and exceeded its maximum limit.
How does excess liability insurance work?
An excess liability insurance policy will sit in the background until the underlying policy's limits have been exhausted. Once the underlying policy hits its coverage limits, the excess liability insurance policy will kick in. The excess liability insurance policy, once in play, will pay up to its policy limits.
While owning an excess liability insurance policy will limit the instances where your company is underinsured, it doesn't guarantee that you will never have to pay out of pocket. If a claim is so large that it hits both the underlying insurance policy and the excess policy's limits, you could still be liable for the difference remaining on a claim.
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Excess liability insurance case
Let's say you have a general liability insurance policy with a per-occurrence limit of $1 million. You also have an excess liability insurance policy with another $1 million in coverage. This gives you a total of $2 million in general liability coverage.
Say you have a customer who slips and falls on your company's premises, and they sustain a concussion with long-term neurological consequences. They sue you for $1.5 million. The general liability insurance would cover the first million, while the excess insurance policy would handle the remaining $500,000.
If there were a claim for $3 million, the general liability policy would cover the first million, the excess liability policy would cover the second million, and your business could still be on the hook for the remaining million.
What is the difference between umbrella and excess liability insurance?
Umbrella and excess liability insurance policies both add liability coverage to specific policies. The difference is that an umbrella policy usually provides coverage for more than one underlying policy, while an excess liability policy is meant to back up only one underlying policy, which is usually general liability, but it may also cover commercial auto.
Generally speaking, both umbrella and excess liability insurance policies will maintain the underlying insurance policies' terms and conditions, including the underlying policy's exclusions.
Do you need excess liability?
Consider your company's risks and optimal coverage amounts when deciding if you should opt for excess liability insurance. It is there to protect you for those rare instances where your general liability insurance policy isn't enough.
These are some question to ask yourself about your company's coverage:
- Can you increase your general liability policy for a reasonable price?
- Do you need higher liability limits to satisfy requirements for a particular client?
- Does your business have the financial resources to handle substantial claims?
- Does your business interact with a large customer base?
- Are there increased risks to conducting business based on your industry?
- Does your business use heavy equipment or commercial machinery?
The bigger your business, and the more interaction it has with consumers, the more likely you need an excess insurance policy. Businesses with increased risk, including those that use heavy machinery and equipment, have more exposure and should carry larger liability limits.
Keep in mind that if you have more than one liability policy – including general liability, workers' compensation, and commercial auto – you may opt for an umbrella policy instead of an excess liability policy. This is because one umbrella policy will increase the limits of all three liability policies, making it a more cost-effective option.
What does excess liability insurance cover?
Excess liability insurance will cover the same claims as the underlying policy; these claims will vary from policy to policy. For example, the excess liability policy for general liability will cover slip-and-fall accidents, while the excess liability policy for commercial auto will cover at-fault accidents, third-party injuries or property damage.
What excess liability covers:
- Third-party bodily injury
- Third-party property damage
- Libel and slander
- Investigation and defense of claims
What excess liability doesn't cover:
- First-party business property
- Inventory
How much does excess liability insurance cost?
Excess liability insurance costs vary because policy price is contingent on several factors, including how much coverage you need, business size, number of employees, industry and the amount of years your company has been in business. If you have prior claims you would pay more than a claim-free company.
The best way to estimate your rate is to get a quote based on your business's unique factors.
Where do you buy excess liability insurance?
Generally speaking, you'd purchase excess insurance from the insurance company you're already dealing with for your underlying policy, such as your general policy insurance carrier or commercial auto insurance carrier.
While it's possible to get an excess liability policy from another insurance carrier, you'd likely pay more for the policy than you would with a carrier that underwrites both policies.
Interested in learning about other types of insurance for your business? Here are several options that might be helpful: