The terms “umbrella policy” and “excess liability policy” are often used interchangeably. But each policy type brings its own advantages. While both policies share some similarities, some key differences make each a better fit in certain situations. Knowing the differences helps ensure that you choose the right type of policy for your coverage needs.
- Both umbrella policies and excess liability insurance policies increase the effective liability coverage limits for underlying policies.
- Umbrella policies bring new coverage for risks such as libel and slander, but excess liability insurance does not modify the underlying coverage.
- Umbrella insurance offers a more comprehensive solution, but excess liability policies often bring higher available coverage limits.
What’s an underlying policy?
An underlying policy is another insurance policy that provides a base level of liability insurance for a specific risk. Both umbrella policies and excess liability policies expand the coverage limit for underlying policies. However, this expanded coverage targets liability risks.
For example, if your auto insurance policy offers a $300,000 liability coverage limit, an umbrella or excess liability policy can provide secondary coverage, increasing your liability protection by the amount you choose when you purchase your policy.
The underlying policy is primary, meaning that if you have a covered claim, the underlying policy pays toward the claim first. If that coverage amount is exhausted, your umbrella or excess liability insurance policy then provides coverage.
This structure reduces the risk of a claim for the secondary (umbrella or excess liability insurance) policy because most claims will only use the primary policy. This reduced risk of claims against the secondary policy translates to lower rates per dollar of coverage. Liability protection from these secondary policies costs a fraction of the cost per dollar of insurance for primary policies.
Understanding liability risks
In simple terms, liability refers to our financial responsibility for losses caused to others. Auto insurance policies cover liability risks for auto-related property damage and bodily injury. Home insurance policies cover liability risks for (non-auto) accidental injuries to others.
Accidents happen, and the potential liability losses can reach hundreds of thousands or even millions in some cases.
Some refer to liability insurance as coverage for others because it pays for accidental damage to the property of others and unintentional injuries caused to others. While “others” are key to coverage in a claim, liability insurance also helps protect your savings, home, and future earnings. In that respect, liability insurance acts as coverage for you as well.
What is an excess liability policy?
An excess liability insurance policy expands the liability coverage limits for its underlying policies. These policies will be named specifically in the excess liability policy, along with the amount of extra coverage provided.
When comparing an excess liability insurance policy to an umbrella policy, an excess liability insurance policy is the simpler of the two because it doesn’t add new coverage. Instead, an excess liability insurance policy just increases your effective liability insurance limits.
For example, let’s say you have two policies, a home policy and an auto policy. Each provides liability insurance for certain risks.
- Home policy liability limit: $300,000
- Auto policy liability limit: $300,000
A million-dollar excess liability insurance policy would increase your effective liability coverage for each policy to $1.3 million.
Smaller and more common claims would be paid by the primary home or auto policy, whereas larger claims that exceed your coverage limit would use your excess liability coverage after the limit on the underlying policy is reached.
Let’s use the example above with a $600,000 auto liability claim with injuries to others. In this case, the primary coverage is exhausted at $300,000. The excess liability insurance policy can then pay the remaining $300,000.
What’s an umbrella policy?
An umbrella policy, much like an excess liability insurance policy, also increases the effective coverage limit of the underlying policies. Much like a large umbrella can shelter more than one person from the rain, an umbrella policy can expand the limits of more than one underlying policy.
However, an umbrella policy also adds new coverage that’s not available with a standard home insurance policy or an excess liability policy.
The earlier example showed how an excess liability insurance policy acts as secondary insurance for liability risks covered by a primary home or auto policy. Umbrella policies do this as well. A $1 million umbrella policy extends your underlying limit by $1 million.
But an umbrella policy can also provide primary coverage for certain risks not covered by your base policies.
- Slander/Libel: Slander refers to spoken defamation of others, whereas libel refers to written defamation of others. One common example of libel is posting something on social media that causes unintentional harm to someone else. Your home insurance policy won’t cover the claim if you are sued in this example, but an umbrella policy can pay for your defense and cover the claim up to your coverage limit.
Other risks that may be covered by an umbrella policy include:
- Invasion of privacy
- Malicious prosecution
- False arrest, imprisonment, or detention
- Wrongful eviction or entry (landlord liability)
Discuss your coverage needs with your trusted agent to learn when these coverages apply and ways to structure your coverage to provide the best protection.
Umbrella policies offer protection against additional risks. Typically umbrella policies cost more than simpler excess liability insurance policies. However, there may be bundling discounts or other factors that can close the gap in price.
Available coverage limits
Another common difference between umbrella policies and excess liability insurance policies is in the available coverage limits. Many umbrella policies offer $1 million to $5 million in coverage, whereas excess liability insurance policies can provide up to $25 million or more.
Which policy type is best for you?
Each policy type brings its own advantages. Excess liability policies typically cost less per dollar of coverage while also offering higher coverage limits. Umbrella policies bring coverage for additional risks not covered by a home insurance policy or excess liability policy.
However, there are ways to customize your coverage for your unique needs. Some households may be well-served by a home insurance policy paired with an umbrella policy. Other households may need additional policy types or riders to address specific risks, such as a home business or volunteer activity.
The experienced team at Coastal Insurance is here to help. We’ll work with you closely to understand your lifestyle and help you design an insurance strategy that fits the way you live. We work with top insurers across the nation to bring you personalized insurance protection at the best rates possible.
Reach out today to learn more about umbrella coverage, excess liability insurance, and the best ways to protect you home and family. With Coastal Insurance Solutions, our team of advisors will partner with you to tailor a package to your unique needs and compare quotes from the finest insurance companies.
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About the Author
David W. Clausen is the CEO of Coastal Insurance Solutions. With over 20 years' experience and over 1 billion insured, David and Coastal Insurance Solutions are the recognized leaders in high net worth insurance. For the fourth consecutive year, David Clausen has been awarded Top Producer by Insurance Business America. David is a trusted high net worth insurance expert who’s published more than 200 articles. His articles & press releases have generated over 500K pageviews and has been featured on blogs such as Google News, Yahoo Finance, CNBC, Market Watch, Fox, The New York Times, etc. David founded Coastal Insurance Solutions in 2001 after earning a BBA from the State University of New York College at Oswego.