What Does Excess Liability Insurance Cover?

Excess liability insurance serves as an additional layer of financial protection. It functions as a supplementary policy, extending the coverage limits of an existing primary insurance policy.

What is Excess Liability Insurance

Excess liability insurance provides additional financial limits above an underlying primary liability insurance policy. This protection becomes active only after the limits of the primary policy have been fully utilized in addressing a claim. For instance, if a primary general liability policy covers up to $1 million, an excess policy would begin to pay for damages once that initial $1 million has been exhausted.

This form of insurance does not expand the scope or types of incidents covered by the primary policy. Instead, it increases the maximum financial payout available for claims already within the terms of the underlying coverage. It is valuable for businesses and high-net-worth individuals facing large liability claims that could exceed typical policy limits.

Consider a business holding a primary general liability policy with a $1 million limit for a single occurrence. If a lawsuit results in a judgment of $2.5 million, the primary policy would pay its $1 million maximum. The remaining $1.5 million would then fall to the excess liability policy, assuming it has sufficient limits. Without this additional layer, the business would be responsible for paying the difference out-of-pocket, potentially leading to severe financial strain.

Excess liability coverage is often secured for specific primary policies, such as general liability, commercial auto liability, or professional liability insurance. Its purpose is to strengthen existing protection against large claims.

Excess Versus Umbrella Coverage

The terms excess liability and umbrella coverage are often used interchangeably, yet they represent distinct approaches to extended liability protection. Both types of policies provide additional coverage above the limits of primary insurance, but they differ in their scope and application.

Excess liability insurance is characterized by its “follow form” nature, meaning it aligns directly with the terms, conditions, and exclusions of a specific underlying primary policy. It increases the monetary limit of that one particular policy. For example, an excess liability policy might extend the limits of a commercial auto insurance policy from $1 million to $5 million, covering only auto-related claims.

Umbrella liability insurance, by contrast, offers broader coverage. While it also provides higher limits over primary policies, it can extend to cover multiple underlying policies simultaneously, such as general liability, commercial auto, and employer’s liability. An umbrella policy may also provide coverage for certain types of claims or perils not included in the primary policies, effectively filling potential gaps in coverage. An umbrella policy might also have a self-insured retention, similar to a deductible, for claims not covered by an underlying policy.

Consider a scenario where a business has a primary general liability policy and a primary commercial auto policy. An excess policy would typically boost the limits of one of these, for example, the general liability. An umbrella policy, however, could provide additional limits for both the general liability and the commercial auto policies, and potentially offer coverage for an event like a lawsuit alleging libel or slander, even if the primary policies do not specifically cover such claims.

The key difference lies in the breadth of coverage; excess policies extend limits for specific underlying coverage, while umbrella policies can expand the scope of coverage across multiple areas and even introduce new coverages.

What Excess Liability Insurance Covers

Excess liability insurance extends the financial limits for claims already covered by underlying primary policies, encompassing a range of potential liabilities. This includes incidents involving bodily injury, property damage, personal injury, and advertising injury.

Bodily injury claims involve medical expenses, rehabilitation costs, and legal judgments arising from physical harm to a third party. For instance, if a customer slips and falls on a business’s premises, incurring medical bills and other damages that exceed the primary general liability policy’s limit, the excess policy would cover the remaining costs.

Property damage coverage addresses the costs to repair or replace property belonging to others that is damaged due to the policyholder’s actions or negligence. An example could be a commercial vehicle accident where the damage to another party’s vehicle or property surpasses the primary auto liability policy’s maximum payout.

Personal injury coverage extends to non-physical harms, such as claims of libel, slander, false arrest, or wrongful eviction. If a business faces a lawsuit for defamation that results in a judgment of several million dollars, and the primary general liability policy includes personal injury coverage, the excess policy would activate to cover the judgment beyond that initial limit.

Advertising injury coverage pertains to liabilities arising from a business’s advertising activities, including copyright infringement, trademark infringement, or misappropriation of advertising ideas. Should a business inadvertently use copyrighted material in its marketing, leading to a substantial lawsuit, the excess policy would provide additional coverage once the primary policy’s advertising injury limits are reached.

How Excess Liability Insurance Functions

The operation of an excess liability policy is sequential, activating only after the primary insurance policy has fulfilled its maximum obligation. When a liability claim is filed, the initial responsibility for payment rests with the underlying primary policy.

This policy, such as a general liability or commercial auto policy, will handle the claim up to its predefined limits, whether per occurrence or in aggregate. Once the primary policy’s financial limits are exhausted by a covered loss, the excess liability policy then comes into effect.

For example, if a primary policy has a $1 million limit and a claim totals $3 million, the primary insurer pays the first $1 million, and the excess insurer then pays the next $2 million, assuming the excess policy has at least that much coverage. Legal defense costs are typically handled in conjunction with the claim itself.

If the costs of defending a lawsuit, combined with any settlement or judgment, exceed the primary policy’s limits, the excess policy will contribute to these expenses once its coverage is triggered. The involvement of the excess insurer usually begins with monitoring the claim handled by the primary insurer, ensuring proper management and that the claim is progressing within established protocols. The primary insurer is typically responsible for the initial investigation, negotiation, and defense of the claim. They manage the process until their policy limits are reached or a settlement is agreed upon within those limits. If the potential payout or actual judgment appears likely to surpass the primary limits, the excess insurer becomes more directly involved, coordinating with the primary insurer to ensure a seamless transition of coverage responsibilities.