Author, Sam Clayton, Vice President, Construction Group, Rancho Mesa Insurance Services, Inc.

When reviewing insurance requirements that contractors receive from municipalities and/or general contractors, two lines of coverage that are often misunderstood are umbrella and excess liability. These terms are commonly interchangeable in the contract, but have subtle differences. In addition, the limits required by contracts are increasing significantly.

Excess vs. Umbrella

An excess liability policy has two primary functions: it provides excess limits above the underlying liability insurance limits and replaces underlying insurance limits as aggregate limits are exhausted; the excess policy will be subject to the same coverage terms, conditions and exclusions as the underlying policies. This is what is called follow-form.

A commercial umbrella liability policy has three primary functions: it provides excess limits above the underlying liability insurance limits; replaces underlying insurance limits as aggregate limits are exhausted; and offers broader coverage than primary policies for certain losses which would be subject to an SIR or self-insured retention.

Why are they important?

A commercial umbrella or a properly structured excess policy will sit above a contractor’s existing policy’s general liability, auto liability and employers’ liability limit. This protects contractors from large unexpected losses that can have devastating financial impact on the company.

With the dramatic rise in costs of insurance claims the last few years, either from social inflation or third-party litigation funding, multi-million dollar settlements are becoming more frequent. For example, if one of your employees is in an auto accident that causes severe bodily injury to multiple people, the legal and medical costs incurred could very easily exhaust your primary auto liability limit very quickly. Umbrella or excess policy limits would be available cover those losses.

So, when reviewing a contract, pay close attention to the umbrella or excess insurance requirements, and ensure that you understand the subtle differences of how they can impact your bottom line if there is a claim.    

To learn more about these specific coverages and how they can be incorporated into your current insurance program, reach out via email to sclayton@ranchomesa.com or (619) 937-0167.