An Umbrella policy is a form of liability insurance which protects the Insured for claims in excess of primary policies and for some losses and coverage that are excluded under their primary policies. The term “umbrella” suggests that it’s a separate policy that is over and above, any other underlying liability policy(ies). An umbrella policy provides higher (excess) limits of insurance and usually broader additional liability coverage with a net effect of creating an “umbrella” of blanket excess protection.
There are different ways that an Umbrella policy can be activated:
Excess Limits
Provides liability protection in excess of the limits provided by the Insured’s primary underlying liability policies scheduled on the Umbrella policy. The Umbrella policy will be activated to pay excess payments once the limit of the primary underlying policy has been exhausted. Defense costs associated with the underlying primary policy are seldom paid under the Umbrella policy.
Excess Aggregate
Provides straight excess limits but also provides coverage in excess of the General Aggregate Limit and Products-Completed Operations Aggregate Limit of the primary underlying Commercial General Liability policy. Once an aggregate limit has been exhausted by prior claims during the policy term the Umbrella would pay first dollar up to the Umbrella policy aggregate limit along with defense costs since the primary underlying policy would not pay the defense costs.
Drop-Down
Provides excess limits protection for losses arising from exposures, either known or unknown, which are not covered by the primary scheduled underlying policies. The Umbrella will ‘drop-down’ to provide coverage on a primary basis because there is no underlying insurance available to the insured. The common ‘drop-down’ coverages provided by Umbrella policies are non-owned aircraft or non-owned watercraft, broader definitions for bodily injury (includes mental anguish) and personal injury (includes discrimination and humiliation) as well as worldwide coverage. Defense costs coverage is available as well.
Step-Down
Also referred to as excess sub-limit coverage, provides excess coverage for losses covered on a sub-limit basis by the primary scheduled underlying policies. Should the underlying policy cover the exposure but have a low limit or sub-limit resulting in underinsured perils, the Umbrella policy could provide additional excess coverage. Since there is underlying insurance available to the Insured in the primary policy, defense cost coverage is not available as the underlying insurer would be responsible and any self-insured retention would not apply.
While seemingly similar the big difference between ‘drop-down’ and ‘step-down’ coverage is the way the Umbrella responds to a claim. Common ‘step-down’ coverage is usually provided by ‘follow form’ endorsements. It should be noted that while they may seem to be sub-limits of the primary underlying Commercial General Liability policy, Coverages C (Medical Payments) and D (Tenants’ Legal Liability) are not usually covered by an Umbrella policy and thus do not provide ‘step-down’ excess coverage.
Summary
While the Umbrella policy is an excess liability insurance policy it should not be confused with a regular Excess Liability policy. An Excess Liability policy provides excess liability limits for specific exposures that usually match or ‘follow form’ those of the primary underlying liability policy. Unlike Umbrella it does not provide ‘drop-down’ or ‘step-down’ coverage.
