What's the Difference Between Excess and Umbrella Insurance?

Excess and umbrella liability insurance have some important differences, most notably that the former simply provides additional limits to an underlying policy, while the latter also expands coverage to include claims and losses outside its initial scope.

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Published August 20, 2018   •   3 minute read

Originally published August 2018. Updated June 2020.

Though you may sometimes hear Excess and Umbrella liability insurance used synonymously, since both increase the limits of underlying policies, there are several significant distinctions.

Firstly, what's an Underlying Policy?

An underlying policy is the initial insurance coverage established to protect against particular risks and address associated loss.

Every policy comes with a specific scope of inclusion, regarding the risks it protects against, and financial limits. Any liabilities from an incident exceeding or not encompassed within these parameters become the responsibility of the policyholder, not the insurance company.

For example, consider an underlying policy which covers job-site injuries, with damages up to $1 million. In which of the following scenarios would the contractor be completely covered?  

Scenario 1: An accident occurs on the job site that the contractor is responsible for. Damages are assessed at $700,000.

Scenario 2: An accident occurs on the job site that the contractor is responsible for. Damages are assessed at $1.4 million.

Scenario 3: An accident occurs off the job site that the contractor is responsible for. Damages are assessed at $700,000.

The contractor is only fully covered in Scenario 1. 

In the second, while the scope of the incident is covered by the policy, the $1 million limit means the contractor would be responsible for the excess400,000.

In Scenario 3, the contractor would be responsible for the full $700,000 assessment. This is because the location of the accident was not covered by the scope of the policy—an inclusion gap. Therefore, no matter the financial cap of the contractor’s policy, the claim would not be covered.

To mitigate this risk, many policyholders seek extra coverage through an excess liability policy. Fortunately, there are ways for contractors to protect themselves against the types of losses in Scenario 2 and 3—which brings us back to excess insurance, and umbrella insurance.

Excess Insurance

Excess insurance provides additional limits above those covered by the underlying policy.

Unlike umbrella policies, excess insurance does not expand the terms, or scope, of the underlying policy, but rather, bestows higher limits to safeguard against unforeseen, catastrophic claims and loss.

Excess insurance would help contractors avoid the situation outlined in Scenario 2 above: By extending their insurance to cover job-site accidents up to, say, $2 million, the contractor in that scenario would not be responsible for the excess $400,000 payment.

Umbrella Insurance

A form of excess liability insurance, umbrella policies cover claims exceeding the limits stipulated by the underlying policy's terms, while also providing broader coverage encompassing losses outside of those outlined within the initial policy.

The typical example is that an umbrella policy may cover auto liability in a foreign country even though the commercial auto policy does not extend it’s territory to foreign countries.

Umbrella insurance thus helps close any outstanding liability gaps.

In the examples above, umbrella insurance would have helped the contractor in Scenario 3 to protect themselves: They could have purchased an umbrella policy that covered extra eventualities not specifically related to the job site.

For more on the difference between excess and umbrella insurance, check out this explainer video on BCS University.

Another term you'll likely hear regarding liability insurance is Self-Insured Retention, commonly referred to as SIR.

What is Self-Insured Retention? This is a specific amount the insured must pay to a claimant before the liability insurance policy will address any losses.

Key Takeaways

  • Excess insurance does not affect the terms of your underlying policy, but instead provides additional limits.
  • Umbrella insurance is a broader type of excess insurance that can additionally cover situations outside the scope of the underlying policy.
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