What's the Difference Between Excess and Umbrella Insurance?

However, contractors can protect themselves against these losses by employing excess and umbrella liability insurance—both of which increase limits of underlying policies, but have several important distinctions.

First, What’s an Underlying Policy?

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

Every policy has its own unique scope of protected risks 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 Scenario 2, while the scope of the incident is covered by the policy, the $1 million limit means the contractor would be responsible for the excess $400,000.

In Scenario 3, the contractor would be responsible for the full $700,000 assessment because the location of the accident was not covered by the scope of the policy—an inclusion gap. 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 contractors protect themselves against the types of losses in Scenario 2 and 3: excess and umbrella insurance.

What Is Excess Insurance?

Excess insurance provides additional financial 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, covers higher limits to safeguard against unforeseen, catastrophic claims and loss.

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

What Is 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.

For instance, an umbrella policy may cover auto liability in a foreign country even though the commercial auto policy does not extend its territory to foreign countries.

Therefore, umbrella insurance 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.

Of course, before liability insurance policies will address any of these losses, the insured must often pay a self-insured retention (SIR) fee—an amount the policyholder pays before insurers will respond to an incident.

Key Takeaways:

While excess insurance does not affect the terms of your underlying policy, it provides additional limits.

Umbrella insurance is a broader type of excess insurance that can additionally cover situations outside the scope of the underlying policy.

BCS: Your COI Tracking Solution

Whatever the terms of your vendors’ certificates of insurance (COIs), managing a team of third-party suppliers comes with many moving parts.

Rather than risk the human oversight and non-compliance often associated with manual document tracking, it is prudent to migrate vendor processes to an automated solution that automatically flags policy deficiencies for an easy return to compliance.

From automated requests for proposal (RFPs) broadcasting and onboarding tools to streamlined vendor portals and in-app messaging, cutting-edge software comprehensively manages the full scope of your third-party processes—leveraging the full benefits of modernization so you can focus on running your business. 

For more on the difference between excess and umbrella insurance, check out this explainer video from Business Credentialing Services (BCS) University.

BCS is the preeminent COI management solution on the market, offering self-service and full-service tracking, in-app communication tools, self-onboarding through the BCS App, vendor portals, automated RFP broadcasting, and so much more. To learn more, schedule a demo or contact us today.