Excess Liability and Commercial Umbrella Policies
This domain tests how liability limits are stacked: the difference between excess and umbrella, how the umbrella sits over scheduled underlying policies, when it drops down over a self-insured retention, and what happens when the insured fails to maintain the underlying insurance it promised to keep.
Excess versus umbrella
An excess policy is follow-form: it adopts the terms of one underlying policy and pays above that policy's limits. An umbrella is broader by design. It pays above the scheduled underlying policies and also drops down to cover losses the underlying policies exclude, subject to a self-insured retention.
Mechanics the exam targets
- Schedule of underlying insurance. Typically general liability, auto liability, and employers liability. Workers compensation benefits are never scheduled - the umbrella sits over employers liability, not the statutory Part One benefits.
- Required underlying limits. Stated in the declarations, for example $1,000,000 per occurrence for general liability and auto and $1,000,000 for employers liability.
- Retained limit. The umbrella pays the greater of the amount payable by the underlying insurance or the self-insured retention. The SIR applies to drop-down claims, not to claims the underlying policy already covers.
- Maintenance of underlying insurance. If the insured lets the required underlying coverage lapse or buys lower limits, the umbrella still responds as though the underlying limits were in place. The insured absorbs the difference.
- Defense. The umbrella generally has no duty to defend while the underlying insurer is defending; it assumes defense when the underlying limits are exhausted, or handles drop-down claims, often with defense costs inside the SIR.
Worked example
A retailer carries $1,000,000 per occurrence/$2,000,000 aggregate general liability, $1,000,000 auto liability, $1,000,000 employers liability, and a $5,000,000 umbrella with a $250,000 SIR. An auto accident produces a $3,500,000 judgment: auto pays $1,000,000 and the umbrella pays $2,500,000. A separate pollution claim of $900,000 is barred by the general liability policy's absolute pollution exclusion but covered by the umbrella: the insured pays the $250,000 SIR and the umbrella pays $650,000.
Traps that cost marks
Assuming the umbrella pays workers compensation benefits; forgetting that the SIR does not apply when underlying insurance responds; missing the maintenance clause consequence, where a lapsed auto policy leaves the insured as its own first-layer insurer; and assuming the umbrella follows every underlying exclusion - it is written to be broader, so read its own exclusions and its own definitions.