8.8 Personal Umbrella and Excess Liability Insurance

The primary purpose of purchasing any form of excess liability coverage is to add another layer of insurance protection above the limits provided by an existing casualty insurance policy. This coverage is especially important when a liability claim is severe enough to exceed the limits of the insured’s underlying policies, such as a Homeowners, Personal Auto, or other primary liability policy.

Excess Liability insurance provides additional limits over the liability coverage of an underlying primary policy. Once the primary policy has paid up to its limit, the Excess Liability policy may respond to pay covered amounts above that limit, subject to the terms and limits of the excess policy.

Personal Umbrella Liability insurance is a form of excess coverage, but it may provide broader protection than a standard Excess Liability policy. A Personal Umbrella policy has two main functions. First, it provides an additional layer of liability insurance after the limits of the underlying primary policies have been exhausted by covered claims. Second, it may provide broader coverage than the underlying policies. When a claim is covered by the Umbrella policy but not by the primary policy, the Umbrella may “drop down” and function as primary insurance, subject to any required self-insured retention.

Each Personal Umbrella Liability policy should be reviewed carefully because Umbrella contracts are not all written the same way. One insurer’s Umbrella policy may contain provisions, definitions, conditions, or exclusions that are different from those found in another insurer’s policy. Although a standardized version of a Personal Umbrella Liability policy exists, insurers may use their own forms or modify policy language. For this reason, it is important to read the specific Umbrella contract to understand exactly what is covered, what is excluded, what underlying insurance is required, and when the policy may apply.

Underlying Limits Conditions

Before an insurer will issue a Personal Umbrella Liability policy, the insured is generally required to carry certain underlying primary insurance. These underlying policies provide the first layer of liability protection for the risks covered by the Umbrella policy. The required underlying policies are usually listed, or scheduled, on the Personal Umbrella Liability policy. Common examples include Personal Auto, Homeowners, Watercraft, or other primary liability policies, depending on the insured’s exposures. Each underlying policy must meet specified minimum limit requirements. These required limits are often based on the highest liability limits available from the primary insurer. By requiring strong underlying insurance, the Umbrella insurer is protected from smaller or more routine claims. This allows the Umbrella policy to serve its intended purpose: providing protection for large or catastrophic liability losses that exceed the limits of the primary policies.

Most Personal Umbrella Liability policyholders are required to maintain both Personal Auto liability insurance and personal liability insurance, such as the liability coverage provided by a Homeowners policy. These underlying policies provide the first layer of protection before the Umbrella policy applies. If the insured has additional liability exposures, such as recreational vehicles (RVs), watercraft, or rental property, those risks must also be covered by appropriate underlying primary policies. The Umbrella insurer requires these policies so that routine or smaller claims are handled by the primary insurer before the Umbrella coverage is needed. A single Personal Umbrella policy may apply over both Homeowners liability and Personal Auto liability losses, as long as the insured maintains the required underlying insurance and minimum liability limits.

If a required underlying policy is cancelled, nonrenewed, or not replaced, the Personal Umbrella Liability policy does not automatically become a substitute for that missing primary coverage. Instead, the Umbrella policy usually responds as though the underlying policy were still in place. This means the insured may be responsible for the amount that the underlying policy would have paid before the Umbrella coverage begins. The same principle may apply if the underlying insurer becomes insolvent. The Umbrella policy is intended to provide excess protection above required primary insurance, not to replace the insured’s obligation to maintain that primary coverage.

Example

The insured owns a boat that is covered by a Boatowners policy with a liability limit of $50,000. The insured also carries a $1 million Personal Umbrella Liability policy that applies over the watercraft liability coverage provided by the Boatowners policy.

The insured later cancels the Boatowners policy and does not replace it with another underlying policy. After the cancellation, a bodily injury claim is brought against the insured because of an accident involving the boat. The insured is found liable for $75,000.

Because the Umbrella policy required the $50,000 underlying Boatowners policy to remain in force, the Umbrella will respond as though that underlying coverage still existed. The insured is responsible for the first $50,000, which the cancelled Boatowners policy would have paid. The Umbrella policy pays only the remaining $25,000.

This example illustrates that an Umbrella policy is not intended to replace required underlying insurance. If the insured fails to maintain the required primary coverage, the insured may have to pay the amount the underlying policy should have covered before the Umbrella policy applies.

Coverage

Personal Umbrella Liability coverage is commonly written in increments of $1 million. The policy usually provides a single limit of insurance that applies per occurrence. This limit may apply to covered claims for bodily injury, property damage, and personal injury that exceed the limits of the insured’s underlying liability policies. Once the underlying policy has paid up to its applicable limit, the Umbrella policy may respond to pay covered amounts above that limit, subject to the Umbrella policy’s terms, conditions, and exclusions.

Personal Umbrella Liability policies commonly provide coverage on a worldwide basis. This means the policy may apply to covered liability losses that occur outside the United States, subject to the policy’s terms, conditions, and exclusions. Worldwide coverage may include certain auto liability losses, provided the loss is covered by the Umbrella policy and any required underlying insurance requirements are satisfied. This broad coverage territory is one reason Personal Umbrella Liability insurance can provide valuable protection for insureds who travel or face liability exposures beyond their local area.

Defense Costs

If a claim or suit is brought against an insured for bodily injury, property damage, or personal injury that is covered by the Personal Umbrella Liability policy, the insurer has a duty to defend the insured. The insurer provides this defense at its own expense, even if the claim or suit is groundless, false, or fraudulent. However, the Umbrella insurer’s duty to defend is limited. The Umbrella policy generally does not provide the defense when the occurrence is covered by an underlying policy, because the underlying insurer is responsible for defending the claim. The Umbrella insurer also may not have a duty to defend if no applicable underlying insurance is in place when such insurance was required. This rule reflects the purpose of Umbrella coverage. The Umbrella policy is intended to provide excess or broader liability protection, but it does not replace the insured’s responsibility to maintain the required underlying insurance.

If a suit is brought against the insured in another country, the Personal Umbrella Liability policy may still provide protection, subject to its terms and conditions. However, in some situations, the Umbrella insurer may be legally or practically prevented from directly defending the insured in that foreign jurisdiction. When the insurer is unable to provide a defense for this reason, the policy may reimburse or pay the defense expenses incurred by the insured. This provision helps preserve the value of the policy’s worldwide coverage by allowing defense costs to be covered even when the insurer cannot directly control or provide the defense.

The Personal Umbrella Liability insurer has the right to investigate any claim or suit that may be covered by the policy. The insurer may also settle the claim or suit in the manner it considers appropriate, subject to the terms of the policy. The insurer’s duty to defend or settle does not continue indefinitely. Once the policy’s limit of liability has been exhausted by payment of covered claims, the insurer’s obligation to continue defending or settling claims ends. This means the insured may no longer have defense protection under the Umbrella policy after the full policy limit has been used.

In addition to the policy’s limit of liability, a Personal Umbrella Liability policy may provide certain Additional Coverages related to the defense of a covered claim or suit. These payments are made in addition to the policy limit, rather than reducing the amount available to pay covered damages. The policy may pay defense-related expenses incurred against an insured, including costs associated with investigating, defending, or settling a covered claim. It may also pay premiums on certain bonds and postjudgment interest that accrues after a judgment has been entered. The policy may also reimburse the insured for reasonable expenses incurred at the insurer’s request while assisting in the defense. This reimbursement is commonly limited to $250 per day.

Self-Insured Retention

A Personal Umbrella Liability policy may provide broader coverage than the insured’s underlying primary policies. When the Umbrella policy covers a loss that is not covered by the underlying policy, the Umbrella may “drop down” and respond as though it were the primary policy. When an Umbrella policy drops down, it may cover the entire covered loss, subject to the policy’s terms, exclusions, and limits. Because there is no underlying policy payment applying to that loss, the insured is usually required to pay a self-insured retention. A self-insured retention is a form of cost-sharing that functions similarly to a deductible. The insured is required to pay the self-insured retention only when the Umbrella policy drops down and acts as primary insurance. If the Umbrella policy is providing excess coverage after an underlying policy has paid up to its limit, the insured generally does not pay the self-insured retention.

An Insurance Story

Sofia and Liam want liability protection for personal injury claims, such as certain claims involving libel, slander, or invasion of privacy. However, Section II of their Homeowners policy provides liability coverage only for bodily injury and property damage unless personal injury coverage is added by endorsement.

One option is to add a Personal Injury Endorsement to their Homeowners policy. Another option is to purchase a Personal Umbrella Liability policy, which may provide broader liability protection, including personal injury coverage.

If a personal injury claim were made against Sofia and Liam, and the claim was not covered by their Homeowners policy but was covered by the Umbrella policy, the Umbrella would “drop down” and act as primary insurance. Because the Umbrella would be acting as the primary policy in this situation, Sofia and Liam would be responsible for paying the required self-insured retention before the Umbrella coverage applies.

Exclusions

Personal Umbrella Liability policies provide broad liability protection, but they also contain exclusions. These exclusions are important because they identify losses, activities, or exposures that the Umbrella policy generally will not cover.

Common exclusions include intentional injury or damage caused by an insured. However, an exception may apply when the injury or damage results from the use of reasonable force to protect people or property.

Umbrella policies also commonly exclude property-related losses involving the insured’s own property. This includes damage to property owned by the insured and damage to property in the insured’s care, custody, or control. These exclusions reinforce that Umbrella coverage is designed to protect against liability to others, not first-party property losses.

Certain vehicle and transportation-related exposures are also excluded. These may include liability arising from the ownership, maintenance, or use of aircraft or hovercraft. Auto liability may also be excluded when the vehicle is being used as a public or livery conveyance, or when it is involved in racing, speed contests, or stunt activities.

Business and professional exposures are generally excluded because they require specialized commercial insurance. Common exclusions include business pursuits, professional liability, and Directors and Officers liability. However, coverage may apply to an insured’s acts or omissions as an officer or board member of a nonprofit organization, provided the insured does not receive compensation.

Personal Umbrella policies may also exclude liability arising from discrimination, bodily injury covered by Workers’ Compensation, non-occupational disability, or occupational disease laws, and injury arising out of the transmission of a communicable disease. Additional exclusions commonly apply to injury or damage resulting from abuse, the use or sale of controlled substances, war, nuclear weapons, fuel escaping from a fuel system, or exposure to lead through ingestion, inhalation, or contamination.

Uninsured motorists and underinsured motorists coverages are also commonly excluded under a Personal Umbrella Liability policy. This means the Umbrella policy generally will not provide coverage when the insured is injured by a driver who has no insurance or does not have enough insurance to pay for the loss.

However, this coverage may be available if it is added by endorsement. When the endorsement is attached, it can extend the Umbrella policy to provide additional protection for uninsured or underinsured motorists losses, subject to the terms, limits, and conditions of the endorsement.