An umbrella liability policy provides an insured with an“umbrella” of liability protection over the primarily liabilityinsurance, explain Donald D. Malecki, CPCU, and David D. Thamann,J.D., CPCU, ARM, authors of Commercial General LiabilityCoverage Guide, 11th Edition.

Most umbrella insurers require you to purchase primary insurancecoverage before selling you an umbrella policy—for example, generalliability insurance, auto liability insurance, workers compensationor employers liability insurance.

Malecki and Thamann note that an umbrella liability policy, suchas ISO commercial umbrella policy, CU 00 01, can providecoverage

• over the primary liability insurance carried by the insured inthe event that the primary insurance is exhausted by a loss;
• of liability exposures for which there is no primary insurance;or
• when the primary policy contains an exclusion that is notsimilarly excluded under the umbrella policy.

1. Individual judgment and individual risk

Umbrella liability insurance policies are largely a matter ofthe judgment of the insurer, the authors explain, and rating isalmost entirely a matter of individual judgment, not only frominsurer to insurer, but also varying with the individual risk. Manyof the umbrella provisions are negotiable with mostunderwriters.

2. Underlying coverage

A requirement for underlying liability limits of $1 million iscommon, the authors say. For insureds with severe advertising orother personal injury, or other special liability exposures,underlying coverage with high limits in these areas may also berequired if these exposures are to be included in the umbrellacoverage.

Umbrella policy conditions usually call for maintenance of theunderlying coverage, with the umbrella insurer’s part in a lossbeing determined as if the underlying contract were in force, evenif it’s not. The only exception is when an underlying policy istotally exhausted by payment of the loss, in which case, theumbrella policy “drops down” to replace the exhausted underlyingprotection. Drop-down coverage also may become effective when theprimary insurer is insolvent.

3. Defense coverage

A significant variation in policies has to do with defensecoverage, the authors explain. Almost all umbrella liabilitycontracts have provisions that, in effect, protect the right of theumbrella insurer to take over or participate in the defense of aclaim that may involve it. These policies include defense coveragefor uninsured exposures, the authors say, even when the lossdoesn’t appear likely to involve the umbrella contract.

Also, some contracts include defense coverage of losses when,because the underlying insurance is exhausted by the loss payment,the umbrella policy comes in as primary coverage. Some policiesinclude defense and appeal costs within the limits of coveragewhile others provide them as supplementary payments outside thelimits of coverage.

4. Additional insured

Any additional insured under any policy of underlying insuranceis automatically an insured under the umbrella policy. But thecoverage isn’t any broader than the coverage provided by theunderlying insurance.

If the underlying insurer or the insured elects not to appeal ajudgment in excess of the retained limit, the umbrella insurerreserves the right to do so at its own expense. The umbrellainsurer also pays for taxable court costs, pre- and post-judgmentinterest and disbursements associated with the appeal.

5. Indemnity policy or pay-on-behalf-ofpolicy

Indemnity policies don’t require the insurer to make payment tothe insured until the insured has first made payment for covereddamages or expenses. The language requires you to use your ownmoney first to pay for damages and defense and then seekreimbursement.

With a pay-on-behalf-of policy the insurer promises to paydamages on behalf of the insured. This means that the insureddoesn’t have to first make payment and then seek reimbursement fromthe insurer. Expenses for defense are normally paid by the insureras they are incurred if the umbrella insurer has taken over thedefense role, even with a pay-on-behalf-of policy.

6. Common exclusions

The Commercial Liability Umbrella Form, CU 00 01 04 13, excludescertain coverages that apply to specific situations. The followingare only a few of the exclusions provided in the form. For moreinformation, refer to the form itself and the detailed analysisprovided by the authors.

• Liquor liability
• Workers compensation, employers liability, andemployment-related practices
• Pollution
• Aircraft or watercraft, and racing activities
• Recall of products, work or impaired property
• Electronic data

An umbrella policy might be right for you, but be sure youunderstand what the policy covers and what it excludes beforebuying.