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It's impossible to predict whether you might lose a lawsuit resulting from a car accident or an accident on your property. Nor is it possible to predict the amount that might be awarded to the winning party, an amount that you would be responsible for paying. To protect yourself against the possibility of devastating financial loss from these unforeseen events, you may want to purchase an umbrella.
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Primary coverage is insurance coverage under which liability applies (or, in insurance parlance, “attaches”) immediately upon the happening of an accident or event (called an “occurrence”) that gives rise to liability. Primary insurance provides an initial layer of protection either on a first-dollar basis or after the application of a self-insured retention or a deductible.
The dollar amount necessary to exhaust the underlying limit and thereby trigger the secondary policy’s coverage is called the “attachment point.” In other words, the primary policy limits must be completely paid out so that there is no insurance left in the primary layer before the secondary policy steps in to provide further coverage.
Let’s say one of your employees gets into a car accident while making a delivery to a customer. The property damage and bodily injury costs exceed your business’ commercial auto liability limits. If you don’t have a commercial umbrella policy, you’d have to pay the amount that exceeds your policy limit, putting your business at financial risk. That’s why it’s important to have umbrella coverage.
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Umbrella/“Horizontal” Coverage Excess (or “vertical”) coverage can be defined as additional liability limits for a claim that is covered by an underlying primary policy. That means a claim that is not covered by a primary policy would not be covered for purposes of the excess policy, either. In contrast, some secondary policies reach out and cover more types of claims arising from more exposures than the ones covered by the underlying primary policy. For example, suppose the primary policy excludes liability claims arising out of a particular kind of drug made by the insured, but the secondary policy covers any kind of product liability claim, even ones arising from that drug. In that situation, the primary insurer would not cover such drug claims, but the secondary insurer would. A secondary policy’s providing coverage for “extra” claims can be thought of as “moving over” to cover additional risks that are not covered by the primary policy. A secondary policy that “spreads out” and provides coverage for additional types of claims that are not covered by the underlying is like an umbrella that opens up to protect a person from raindrops. That is why secondary policies that provide coverage for additional claims are called “umbrella” policies. If you think about the risks being insured as being plotted along the horizontal axis in Exhibit 1.4, providing umbrella coverage for additional risks can also be called “horizontal” coverage.
Excess/“Vertical” Coverage For claims that are covered by the primary policy, “excess coverage” is the additional coverage provided by the secondary policy above the primary policy’s limit. After the primary insurer pays its entire limit and exhausts the available coverage in the primary layer, the secondary policy takes over and provides additional coverage up to the amount of the secondary policy limit.
Excess coverage can be therefore thought of as coverage provided by an additional policy that simply raises the policyholder’s liability limit by an additional amount. Raising the liability limit can be represented in the graphic in Exhibit 1.4 by extending the height of the secondary policy along the vertical axis. This is why excess coverage is also called “vertical coverage.”
Follow Form Excess Coverage “Follow form” coverage describes the situation where the secondary policy provides insurance with exactly the same terms and conditions as the primary policy (also called the “followed policy”). Follow form provisions simply state that the secondary policy will provide coverage according to the exact same terms, conditions, and exclusions as the primary policy. Providing exactly the same coverage in the secondary layer is beneficial because it minimizes the chances that a claim might not be covered by the secondary policy. True follow form excess policies only need to be a couple of pages long, relying on the followed policy for most of their governing terms.
Self-Insured Retention Umbrella coverage for claims that do not fall within an underlying policy’s coverage applies on a “first dollar” basis. For a claim that is not covered by a primary policy, the umbrella policy will “move over” and provide coverage as if it were a primary policy for purposes of that claim.
When an umbrella policy “moves over” to apply on a first-dollar basis as if it were a primary policy for purposes of an umbrella claim, most policies subject the umbrella coverage is a small “self-insured retention” (or SIR, as it is commonly abbreviated). This is an amount of money (typically $10,000) which the policyholder must pay on that claim before reaching the horizontal umbrella coverage.
Having too much liability insurance is better than having too little. Use our calculator to determine how much umbrella coverage is right for you. It's wise to have at least enough liability insurance to cover your net worth. Your Net Worth is Assets minus Liabilities.