What Is Excess Liability Insurance?

Learn how excess liability insurance works, what it covers, how it differs from umbrella policies — and how to determine if your business needs it.

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Sometimes, a commercial insurance policy’s general liability limits aren’t enough to handle significant claims. In these circumstances, business insurance policyholders rely on extra coverage through an excess liability insurance policy or an umbrella insurance policy. Here’s a look at excess liability insurance, how it works, what it covers, how it differs from umbrella insurance and how to tell if it’s right for your business.

What is excess liability insurance?

Excess liability insurance is a policy that increases the limits of another underlying policy. It’s most often seen as added coverage for a general liability insurance policy, but it can also increase commercial liability auto insurance policies. Think of excess insurance as a “second-in-line” policy, where a claim would be filed on the excess insurance policy only when the underlying liability insurance has hit and exceeded its maximum limit.

What does excess liability insurance cover?

Excess liability insurance will cover the same claims as the underlying policy; these claims will vary from policy to policy. For example, the excess liability policy for general liability will cover slip-and-fall accidents, while the excess liability policy for commercial auto insurance will cover at-fault accidents, third-party injuries or property damage.

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Excess liability insurance typically covers the following:

• Third-party bodily injury
• Third-party property damage
• Libel and slander
• Investigation and defense of claims

Excess liability doesn’t cover the following:

• First-party business property
• Inventory

When choosing business insurance, get quotes for both excess insurance and the underlying policy with double the coverage. Then look at the cost difference. You may opt to increase coverage if an excess insurance policy brings no actual cost savings.

How does excess liability insurance work?

An excess liability insurance policy sits in the background until the underlying policy’s limits have been exhausted. The excess liability insurance policy will kick in once the underlying policy hits its coverage limits. Once in play, the excess liability insurance policy will pay to its policy limits.

While owning an excess liability insurance policy will limit the instances where your company is underinsured, it doesn’t guarantee you will never have to pay out of pocket. If a large enough claim hits the underlying insurance policy and the excess policy’s limits, you could still be liable for the difference remaining on a claim.

Excess liability insurance example

Let’s say you have a general liability insurance policy with a per-occurrence limit of $1 million. You also have an excess liability insurance policy with another $1 million in coverage. This gives you a total of $2 million in general liability coverage.

Say you have a customer who slips and falls on your company’s premises and sustains a concussion with long-term neurological consequences. They sue you for $1.5 million. The general liability insurance would cover the first million, while the excess insurance policy would handle the remaining $500,000.

If there were a claim for $3 million, the general liability policy would cover the first million, the excess liability policy would cover the second million, and your business could still be on the hook for the remaining million.

While you should seek enough insurance to protect your company against the most common claims, you cannot foresee and cover every possible risk. Strike a balance between coverage and business insurance costs, knowing there could be a significant claim over and above policy limits.

Do you need excess liability insurance?

Consider your company’s business insurance risks and optimal coverage amounts when deciding whether to opt for excess liability insurance. It is there to protect you in rare instances where your general liability insurance policy isn’t enough.

Ask yourself the following questions about your company’s coverage:

• Can you increase your general liability policy for a reasonable price?
• Do you need higher liability limits to satisfy requirements for a particular client?
• Does your business have the financial resources to handle substantial claims?
• Does your business interact with a large customer base?
• Are there increased risks to conducting business based on your industry?
• Does your business use heavy equipment or commercial machinery?

The bigger your business — and the more interaction it has with consumers — the more likely you will need an excess insurance policy. Businesses with increased risk, including those that use heavy machinery and equipment, have more exposure and should carry larger liability limits.

Keep in mind that if you have more than one liability policy, including general liability, workers’ compensation, and commercial auto, you may opt for an umbrella policy instead of an excess liability policy. This is because one umbrella policy will increase the limits of all three liability policies, making it a more cost-effective option. (We’ll explain more about umbrella policies below.)

While most filed insurance claims end up well under the general liability limit, you can't foresee when a major claim will occur. If your business has a lot of foot traffic — or other exposure risks — consider an excess liability insurance policy.

How much does excess liability insurance cost?

Excess liability insurance costs vary widely because policy prices are contingent on several factors, including the following:

• How much coverage you need
• Business size
• Number of employees
• Industry
• Years your company has been in business
• Prior claims history

Obtain and compare quotes from several reputable insurers based on your business’s unique factors, or consult a business insurance broker when exploring costs for excess liability coverage.

Where do you buy excess liability insurance?

Generally speaking, you’d purchase excess insurance from the company that holds your underlying policy, such as your general policy insurance carrier or commercial auto insurance carrier.

While it’s possible to get an excess liability policy from another insurance carrier, you’d likely pay more for the policy than you would with a carrier that underwrites both policies.

Interested in learning about other types of insurance for your business? Here are several options that might be helpful:

• Cyber insurance
• Indemnity insurance
• Professional liability insurance
• Business owner’s policy
• Gap insurance
• Product liability insurance
• Errors and omissions insurance
• Specialty insurance

What is the difference between umbrella and excess liability insurance?

Commercial umbrella insurance policies and excess liability insurance policies both add liability coverage to specific policies, with a key difference. An umbrella policy usually provides coverage for more than one underlying policy. An excess liability policy is meant to back up only one underlying policy, usually general liability, but it may also cover commercial auto.

Generally speaking, both umbrella and excess liability insurance policies will maintain the underlying insurance policies’ terms and conditions, including the underlying policy’s exclusions.

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