Insurance Advisory Newsletter – Understanding Umbrella Insurance Policy And Excess Liability Insurance Policy : October 2024

Business entities at times need to choose policy structures in addition to their primary policy program. From the perspective of structural bifurcation, a primary insurance policy (“Primary Insurance Policy”) can be the policy getting triggered on the occurrence of a claim event. The insured can consider placing additional policies over and above the Primary Insurance Policy with a view to get additional sum insured limits and are placed as supplementary insurance policies like umbrella insurance (“Umbrella Insurance Policy”) and/or excess liability insurance (“Excess Liability Insurance Policy”). In the event of claims, insurance settlements and court verdicts may result in huge payment outgo. By setting up of additional insurance in the form of Umbrella Insurance Policy and Excess Liability Insurance Policy, an entity is able to cover liabilities in excess of the Primary Insurance Policy limits. 

The purpose of both an Umbrella Insurance Policy and an Excess Liability Insurance Policy is to aid the insured to cover its liabilities once the Primary Insurance Policy limits are exhausted. Such supplementary policies are generally obtained for premium efficacy and to negotiate robust Primary Insurance Policy which can be suitable for the insurer’s risk appetite. 

Umbrella Insurance Policy 

Umbrella Insurance Policy offers a broader floating cover or shield for multiple trigger events which may be the subject matter of standalone insurance policies like Commercial General Liability Policy (“CGL Policy”), Workmen Compensation Policy (“WC Policy”) or Automobile Insurance Policy (“Automobile Insurance Policy”) are exhausted.

For example, a company is sued for INR 2.5 Crore, but it has coverage of only INR 1.5 Crore, under CGL Policy. In such case, the Umbrella Insurance Policy of INR 5 Crore, would get triggered and cover the balance amount of INR 1 Crore over and above the sum insured limits of CGL Policy. The remaining sum insured of the Umbrella Insurance Policy would be available for any claims in the event the Primary Insurance Policy of Automobile Insurance Policy or WC Policy falls short. 

The Umbrella Insurance Policy is more prevalent in the USA and UK jurisdictions.

In India, Umbrella Insurance Policy is generally applicable to first-party covers like fire, burglary, bodily injury, etc., however the same is not applicable for third-party liability claims. The Umbrella Insurance Policy is not applicable in India in the same shape and form as US policies since the WC Policy and Automobile Insurance Policy are not mandatory insurance policies requirement in India. WC Policy is statutorily required as per each state law in USA and the same is true with Automobile Insurance Policy. In India, WC Policy is not mandatory and Automobile Insurance Policy is covered as per the Motor Vehicles Act 1988 when any owner buys a vehicle. Hence, the Umbrella Insurance Policy is not relevant from the perspective of the Indian insurance market.  

Excess Liability Insurance Policy

Though both Umbrella Insurance Policy and Excess Liability Insurance Policy are supplementary policies and available after the Primary Insurance Policy is exhausted and are often used interchangeably, they have distinct characteristics that set them apart.  Essentially, Excess Liability Insurance Policy is attached to a single Primary Insurance Policy where Umbrella Insurance Policy acts as a floating cover applicable to multiple Primary Insurance Policies. 

Company can obtain multiple Excess Liability Insurance Policy with different limits of liability. With every addition in the Excess Liability Insurance Policy, the company will be in a position to enjoy the benefit of lesser premium amount. 

Features Of Umbrella Insurance Policy And Excess Liability Insurance Policy