Excess liability insurance

An excess liability insurance policy, also known as excess liability coverage, offers financial protection and higher policy limits if a claim is made that exceeds the limit of an underlying liability policy. It’s similar to having an additional insurance policy on top of your existing coverage.

For example, if you had $2 million in general liability insurance and faced a $2.75 million claim, you and your business would have to cover the $750,000 that exceeds your general liability limits.

If you had an excess liability policy of, say $1 million or more, on top of your general liability insurance, your excess liability coverage would cover that $750,000 loss with higher limits that keep you financially protected.

Many small business owners use excess liability insurance as a cost-effective way to increase the limits on their underlying coverage, for any claims that might exceed their primary insurance policy. It's often used to boost coverage on general liability insurance coverage or errors and omissions insurance (E&O), also called professional liability insurance.

The cost of excess liability insurance can also depend on your industry and any inherent risks associated with that industry.

For example, someone who works in construction or manufacturing is likely to face more liability claims and pay higher premiums for excess liability coverage, compared to someone who does consulting work out of their own home.

Excess liability insurance protects your business from catastrophic losses and claims that exceed the coverage limits of your liability policy, thereby reducing the chance that a lawsuit could bankrupt your business.

Small business owners usually buy excess liability insurance to fulfill the terms of a lease or client contract.

Some business owners opt for excess liability coverage as an additional layer of protection because they face substantial risks, such as:

• A high degree of foot traffic
• The handling of hazardous materials in transit by transportation businesses
• The personal injury claims that could be leveled against construction, manufacturing, or similar businesses

Your existing liability insurance comes with two kinds of limits: per occurrence and aggregate.

A per-occurrence limit is the maximum amount that your insurance company will pay for a single covered loss under your policy. An aggregate limit is the maximum amount that a policy will cover in any one-year period.

For example, say your commercial auto liability coverage has a $500,000 aggregate limit and a per-claim limit of $25,000 for bodily injury and property damage. If a single accident exceeded this $25,000 limit, the policyholder would have to cover the additional expense.

If your business exceeded $500,000 in claims over an entire year, your commercial auto policy would still only cover $500,000.

With an excess liability policy, you would be financially protected if any claims exceeded your per-occurrence and aggregate coverage limits.

Keep in mind that an excess liability policy only applies to one underlying policy. To increase liability coverage across multiple policies, look to commercial umbrella insurance.

Although the two terms are often used interchangeably, excess liability and commercial umbrella insurance mean two different things.

Excess liability insurance is an added layer of financial protection for one designated liability insurance policy, such as your general liability insurance. Your excess liability coverage would activate if you face a claim that exceeds your general liability coverage limits.

Umbrella insurance provides additional coverage for several liability policies, including general liability insurance, commercial auto insurance, hired and non-owned auto insurance, and employer’s liability insurance (part of workers' compensation). Your umbrella policy would kick in whenever you face a claim that exceeds the coverage limits of one of these underlying policies.

For example, if customer slips and injures themselves at a local nonprofit, it could lead to an expensive legal battle. Between the lawyer’s fees and damages, that nonprofit business owner could owe in excess of $2.1 million, but they may only have a general liability insurance policy with a $2 million per-occurrence limit. Their umbrella coverage would help pay for expenses that exceed that policy's limit, in this case covering the additional $100,000 or more owed.

Another type of insurance with a similar name is excess and surplus lines insurance. This type of coverage is sold by non-admitted insurance carriers to insure businesses with higher than normal risks, a large number of claims, or an unknown risk exposure.

These policies do not have the same financial backing as standard insurance policies, but the carriers are allowed greater flexibility in their insurance solutions for businesses. You might also see it called E&S insurance, surplus lines insurance, or excess lines insurance.

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