An excess liability insurance policy provides extra financial protection in case you are required to pay a larger amount of money than your standard liability policy covers. It is similar to an umbrella policy, but with a much more narrow focus.
An 'Excess' Scenario
Excess liability insurance is a secondary policy that serves as a backstop to your primary insurance. Say you have a homeowners' insurance policy that provides $750,000 worth of liability coverage. Someone slips and falls on your property, sues you and wins a $1 million award from a court. Your insurance policy will cover no more than $750,000. The additional $250,000, the so-called excess, is your responsibility. If you have excess liability coverage of at least $250,000, that insurer will step in and pay the rest.
Scope of Liability
Excess liability insurance doesn't broaden the coverage of your primary, or "underlying," insurance policy. That means It will pay claims only under the same conditions as the primary insurance. For example, say you have a swimming pool and your homeowners' policy specifically excludes liability stemming from the pool. If someone is injured in the pool, the main policy isn't going to help you, and neither will the excess liability policy.
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Stacking Excess Policies
Depending on insurance needs, a policyholder can essentially stack excess liability policies to ensure adequate coverage. For example, a small business might have a $1 million general liability policy, with a $5 million excess policy and a $10 million "second-layer" excess policy. The primary policy pays the first million, then the first excess policy kicks in. The second-layer excess policy doesn't pay out anything until the first two put in a combined $6 million.
Excess vs. Umbrella
Though excess policies are sometimes referred to as umbrella policies, there's a key distinction between them. A typical umbrella policy provides excess coverage over primary policies and also covers "gaps" in insurance protection. The umbrella policy, therefore, can step in to provide primary insurance when no coverage is otherwise available.