In addition to primary insurance policies, I recommend that some of my clients purchase umbrella or excess policies to provide additional insurance. In case you’re interested, California Insurance Code § 676.6 defines “umbrella liability insurance policy,” “excess liability insurance policy,” and “excess property insurance policy.”

First, What is an Excess Insurance Policy?

In plain English, an excess liability typically provides the same type of coverage as an underlying insurance policy but with higher limits. And usually the first or underlying policy must be “exhausted” or all the money must be taken out of the underlying policy first. Many excess policies often are very short and have a “follow form” provision that adopts the terms and conditions of an underlying policy (except for specific provisions or endorsements). On the other hand, some excess liability policies contain their own insuring agreements, exclusions, and conditions. Be careful though, because these differences in language can create gaps in coverage or other problems when an insured seeks coverage from its excess insurers for large claims or claims spanning multiple years, such as claims alleging continuous damage over multiple years.

Second, What’s an Umbrella Policy?

Umbrella policies are directly above a primary insurance policy to provide additional coverage in one of two ways.

(1) if a primary policy is triggered, an umbrella policy functions as an excess policy, which means it provides additional coverage for that same claim after the underlying policy. For example, if the amount of liability for the underlying claim exceeds the limits of the primary policy, the umbrella policy gives additional coverage in excess of the limits of the primary policy.

(2) An umbrella policy also provides wider coverage than primary policies. The umbrella “drops down” to give coverage for occurrences or losses that the primary policy doesn’t cover. Cranford Ins. Co. v Allwest Ins. Co. (ND Cal 1986) 645 F Supp. 1440, 1447 (umbrella insurer stands in position of, and assumes defense obligations of, primary insurer); Legacy Vulcan Corp. v Superior Court (2010) 185 CA4th 677, 689, 110 CR3d 795 (“Umbrella insurance provides coverage for claims that are not covered by the underlying primary insurance. An umbrella insurer ‘drops down’ to provide primary coverage in those circumstances.”). This “drop down” coverage is subject to a deductible as stated in the policy. But umbrella policies have their own limitations on coverage. CDM Investors v Travelers Cas. & Sur. Co. (2006) 139 CA4th 1251, 43 CR3d 669 (duty to indemnify limited to court-rendered damages); Industrial Indem. Co. v Apple Computer, Inc. (1999) 79 CA4th 817, 841, 95 CR2d 528 (no coverage for trademark infringement).

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