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Excess Liability Insurance Explained
Learn how excess liability insurance works, what it covers, how it differs from umbrella policies — and how to determine if your business needs it.
Table of Contents
A commercial insurance policy’s general liability limits aren’t always enough to handle significant claims. In these circumstances, business insurance policyholders rely on extra coverage through an excess liability insurance policy. This guide covers 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 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.
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What does excess liability insurance cover?
Excess liability insurance usually covers 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.
The following are commonly covered by excess liability insurance:
- Bodily injury: Medical expenses, rehabilitation costs, and legal judgments for injuries to third parties.
- Property damage: Costs to repair or replace damaged property belonging to others.
- Personal and advertising injury: Claims involving libel, slander, invasion of privacy, or false advertising.
- Legal defense costs: Attorney fees, court costs, and related legal expenses.
- Settlement costs: Negotiated settlement amounts within policy limits.
Industry data shows the increasing importance of adequate excess liability coverage. According to WTW’s 2024 casualty market analysis, third-party litigation funding is expected to reach $31 billion annually by 2028, fueling larger verdicts and settlements that can quickly exhaust primary liability limits.
Excess liability doesn’t typically cover the following:
- Intentional acts: Deliberate wrongdoing or criminal behavior.
- Workers’ compensation claims: Employee injuries (covered by separate workers’ comp policies.)
- Professional liability: Errors and omissions in professional services.
- Product liability: In some cases, depending on policy terms.
- Cyber liability: Data breaches and cyber attacks (requires separate coverage.)
- Property damage to your own assets: Coverage applies only to third-party property.
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.
For example if 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. You would have a total of $2 million in general liability coverage.
If a customer who falls at your location ends up with a serious injury and sues you for $1.5 million, the general liability insurance would cover the first million; the excess insurance policy would handle the remaining $500,000.
However, if the customers’ claim totaled $3 million, the general liability policy would cover the first million and the excess liability policy would cover the second million. Your business would still be responsible for the remaining million.
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:
- Asset evaluation: Does your company have significant assets that could be at risk in a large lawsuit?
- Industry risk assessment: Does your industry have higher-than-average liability exposures?
- Customer interaction level: How frequently does your business interact with the public or customers?
- Geographic considerations: Are you operating in states with higher litigation rates or larger jury awards?
- Contractual requirements: Do your clients or contracts require specific liability coverage limits?
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.
What does excess liability insurance cost?
Small businesses pay $480 per year on average for $1 million excess liability insurance. Excess liability insurance costs vary widely because policy prices are contingent on several factors, including:
- Coverage limits: Higher limits result in higher premiums.
- Industry type: High-risk industries pay significantly more.
- Company size and revenue: Larger companies typically face higher premiums.
- Claims history: Poor loss experience increases costs substantially.
- Geographic location: Some states have higher litigation costs.
- Underlying policy limits: Higher underlying limits may reduce excess costs.
- Risk management practices: Strong safety programs can reduce premiums.
Cost-effectiveness evaluation
When evaluating excess liability coverage, consider:
- Asset protection ratio: Coverage should generally equal or exceed net worth
- Revenue multiple: Many risk professionals recommend coverage of 1 to 2 times annual revenue
- Industry benchmarks: Compare your coverage to similar businesses in your sector
- Total cost of risk: Factor in potential out-of-pocket expenses for uninsured claims
Excess liability vs. umbrella 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.
Feature | Excess Liability | Umbrella Insurance |
|---|---|---|
Coverage scope | Single underlying policy | Multiple underlying policies |
Policy breadth | Follows form of underlying policy | May provide broader coverage |
Cost | Generally costs a lower premium | Higher premium but broader protection |
Flexibility | Limited to one policy type | Covers various liability exposures |
Claims handling | Simpler with one carrier relationship | May involve multiple carrier coordination |
Coverage gaps | Potential gaps between policies | Better gap coverage |
Minimum underlying limits | Varies by carrier | Typically requires higher underlying limits |
When to choose excess liability
- Single high-exposure area: Your business has one primary liability concern.
- Cost sensitivity: Budget constraints favor the lower-cost option.
- Simple operations: Limited liability exposures across business activities.
- Carrier relationships: Strong relationship with current liability insurer.
When to choose umbrella coverage
- Multiple liability exposures: Business operations involve various liability risks.
- Comprehensive protection: Desire for broad coverage across all policies.
- Gap coverage needs: Want protection for exposures not covered by underlying policies.
- Multi-policy coordination: Prefer single carrier for excess coverage.
Generally speaking, both umbrella and excess liability insurance policies will maintain the underlying insurance policies’ terms and conditions, including the underlying policy’s exclusions.
