Excess Liability Insurance: What It Is, Coverage and Costs Explained

By purchasing excess liability insurance, you can secure extra coverage in case a costly lawsuit exhausts the coverage limit of your general, professional, commercial auto or other liability insurance policy. Excess liability coverage is especially valuable for large, growing businesses, but it may also be necessary for small businesses that operate in high-risk industries or need to meet certain licensing or contract requirements.

Excess liability insurance is a type of commercial insurance that covers legal fees for claims that exceed the coverage limit of a single underlying liability insurance policy.

Continue reading to learn how excess policy insurance works, what factors influence the cost of coverage and when your business may need to consider excess insurance coverage.

Key Takeaways Excess liability insurance provides additional protection for claims that go above the limit of one of your primary commercial liability insurance policies. Examples of policies that may be eligible for excess coverage include general liability, commercial auto liability, professional liability, cyber liability and directors and officers liability insurance. Businesses with significant assets, high-risk operations or contractual insurance requirements may benefit the most from excess coverage. Premiums for excess liability coverage may start as low as a few hundred dollars per year, depending on factors like your policy details and business risk factors. Commercial umbrella insurance is a type of excess coverage that sits over multiple policies at once and may fill in coverage gaps left by exclusions in the underlying policies.

What Is Excess Liability Insurance?

Excess liability insurance is a type of business insurance that provides additional coverage beyond the limits of a primary commercial liability insurance policy, such as general liability, professional liability or commercial auto liability insurance. As its name suggests, excess coverage only steps in after the underlying policy’s coverage limit has been exhausted by a particularly costly claim.^[1]

Your excess liability coverage may apply if you hit either the per-occurrence or aggregate limit for the underlying policy.^[1] The per-occurrence limit refers to the maximum amount your insurance company will contribute toward any given insurance claim, while the aggregate limit is the maximum amount your insurer will pay out across all claims over the course of the coverage period for a given policy.

How Does Excess Liability Insurance Work?

Suppose your general liability insurance policy has a $500,000 per-occurrence coverage limit but you are sued for $750,000 after a guest is seriously injured on your business premises. In this scenario, your general liability insurance would cover the first $500,000, and your excess liability insurance would then activate to cover the remaining $250,000.

Although the purpose of excess liability insurance is to take over in the event of a claim that exceeds your underlying liability coverage limit, your excess liability policy will still come with its own coverage limit. For example, if you have $2 million in excess coverage but are sued for $2.4 million, you will likely have to cover the final $400,000 of the claim out of pocket.

What Does Excess Liability Insurance Cover?

What your excess liability insurance covers may depend on the terms and conditions of your underlying insurance coverage, since excess liability insurance generally extends the coverage already provided by an existing policy. See the upcoming sections for examples of claims that may be eligible for coverage under your excess liability policy.

Bodily Injury and Property Damage Claims

One of the main functions of excess liability insurance is to provide extra coverage for third-party bodily injury and property damage claims covered by your general liability or commercial auto insurance.^[1] For example, it could kick in if a construction subcontractor drops a hammer from scaffolding and severely injures a passerby. Likewise, coverage may be available if a delivery driver causes a commercial vehicle accident that totals multiple people’s cars.

Other Liability Claims

Depending on your insurance company, you may have the option to purchase extra liability insurance for several different types of policies, extending the range of losses that may be eligible for excess coverage. The following table goes over examples of additional losses that could be covered by an excess liability insurance policy and which underlying coverage type they would correspond to:^[1][2][3]

Claim	Underlying Policy	Example
Personal and advertising injury lawsuit	General liability insurance	A competitor claims you defamed it or stole its copyrighted materials for your advertising campaign
Mistake in the administration of employee benefits packages	Employee benefits liability insurance	One of your employees sues you after realizing that you failed to enroll them in the health insurance plan they signed up for
Error or omission in the performance of professional services	Professional liability insurance	A client sues you because you misrepresented your experience or caused them to experience a financial loss due to your negligence
Data breach	Cyber liability insurance	Someone hacks into your e-commerce store’s online database and steals your customers’ payment information
Alcohol-related liability claim	Liquor liability insurance	You are sued by an individual who got into a car accident with a patron who got drunk at your bar
Environmental hazard	Pollution liability insurance	The local government fines your business after toxic substances from your factory contaminate the city’s drinking water supply
Violation of employee rights	Employment practices liability insurance	An employee accuses you of harassment, discrimination or wrongful termination
Allegation of corporate misconduct	Directors and officers liability insurance	Your company’s CEO is sued for mismanaging company funds
Lawsuit related to a workplace injury	Employer’s liability insurance	An employee sues you after work-related stress causes them to experience mental health problems that aren’t covered by your company’s workers’ compensation insurance policy

Data breaches are often the costliest type of business insurance claim, with an average claim cost of $3.6 million — making excess cyber liability insurance especially important.^[1]

Legal Costs

While excess liability insurance can cover medical treatment and repair bills in the event of a bodily injury or property damage claim, it primarily provides legal expense coverage for most other types of claims. For example, if you are sued over a covered claim, your excess liability insurance may cover legal defense costs, court-ordered judgments, settlements and other relevant court fees that exceed your primary policy’s coverage limits.

What Excess Liability Insurance Does Not Cover

Excess liability insurance generally doesn’t cover anything that is excluded from coverage under the primary liability insurance policy, and it won’t cover any expenses that fall within the coverage limit of the underlying policy.^[2] Other possible exclusions include the following:

1. Intentional losses: Your excess liability insurance generally won’t cover losses stemming from intentional actions — especially criminal conduct, like fraud.
2. First-party property damage: Though excess liability insurance can cover property repairs if your business is responsible for damaging someone else’s property, it won’t cover damage to your business-owned buildings and items. These are instead covered by commercial property insurance.
3. Most workers’ compensation claims: In general, excess workers’ compensation insurance is only available to businesses that self-insure against work-related accidents.^[4] As a result, if you have a traditional workers’ compensation insurance policy, you may not be eligible for excess coverage in the event that several employees get sick or become injured on the job.

Additionally, some excess liability insurance policies don’t “follow form,” meaning they don’t adhere to the exact terms of the underlying policy and may offer more restrictive coverage. For example, even though directors and officers insurance will generally cover legal defense costs for an executive who is sued for failing to comply with state law, your excess D&O liability insurance provider could exclude coverage for any claim involving criminal allegations.^[2]

Who Needs Excess Liability Insurance?

Any business with highly valuable assets, increasingly high-risk exposures or contractual insurance requirements should consider purchasing excess liability coverage. Read the sections below for a more in-depth breakdown of when you may need excess liability insurance for your business.

Businesses With Significant Assets

If the total value of your commercial assets is very high, a basic liability insurance policy may not offer enough coverage to fully protect those assets in the event of a catastrophic liability claim. As a result, excess liability insurance can provide a crucial cushion for companies with substantial assets — including real estate, equipment, cash reserves and investments — which could otherwise be seized to satisfy judgments.

High-Risk Industries and Operations

Businesses in higher-risk industries are more likely to encounter liability claims, so they may need more coverage to protect themselves from a high volume of lawsuits. This can include businesses with frequent liability risks, such as stores with a large amount of foot traffic, or those facing individual risks that are especially likely to result in legal action — like a knife manufacturer whose products can easily result in customer injuries.^[1]

Examples of industries that commonly need excess liability insurance coverage include the following:^[2]

• Construction
• Manufacturing
• Insurance and finance
• Technology
• Retail
• Media and publishing
• Hospitality
• Wholesaling
• Health care
• Legal services
• Staffing

Companies With Contractual Insurance Requirements

Businesses are often required to show proof of insurance coverage when entering into contracts with clients, commercial landlords or governmental organizations. As a result, depending on the amount of coverage required by your contract, you may need to secure a certificate of liability insurance that shows you are covered by an excess liability insurance policy.

Growing Businesses With Increased Exposure

Liability risks can change over time — especially if your business is rapidly growing. If you have hired more employees, purchased larger facilities, expanded into new areas or started to bring in significantly more revenue, then your liability risk has likely risen. To ensure your business stays fully protected, it’s a good idea to periodically review your current coverage and consider whether a new excess liability insurance policy may be beneficial.

When Is Excess Liability Insurance Required?

Excess liability insurance generally isn’t required by law, but there are certain situations where it may be necessary for your commercial enterprise. See the table below for an overview of when you may need to acquire excess liability insurance:

Situation	Excess Liability Insurance Requirement
Government contract	May be necessary if your primary liability limits don’t meet the minimum standards for federal contractors[5]
Lease agreement	May be required by commercial landlords looking to protect their investment in property leased to high-risk businesses[6]
Client contract	Not always mandatory, but may be needed to secure work with certain private clients[7]
Industry licensing	May be necessary if your underlying general liability limits don’t meet your state’s requirements for getting a business license in your industry[8]
Loan covenant	Often required for commercial mortgage loans — especially those backed by the federal government[9]

Excess Liability Insurance vs. Umbrella Insurance

Commercial umbrella insurance is a type of excess liability insurance that generally provides broader coverage. Usually, a basic excess insurance policy only extends the limits for one underlying policy at a time — though some insurers may allow you to cover multiple underlying coverages with one excess casualty insurance policy.^[1][3] Conversely, you can always raise the limits for multiple primary coverage types under a single umbrella insurance policy.^[1]

In addition, your umbrella insurance policy may include a drop-down provision, meaning it can take over as the primary coverage for certain claims that aren’t covered by the underlying policies. For example, your umbrella insurance may cover liability claims involving nonowned watercraft or aircraft, even if these aren’t covered by your underlying general liability insurance.^[10]

Because of these extra benefits, commercial umbrella insurance tends to be more expensive than standard excess liability insurance, with premiums starting around $300 per year.^[11] Also, umbrella insurance claims may require a self-insured retention — an out-of-pocket payment that functions similarly to a deductible.^[2] Take a look at the following table for a review of the main differences between excess liability and commercial umbrella coverage:

	Excess Liability Insurance	Commercial Umbrella Insurance
Coverage Scope	Generally extends coverage for only one primary policy	Extends coverage for multiple primary policies
Coverage Gaps	Typically “follows form,” but may provide even less coverage than the underlying policy in some cases	Covers all losses covered by the underlying policies and may fill in coverage gaps in those policies
Drop-Down Provision	Does not cover any losses excluded by the base policy	May drop down to provide primary coverage for losses excluded by the underlying policies
Deductible	No out-of-pocket costs required for claims	Self-insured retention must be paid out of pocket before coverage takes effect
Starting Rates	$250 per year	$300 per year

When To Choose Excess Liability Coverage

Excess liability insurance may make sense if you only need extra coverage for a specific type of liability claim and want to avoid paying for more coverage than you need. For example, if you own a restaurant that doesn’t deliver food, you may benefit from excess general liability coverage, but you may be overinsured if you select a commercial umbrella insurance policy that drastically raises your commercial auto liability coverage limits.

When To Choose Umbrella Insurance

Commercial umbrella insurance may be the best option for large businesses seeking more expansive coverage against a wide range of possible liability claims. For example, if you run a national consulting firm that faces a high exposure to data breaches, professional service mistakes and allegations of executive misconduct, you may be more likely to benefit from the comprehensive protection offered by a commercial umbrella insurance policy.

How Much Does Excess Liability Insurance Cost?

The cost of commercial excess liability insurance typically ranges from around 50% to 100% of the cost of the underlying policy.^[2] For example, if you want to obtain excess general liability insurance coverage, you can likely expect an average annual premium between $250 and $1,200.^[12] In general, excess liability insurance tends to be cost-effective relative to the amount of coverage it provides.

Factors That Affect Excess Liability Premiums

Your excess liability insurance premiums will generally be influenced by the following cost factors:^[2]

1. Policy details: The more coverage your policy provides, the more that policy will cost. That said, your excess liability insurance could cost less if the underlying policy has a high coverage limit, since there is a lower chance that you will need to file a claim on the excess policy.
2. Industry: Businesses in industries with a high liability risk are more likely to file excess liability insurance claims, so they are generally charged more for excess coverage.
3. Business history: Factors like how long you have been in business and how many claims you have filed in the past may indicate how fiscally responsible your business is and, by extension, how likely you are to file a claim.
4. Size: There is generally a greater liability risk associated with large companies with several locations and high annual revenue and payroll. For this reason, bigger businesses can often expect bigger monthly insurance bills.
5. Location: If your business is located in a region with a sizable population or substantial litigation rates, your excess liability insurance policy will usually be more expensive.

Excess Liability Insurance at a Glance

1. Definition: Excess liability insurance is a commercial policy that covers liability claims that exceed the coverage limit of an underlying business liability insurance policy.
2. Coverage: You can purchase excess coverage for a large array of commercial liability insurance policies — from commonplace coverages, like commercial auto and general liability insurance, to more niche policies, like cyber and pollution liability insurance.
3. Limitations: In general, excess liability insurance only extends the coverage limit for one type of underlying liability policy at a time. It takes effect only after the primary liability limit has been exhausted, and it may exclude coverage for certain losses covered by the underlying policy.
4. Requirements: Excess liability insurance isn’t required by law, but it may be necessary to secure a government or other client contract, protect high-value business assets or adhere to the terms of a commercial lease or loan agreement.
5. Costs: The cost of excess liability coverage generally ranges from 50% to 100% of the cost of the underlying policy, depending on factors like your company’s location, size and policy details.
6. Alternative: Commercial umbrella insurance is an alternative to excess liability insurance that applies to multiple underlying policies and may provide coverage for additional losses in exchange for a higher premium.

How To Get Excess Liability Insurance for My Business

As you weigh whether excess liability insurance makes sense for your business, you need to take the following steps:

1. Assess your current coverage: Review your existing liability policies and coverage limits, and consider whether you have encountered a situation where your current coverage proved to be insufficient.
2. Evaluate your risk exposure: Take a look at the level of risk associated with your industry, the total value of your commercial assets and the insurance requirements laid out in your commercial contracts, and see whether your current policies match up with these risks and stipulations.
3. Determine appropriate limits: Consider reaching out to an insurance professional for guidance on what liability coverage limits would be adequate for your business and whether excess liability insurance may be necessary.
4. Shop around: If you determine that excess liability coverage would be a good fit for your business, you need to compare quotes from multiple insurance carriers to find the most affordable policy that matches your coverage needs.
5. Carefully review policy terms: For complete protection, make sure any excess liability insurance policy you select “follows form” with your underlying policy and won’t result in any coverage gaps in the event of a costly claim.

The best way to comparison shop for excess liability insurance is to use SmartFinancial’s online marketplace platform. After you fill out a brief questionnaire, you’ll be connected with a licensed insurance agent who can help you sort through excess liability options to find the perfect fit for your business. Get started on comparing commercial insurance quotes for free today!