What is the difference between excess liability and umbrella insurance?

Complete Guide to Excess Liability vs. Umbrella Insurance

Why This Question Matters for Colorado and Utah Residents

If you own or operate a business in Colorado or Utah, one lawsuit or accident can put your hard-earned assets at risk. Understanding how umbrella and excess liability policies work is crucial for local business owners—especially with our region’s increasing litigation rates and multi-million-dollar claim settlements. Here’s why this distinction is so important:

• Risk of Catastrophic Claims: Average liability settlements in the region exceed $4.5 million, far above most primary policy limits.
• Hail, Weather, and Event-Driven Exposures: Colorado ranks second nationally for hail-related claims; these events can trigger third-party property or injury lawsuits that standard policies may not fully cover.
• Contractual Requirements: Many local contracts and leases (especially in construction and healthcare) require specific types or amounts of coverage—choosing the wrong option could leave you in breach or under-protected.

What Most People Get Wrong

Many Colorado and Utah business owners assume “excess” and “umbrella” policies are the same. In reality, excess liability only increases the limits of an existing policy (like your general liability), while umbrella insurance can offer broader protection—including coverage for some types of claims your main policies don’t address.

Another misconception: “Umbrella” means unlimited coverage. But both types come with specific limits and conditions—and umbrella policies can contain exclusions and unique features known as drop-down coverage, which are vital for true risk protection.

The Complete Picture

Excess Liability Insurance acts as an extra layer on top of a specific underlying policy (e.g., general liability, commercial auto), increasing the payout limit if a major claim exceeds that policy’s coverage. But if the underlying policy excludes a claim, the excess policy likely does, too. This solution is typically used to meet contractual requirements for higher limits.

Umbrella Insurance not only increases your overall liability limit across multiple policies, it may also cover certain claims excluded from your primary policies—this is known as “drop-down coverage.” For example, if your general liability policy excludes a slander or libel claim, your umbrella policy could respond—something excess liability would not do.

In Colorado and Utah, where only 38% of businesses purchase umbrella coverage, many are left exposed to catastrophic claims and compliance gaps. State regulations require umbrella policies to be carefully coordinated with underlying coverage (minimum limits apply), so it’s critical to partner with a local expert who understands both the nuances of regional risk exposures—like hail damage litigation—and evolving legal requirements.

Making the Right Decision for Colorado and Utah Residents

Question 1: Does my industry require coverage beyond standard policy limits?

Assess your risk profile with these points:

• Does your business contractually commit to higher liability limits (common in construction, healthcare, or municipal contracts)?
• Are you exposed to multi-million dollar claims due to property, product, or weather risks (e.g., hail, wildfire, major auto accidents)?

Question 2: Would a broader umbrella policy address vital gaps left by my primary coverage?

Review your insurance with a local agent to identify exposures such as:

• Slander, libel, or other personal injury not covered by your general liability policy
• Specific exclusions in your underlying policies (e.g., liquor liability, data breaches for tech or retail businesses)

Question 3: Am I planning for future regional risks and evolving requirements?

Look ahead at:

• Rising claim sizes year-over-year (CO & UT see 6%+ annual increases in average settlements)
• New state laws requiring explicit coverage disclosures and drop-down provisions—regular policy reviews are key