You probably hear a lot of talk about umbrella policies, but are you clear on exactly how they work? Intended to provide coverage when your regular liability policy limit maxes out, umbrella policies can extend to general liability, directors’ and officers’ liability (D&O) and workers compensation policies. Here are the basics:

• They are (generally) a less expensive way to purchase additional layers of liability insurance. These layers are provided in million-dollar increments and help meet the Davis-Stirling requirements for liability limits. In many cases, it is more cost effective to purchase a lower limit general liability policy and add layers of umbrella liability than to attempt to write multiple layers of general liability. In fact, few carriers will offer more than $3 million of general liability insurance, so an umbrella policy would be needed to achieve limits that would properly protect certain risks.

• Umbrella policies can extend over all of the other liability policies in your insurance program. Purchasing umbrella liability provides excess insurance over the general liability, directors’ and officers’ liability, commercial auto liability, even certain aspects of the worker’s compensation insurance policy. Contact your insurance professional to ensure that all of your liability policies are listed as “underlying” on the umbrella policy schedule.

• Umbrella policies “kick in” when the limits of the underlying policy are exhausted. For example, if an association is ordered to pay damages in a lawsuit, and those damages exceed the liability policy limits, the umbrella would be used to make up that difference.

• Umbrella policies cannot extend to property coverage. They are excess liability insurance policies, not property insurance policies. However, extended replacement cost and guaranteed replacement cost endorsements were created for those “just in case” situations where repair costs exceed insurance limits in a covered property claim.

Terri Guest is the Northern California Sales & Marketing Representative for Berg Insurance Agency and can be reached at Terri@berginsurance.com. Have an insurance question? Ask Terri and your question may be the subject of next month’s edition of Coverage Corner! If your question is picked, you will win a gift card!