Umbrella liability insurance refers to liability insurance that is in excess of specified other policies and also potentially primary insurance for losses not covered by the other policies.
When an insured is liable to someone, the insured’s primary insurance policies pay up to their limits, and any additional amount is paid by the umbrella policy (up to the limit of the umbrella policy).
Excess insurance is similar in that it pays after an underlying primary policy is exhausted, but the critical difference is that excess policies are normally “follow form” policies that conform exactly to the coverage of the underlying policy, except that they add on their own excess limit which is then stacked on top of the primary policy’s limit. Umbrella policies tend to provide broader coverage over one or more primary policies, in that they usually lack “follow form” clauses, their definitions of what is covered may be broader than the definitions in the primary policies, and they sometimes lack exclusions used in underlying primary policies. Thus, an umbrella policy may cover certain risks from the first dollar of loss or liability incurred, which were never covered under the primary policies. For those risks that are left uncovered by primary policies but are covered under the umbrella policy, the latter is said to “drop down” to cover them as primary insurance and fill in the gaps in the underlying policies. Hence, the “umbrella” nomenclature is a reference to the broader coverage of the policy.