The number of lawsuits filed and monetary awards handed out have increased in today’s litigious society. As a result, coverage limits in standard commercial general liability policies — typically $1 million per occurrence and $2 million in annual aggregate — are often insufficient for modern veterinary practices.
Your liability related to the transmission of zoonotic diseases, the use of employees’ personal vehicles on company business and an injury to clients inside your hospital are examples of events that can easily exceed standard primary insurance limits. Additional financial protection against large claims such as these is where an excess liability policy comes into play.
What It Is
Often called an umbrella policy, an excess liability policy provides additional coverage over one or more underlying business liability policies. Excess liability policies are typically provided in increments of $1 million per occurrence. They serve three primary purposes:
- Coverage in excess of the underlying limits. Example: An employee has an at-fault auto accident while driving a personal vehicle on company business. Multiple people are injured, resulting in a total settlement of $1.5 million. The excess policy will pay $500,000 beyond the $1 million occurrence limit in the primary liability policy.
- Drop-down primary coverage when the underlying policy’s aggregate limits have been exhausted. Example: Two liability claims totaling $1 million are paid out in a policy year, exhausting the primary liability policy’s aggregate limit. A $200,000 claim then occurs in the same policy period. The excess liability policy will “drop down” and provide primary coverage to pay the claim.
- Broader coverage than the existing underlying coverage. Example: A certain claim is not covered by the primary liability policy. However, the excess liability policy has broader coverage that includes such a claim. Again, the excess liability policy will drop down and provide primary coverage.
Three Types
You will find three main kinds of excess liability policies: following form, excess liability and commercial umbrella. Let’s summarize each.
FOLLOWING FORM
- Has the same terms and conditions as the underlying liability policy.
- Does not provide narrower or broader coverage than the underlying primary liability policy.
- Self-insured retention is not applicable. (See the self-insured section below for an explanation.)
EXCESS LIABILITY
- Has its own terms and conditions.
- Coverage might be narrower, the same or broader than the underlying primary liability coverages.
- Self-insured retention is applicable if the excess liability form provides broader coverage of a claim than the underlying primary liability policy.
COMMERCIAL UMBRELLA
- Has its own terms and conditions.
- Provides broader coverage for exposures not covered by the underlying primary liability policy.
- Self-insured retention is applicable.
Self-Insured Retention
Excess liability policies do not have a deductible. However, under certain claim circumstances the policyholder must pay a self-insured retention — a specified dollar amount — before the excess liability policy responds.
As noted above, a self-insured retention is not applicable with a following form policy. Any self-insured retention is listed on the declarations page of the excess liability policy. Most policies sold in the veterinary industry have a self-insured retention of about $10,000.
Don’t confuse a self-insured retention with a deductible. A deductible is typically seen in property insurance policies and is the amount the policyholder must pay toward all claims before the insurance policy responds. The self-insured retention I am referring to is applicable in specific circumstances when the excess policy has broader coverage and responds to a liability claim when the underlying policy doesn’t.
Concurrency
This refers to having the same, or concurrent, effective and expiration dates — the policy period — for excess liability and primary liability policies. Having non-concurrent dates can potentially reduce the coverage available to respond to a claim. Excess liability policies require losses that exceed the required limits of the underlying policy to occur while the excess policy is in effect.
Example: A hospital’s commercial general liability policy has an effective date of Jan. 1 and limits of $1 million per occurrence and $2 million in annual aggregate. The hospital purchases an excess liability policy on July 1 at $2 million per occurrence and $2 million in annual aggregate. A $1 million claim is filed March 1 before the excess policy is activated. The claim is covered by the underlying primary liability policy. A separate $250,000 claim is filed May 1 (again before activation of the excess liability policy) and also is paid through the underlying policy.
On Oct. 1, a $1.1 million claim is filed after the excess liability policy goes into effect. The underlying policy pays $750,000 — the remainder of the underlying $2 million aggregate limit. The excess liability policy does not cover the $350,000 balance because the underlying policy limit was not in full effect.
Confusing? Maybe. Likely to occur? Probably not. But why take the risk? Simply make sure your primary liability and excess liability policies have the same effective and expiration dates.
Are You Underinsured?
How much excess liability coverage is enough? The answer depends on factors such as these:
- Your age. Do you have the time and energy to start over if you lose everything?
- Your location. Some states are far more litigious and claimant friendly than others.
- Your legal entity. Are you self-employed, or is your business set up as a partnership, LLC or S-corp?
- Your personal worth. Can you afford to self-insure some of your business exposure?
- Your financial obligations. Do you have student loans, alimony payments or children? Are you paying your kids’ college tuition? Are you supporting elderly parents?
My recommendations are:
- Purchase an excess liability policy for your business. It’s an inexpensive way to protect your financial assets.
- Consult your financial adviser, accountant or legal counsel for specific suggestions for how much excess liability coverage is enough.