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 is different in that it 1) normally applies to only one underlying primary policy and 2) covers only those losses that are covered (up to policy limits) by that primary policy.  For example, if the primary policy does not cover liability due to pollution, the excess policy does not either. But an umbrella policy may cover pollution liability from the first dollar in addition to liability of other kinds that is simply beyond the primary policy's limit. The policy is said to "drop down" to cover the pollution liability as primary insurance and fill in the gaps in the underlying policies.
The "umbrella" nomenclature is a reference to the broad coverage of the policy.
Personal umbrella policies are typically made excess of a person's homeowner's and automobile insurance. A commercial umbrella policy may be based on a commercial general liability (CGL) primary policy.
Examples of liability that an umbrella policy may cover that a homeowner's policy often excludes include:
- Powerine Oil Co., Inc. v. Superior Court, 37 Cal. 4th 377 (2005).
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