An excess insurance policy provides additional coverage and/or higher limits above and beyond those of the underlying primary policy. A deductible is the amount an insured must pay out of pocket before an insurance company will issue payment for the remainder of the claim.
Excess Policy Limits
With an excess insurance policy, the insurance company pays claims that otherwise would go uncovered because of indequate limits on the primary policy. For example, John Smith purchases a $10 million mansion. Because of the high exposure, no single insurance company is willing to take on the risk of insuring the entire $10 million. As a result, the Smith purchases a primary property policy in the amount of $5 million and an excess property policy of $5 million. In the event of a $7.5 million loss, the primary policy pays $5 million and the excess property policy pays $2.5 million.
Excess Insurance Coverage
In addition to excess limit insurance policies, there are excess coverage insurance policies. Excess coverage policies not only provide excess limits, they also provide additional coverage. One such excess coverage policy is an umbrella liability policy. The umbrella policy provides limits above the primary policy, and it also covers some claims that aren't covered by the underlying policies. Because of this feature, umbrella policies have a type of deductible called a self-insured retention.
The intent of an insurance policy is to restore the insured to a pre-loss condition. If a building burns to the ground, the property policy pays the amount it takes to restore or rebuild the building subject to policy limits. It is not the intent of the insurance policy to pay for nuisance claims. As such, insurance policies have deductibles. Deductibles vary depending on the type of policy and exposure. Some deductibles are as low as $100 or $250 as seen on automobile policies, but others can be $10,000 or more, as is common on professional liability policies.
A self-insured retention is a special type of deductible normally seen on liability policies. In addition to paying the liability claim, it’s the insurance company’s responsibility to pick up the legal costs of defending the insured against the claim. A self-insured retention means the policyholder must pay all costs that arise as a result of the claim until they meet the amount of the stipulated self-insured retention. The insurance company then pays the rest.