What Is Drop Down Coverage on an Umbrella Insurance Policy?

An umbrella insurance policy provides additional limits of liability insurance in the event a primary liability insurance policy is exhausted through the payment of claims. The drop-down provision governs how an umbrella policy will respond on behalf of the insured in the event of the primary policy's exhaustion.

Limits of Liability

All liability insurance policies have limits of liability that define the maximum the insurer will pay on behalf of the insured in the event of a claim. The "per occurrence" limit is the most the insurer will pay on any one claim. The "aggregate" limit is the most the policy will pay, regardless of the number of claims. A liability policy will generally have both types of limits defined on the declarations page.

Primary Policy

An insured may have many policies in force for a sufficient total limit of liability available to pay claims. A primary liability policy is the first policy that will respond on behalf of the insured in the event of a claim. Subsequent policies are known as excess or umbrella policies.

Attachment Point

Excess or umbrella policies will define exactly how they will step in the event of underlying policy exhaustion. The differences in how policies attach may appear to be subtle but can have a significant impact on what coverage is available to the insured in the event of a claim.

Drop-Down Provision

A drop-down provision in the umbrella policy requires the umbrella to respond to claims when a primary policy is exhausted through the "per occurrence" limit or "aggregate" limit. Umbrella policies without a drop-down provision will only respond when the "per occurrence" limit is exhausted.

Coverage Gap

Without a drop-down provision, the insured is potentially left with a gap in insurance coverage as its primary liability exhausts through the payment of claims. Because the attachment point is stated to be only the "per occurrence" limit, a primary policy could exhaust on an aggregate basis and leave a gap before the umbrella policy attaches.

Negotiation of Coverage

Purchasers of insurance should always verify the drop-down provision in prospective umbrella policies prior to binding coverage. Because the exhaustion of liability policies may take place over the course of many years, it is important to properly document in the policy wording the drop-down provision at the inception of the policy.

References

• International Risk Management Institute

Resources

• Chubb Group: Exc ess & Umbrella Liability