Personal Umbrella, Excess Liability and the Personal Liability Supplement

A primary liability policy has a limit, and a serious claim can exceed it. A jury verdict for a catastrophic injury, or a series of claims in one year, can reach past the $250,000 per person on an auto policy, the limit on a homeowners policy or the occurrence limit on a commercial general liability policy. Excess and umbrella policies sit above those limits. The sections below show how the layers pay a loss, what an insured must carry underneath, how a retention differs from a deductible, how Michigan’s auto liability limits set the underlying requirement for a Michigan client, and how the personal liability supplement gives a dwelling policy the liability coverage it lacks. The amounts and names in the examples are invented. Umbrella forms differ by insurer, so statements about them describe standard forms generally, and the policy in front of the client controls.

Excess and Umbrella Policies Compared

An excess liability policy provides limits above the limits of the underlying coverage and follows the underlying policy’s terms. It increases the limit and nothing else. If the underlying policy does not cover a claim, the excess policy does not either.

An umbrella policy provides excess limits too, usually as one blanket limit over several underlying policies, such as the liability sections of a homeowners policy and an auto policy for a person, or commercial general liability, commercial auto and employers liability for a business. Its second feature is broader protection. An umbrella generally covers some claims the underlying policies do not, such as certain personal injury offenses like libel, slander or false arrest, and may fill in where an underlying policy has an exclusion. When it does, it behaves like primary insurance for that claim, and that is why it carries a retention.

Feature	Excess liability	Umbrella liability
Increases the limit over underlying	Yes	Yes
Covers claims the underlying policy excludes	No, it follows the underlying form	Often, under its own insuring agreement
Retention applies	Seldom, because the underlying always responds first	Yes, to a covered claim that no underlying policy covers
Sits over	A stated underlying policy	Several scheduled policies, under one blanket limit

Two terms describe how the umbrella relates to the underlying. A policy that follows form adopts the underlying policy’s definitions, exclusions and conditions, so it pays only what the underlying would have paid had its limit been higher. A policy that drops down steps into the underlying’s place when the underlying limit is used up, or when it does not apply to a covered claim, paying from the first dollar above any retention.

Retained limit and self-insured retention

An umbrella states what the insured must bear before the umbrella pays. For a claim the underlying policy covers, that amount is the underlying limit. For a claim only the umbrella covers, it is a self-insured retention, which the insured pays, and usually handles, before the insurer’s obligation begins. This differs from a deductible. A deductible reduces what the insurer pays on a loss that is within its coverage. A retention is the insured’s own layer. The two together are commonly called the retained limit: the underlying limit where an underlying policy applies, and the retention where none does.

Underlying Requirements

An umbrella insurer usually requires the insured to keep specified minimum limits on specified underlying policies, and the declarations schedule them. For a personal umbrella, the schedule typically lists the homeowners or dwelling liability limit, the auto liability limits, and watercraft or recreational vehicle liability where the insured owns them. For a commercial umbrella, it lists commercial general liability, commercial auto and employers liability, which is Part Two of the workers’ compensation policy.

The requirement protects the umbrella insurer’s pricing, which assumes that the primary insurer absorbs the frequent, smaller claims. If the insured carries less than the scheduled limit, the umbrella insurer generally treats the schedule as if the full underlying limit were in place. The insured, not the umbrella insurer, bears the gap. The same happens if the underlying policy is cancelled, lapses, or has been reduced by earlier claims without being reinstated. Producers should therefore tie an umbrella placement to a review of the underlying limits, and tell the client in writing about the gap risk when limits are lowered later.

Michigan Auto Limits and the Underlying Requirement

A Michigan auto liability policy, called residual liability insurance, must carry limits of at least $250,000 for bodily injury to or death of one person in an accident, $500,000 for two or more persons in an accident, and $10,000 for property of others (MCL 500.3009(1)). A named insured may choose lower bodily injury limits, but not below $50,000 and $100,000, by completing the form the Director issues (MCL 500.3009(5)). If the named insured has not made an effective choice, the $250,000 and $500,000 limits apply (MCL 500.3009(8)).

The choice matters to an umbrella buyer because the umbrella insurer’s schedule will usually list the higher limits. A client who selected the $50,000 limit to save premium has less underlying than the umbrella insurer expects, and the difference falls on the client unless the limit is raised.

Michigan’s no-fault system also shapes what an umbrella over auto will be asked to pay. Personal protection benefits are paid by the insured’s own auto insurer without regard to fault. They are not damages the insured is legally liable for, so they are not an umbrella claim. What reaches the umbrella is liability that survives no-fault: noneconomic loss when the injured person has suffered death, serious impairment of body function or permanent serious disfigurement, and damages for allowable expenses, work loss and survivor’s loss in excess of the injured person’s PIP limit or without limit for allowable expenses where the injured person opted out of PIP medical coverage or an exclusion under MCL 500.3109a(2) applies (MCL 500.3135(1), (3)(c)). Lower PIP choices therefore send more economic loss claims toward residual liability limits and then toward the umbrella.

Worked Losses Through the Layers

A loss above the primary limit

Rosa Delgado has an auto policy with $250,000 per person residual liability and a $1,000,000 personal umbrella. She is found liable for $1,400,000 to one injured person.

1. The auto policy pays its $250,000 limit.
2. The umbrella pays the next layer, up to its $1,000,000 limit. The remaining judgment is $1,400,000 - $250,000 = $1,150,000, which exceeds the umbrella’s limit, so the umbrella pays $1,000,000.
3. Rosa owes the rest: $1,150,000 - $1,000,000 = $150,000.

Total insurance available was $250,000 + $1,000,000 = $1,250,000, and the judgment exceeded it by $150,000. Defense costs are a separate question. Under standard primary forms the primary insurer defends, and once the primary limit is paid the umbrella generally takes over the defense, with the form saying whether defense costs reduce its limit.

A gap in the underlying limit

Marcus Lindqvist chose the $50,000 per person Michigan minimum on his auto policy. His umbrella schedules $250,000 per person underlying. A claimant obtains a $600,000 judgment against him.

1. The auto policy pays its $50,000 limit.
2. Marcus bears the gap between the scheduled limit and what he carried: $250,000 - $50,000 = $200,000.
3. The umbrella pays the loss above the scheduled $250,000: $600,000 - $250,000 = $350,000.

The check is $50,000 + $200,000 + $350,000 = $600,000. The client paid the $200,000 gap from personal assets, which is the result a producer is trying to prevent.

A claim only the umbrella covers

Suppose a personal umbrella covers libel and an insured is sued over a social media post and settles for $85,000. The homeowners and auto policies do not respond. The umbrella has a $10,000 self-insured retention. The insured pays $10,000, and the umbrella pays $85,000 - $10,000 = $75,000.

Several layers over a commercial risk

A contractor buys $1,000,000 per occurrence primary commercial general liability, a $4,000,000 first excess policy and a $5,000,000 second excess policy, both following form. A single occurrence produces a $7,500,000 loss.

Layer	Attaches at	Limit	Pays
Primary	$0	$1,000,000	$1,000,000
First excess	$1,000,000	$4,000,000	$4,000,000
Second excess	$5,000,000	$5,000,000	$2,500,000

The second layer pays only to the extent of the loss that reaches it: $7,500,000 - $5,000,000 = $2,500,000. The total is $1,000,000 + $4,000,000 + $2,500,000 = $7,500,000.

An exhausted aggregate and the drop down

Commercial general liability carries an annual general aggregate, while a homeowners liability limit applies per occurrence and an auto liability limit per accident. A business with a $2,000,000 general aggregate has paid $1,900,000 in claims this year. A new $400,000 claim arrives.

1. The primary policy pays the $100,000 left in the aggregate: $2,000,000 - $1,900,000.
2. The balance is $400,000 - $100,000 = $300,000.
3. If the umbrella drops down over the exhausted aggregate without a retention, it pays $300,000. If it applies a $10,000 retention to the dropped-down amount, the insured pays $10,000 and the umbrella pays $290,000.

The drop-down terms and the retention differ among forms, so a producer reads this wording before telling a client that the umbrella restores an exhausted aggregate.

Exclusions and Employers Liability Underneath

An umbrella is a liability contract, so it responds to claims for which the insured is legally liable. Umbrella forms generally exclude obligations under workers’ compensation law, so the umbrella does not pay compensation benefits. Employers liability, which is Part Two of the workers’ compensation policy, is the exposure an umbrella commonly covers, which is why a commercial umbrella schedules it as underlying and often asks for higher employers liability limits than the policy’s standard limits. Employers liability limits are commonly $100,000 per accident, $100,000 per disease and $500,000 aggregate for disease. A client who wants the umbrella to sit above employers liability may need to raise those limits before the umbrella attaches.

The Personal Liability Supplement

A dwelling policy insures a residence against property loss. A dwelling policy does not include personal liability or medical payments coverage. The personal liability supplement adds it by endorsement. A separate comprehensive personal liability policy is the alternative for a person who needs liability coverage without the dwelling policy.

The supplement adds two coverages that correspond to Coverages E and F of a homeowners policy. Coverage L, personal liability, pays damages the insured is legally liable for because of bodily injury or property damage caused by an occurrence, up to the limit for each occurrence, and defends the insured even if the suit is groundless, false or fraudulent. Coverage M, medical payments to others, pays necessary medical expenses incurred or medically ascertained within three years of an accident, up to the limit for each person, whether or not the insured is liable. It applies to a person on the insured location with the insured’s permission. It does not pay for the named insured, for anyone who regularly lives in the household or on the insured location, or for anyone eligible for workers’ compensation benefits.

The supplement excludes expected or intended injury and damage, and injury or damage arising out of a business, professional services, premises an insured owns or rents that are not an insured location, aircraft, hovercraft, most motor vehicles, and larger watercraft. Coverage L also does not apply to most liability assumed by contract, to damage to property an insured owns or rents, or to injury to an insured in the household or to a person eligible for workers’ compensation benefits that an insured provides or must provide. In addition to the limits, it pays claim expenses, first aid and damage to the property of others up to a stated amount.

A claim under the supplement

Elena Brandt owns a home she insures on a dwelling policy, and she has added the supplement with a $100,000 Coverage L limit and a $1,000 Coverage M limit. These limits are an example. A neighbor’s guest slips on the cracked porch step and breaks her wrist. Her medical bills are $2,300.

1. Coverage M applies without proving fault, because the guest was on the insured location with permission. It pays up to its limit of $1,000 per person, so the guest receives $1,000 and the remaining $1,300 is not Coverage M’s to pay.
2. The guest sues for $38,000 on a negligence theory. Coverage L answers the suit and defends Elena. If the claim settles at $38,000 for damages beyond the bills Coverage M paid, Coverage L pays $38,000, which is well within $100,000.
3. Elena’s own daughter, who lives with her, trips on the same step. Coverage M does not pay, because it excludes people who regularly live in the household, and Coverage L excludes injury to an insured resident. Her own health insurance would respond.

Household help raises a separate question. The supplement’s workers’ compensation exclusion applies to a person eligible for benefits that an insured provides or must provide. In Michigan, a private employer is not liable under the compensation act to a household domestic employed for less than 35 hours a week for 13 weeks or longer in the preceding 52 weeks, unless the employer assumes liability (MCL 418.118(2)). A homeowner who employs a worker below that threshold may therefore have no compensation obligation. The exclusion applies to benefits an insured provides or must provide, so it does not by itself bar that worker’s injury claim, and the claim is a liability claim for the supplement or the umbrella to consider, subject to their other terms. For a worker at or above the threshold, the employer’s obligation under the Act has to be checked first, and the exclusion may then apply.

How the supplement supports an umbrella

An umbrella needs underlying liability coverage to attach to. For an owner whose home is insured on a dwelling policy, the supplement’s Coverage L limit is the underlying the umbrella schedules. Without a supplement, there is no underlying home liability. The umbrella insurer will usually not issue the umbrella, or it treats the missing coverage as a retention. A dwelling policy owner who wants an umbrella therefore adds the supplement first and carries the limit the umbrella insurer requires.

Reviewing a Client’s Liability Layers

A producer checking a client’s liability program can work through four questions in order.

1. What is the highest realistic claim against the client, given assets and exposures such as a pool, a teen driver or rental property?
2. What does each primary policy pay, and what is the Michigan auto limit actually chosen?
3. Does the umbrella’s schedule match what the client carries, and does every scheduled policy remain in force?
4. Which exposures sit outside both layers, such as a business activity or a vehicle the umbrella does not schedule?

The answers show the gap in dollars, which is more persuasive to a client than a general statement that the limit is “not enough.”

Lesson summary

• An excess policy follows the underlying form and increases only the limit. An umbrella adds a blanket limit and, on some claims, broader coverage than the underlying policies.
• The retained limit is the underlying limit where an underlying policy applies, and a self-insured retention where only the umbrella covers.
• Umbrella insurers require scheduled underlying limits. If the insured carries less, the insured generally bears the gap between what was scheduled and what was carried.
• Michigan residual liability must be at least $250,000 per person, $500,000 per accident and $10,000 for property of others unless the named insured signs the Director’s form to choose lower bodily injury limits of no less than $50,000 and $100,000 (MCL 500.3009).
• PIP benefits are not an umbrella claim, but liability that survives no-fault, including some economic loss above PIP limits, can reach residual liability and the umbrella (MCL 500.3135).
• Layers pay in order. Each layer pays only the portion of the loss that reaches it, up to its limit, and the insured bears any loss above all limits.
• The personal liability supplement gives a dwelling policy Coverage L and Coverage M, and its Coverage L limit is the underlying for an umbrella.
• Coverage M pays without regard to fault and excludes residents of the household. Coverage L requires legal liability and excludes injury to insureds.