Umbrella Policy Law and Legal Definition

Umbrella policy means an additional insurance coverage for losses that exceed the basic or usual limits of liability provided by an underlying policy. Homeowner’s insurance policies and auto insurance policies are the examples of umbrella policy. An umbrella policy can turn as the principal policy on the risk in certain situations. Umbrella policies are intended to provide liability insurance against claims made against the insured by third-parties, and are not intended to provide the insured with a first-party source of recovery. An umbrella policy that lists another umbrella policy in its schedule of underlying limits is an excess umbrella policy, which means that the insurer will pay only when the insured's liability exceeds that of the underlying umbrella policy limits.

In Treder v. LST, Ltd. P'ship, 2004 WI App 75 (Wis. Ct. App. 2004), the court held that “Umbrella policies are regarded as true excess over and above any type of primary coverage, including excess provisions arising in regular primary policies.” “An umbrella policy is unique and provides special coverage. The umbrella coverage's purpose is different than that of primary coverage; i.e., it provides the insured with liability coverage in excess of that offered by the primary policy.” The court further observed that “The umbrella policy serves a different function than primary policies -- it is the last line of defense -- and that is why coverage offered in primary policies is utilized before that found in umbrella policies. Case law requires an exhaustion of primary policies before the umbrella policy becomes responsible for any liability. Thus, umbrella policies stand apart from primary policies, umbrella policies serve a different function than primary policies, and, unlike a primary insurance policy, an umbrella policy specifically contemplates and, in fact, requires underlying insurance.”