Understanding Excess Insurance Carriers

Excess insurance covers a claim after the primary insurance limit has been exhausted or used up. It is a type of coverage for financial risks that are too high to insure through the standard market and is obtained from an insurer that is not licensed in your state. Excess coverage typically falls into one of three categories: specific only, aggregate, and a combination of the two. Specific coverage is for a single bad event, while aggregate coverage refers to frequency and minimises your exposure over a specified time period.

Characteristics of Excess Insurance

Excess insurance vs. primary insurance

An excess insurance carrier provides additional coverage for the same claim once the limits of the primary policy have been reached.

Primary Insurance

Primary insurance is the first policy to cover a financial liability for the policyholder after a triggering event. It covers the financial cost of an insurance claim up to a certain limit. The insurance carrier holding the primary policy usually has the immediate and prime duty to defend any claims against the insured. For example, if you have auto insurance coverage, your primary policy would be invoked immediately upon being involved in a traffic collision, assuming all the obligations of the insured, such as prompt reporting of the claim, are met.

Excess Insurance

Excess insurance, also known as secondary insurance, provides additional coverage for the same claim once the limits of the primary policy have been reached. It covers a loss covered by another policy (the primary policy) only if the amount of the loss exceeds the limits of the primary policy. The excess policy is only reached when the entire layer of the primary policy is consumed.

Examples

If you are found liable for $125,000 and your primary insurance policy has a $100,000 limit, an excess policy may cover the remaining $25,000. Similarly, if the primary insurance coverage limit was $50,000 and the excess policy covered an additional $25,000, a claim of $60,000 would result in a $50,000 payout from the primary insurance and $10,000 from the excess policy.

Umbrella Policies

An umbrella policy is a type of excess insurance that can be added to multiple primary policies. For example, a family might purchase a personal umbrella insurance policy to extend excess coverage over both their automobile and homeowners' policies. Umbrella policies can be less expensive, meaning lower premiums for the insured, versus buying multiple primary insurance policies. If the umbrella policy is purchased through the existing insurer that covers the primary policies, the overall cost is usually lower and the insured gets comprehensive coverage.

Excess Carriers for Workers' Compensation

Some companies make the decision to self-insure workers' compensation claims. Because an extremely large claim could cause financial damage to a small business, it is typical for a self-insured company to use an excess carrier and to take out excess carrier insurance. A predetermined cutoff is defined, and the excess carrier reimburses the claim expenses above that point, up to the policy limit.

When is excess insurance needed?

Excess insurance is needed when you want to cut down the cost of claiming on other policies and protect yourself from expensive hire car charges. It is also useful if you have a high compulsory excess on your insurance policy.

Excess insurance is especially useful when hiring a car. When you hire a car, cover called Collision Damage Waiver (CDW) or Loss Damage Waiver (LDW) insurance is usually included in Europe, but not in America. Even with this cover, you would still be liable to pay the first part of the amount you are claiming for, known as the "excess". This excess amount can be very high, sometimes even more than you paid to hire the car in the first place. Car hire companies can apply a £1,000 excess while you are renting a vehicle, meaning you would have to pay for any damage up to £1,000.

Excess insurance is also useful if you have a high compulsory excess on your insurance policy. For example, you may have to pay a high theft excess on your motor insurance or for subsidence claims on your home policy. Young or new drivers may also face higher compulsory excesses because they are more likely to make a claim.

There are three types of excess insurance: car hire, single policy, and lifestyle policy. Car hire excess insurance can be taken out on a daily or annual basis, depending on how long you are hiring the car for. Single policy covers the excess on one insurance policy, like car or travel insurance, and is best if you have insurance with a high excess to save on your premium. Lifestyle policy covers the excess on a range of insurance policies, like car, home, and travel insurance, and is usually the cheapest way to cover all policies, but there will be a total cap on how much you can claim for.

When deciding whether to get excess insurance, weigh up the price of an excess policy against the cost of paying your excess. If it is cheaper to pay your excess, don't pay out for cover.

Who sells excess insurance?

Excess insurance covers a claim after the primary insurance limit has been exhausted or used up. It does not expand policy terms but covers higher limits in case of catastrophic claims or loss.

Excess insurance is typically sold by surplus lines insurers, who fill the need for coverage in the marketplace by insuring risks that admitted insurance carriers won't underwrite and price. Surplus lines insurance is any policy that offers coverage to an insured outside of a state's admitted market. The admitted market comprises insurance carriers that have a certificate of authority from the state and operate under that state's solvency and rate-setting requirements. Non-admitted carriers, or surplus carriers, still need some degree of state approval to sell policies in the admitted market, but they have more freedom to offer policies at rates, or for risks, outside of the state's standard market.

Some of the prominent carriers in the surplus lines insurance market include the United Kingdom's Lloyd's of London, which writes 24% of the surplus lines market, and American International Group (AIG).

Cost of excess insurance

Excess insurance, also known as secondary insurance, is a type of insurance that covers specific amounts beyond the limits of a primary insurance policy. The cost of excess insurance can vary depending on several factors, and it is important to understand how it works to make informed decisions about your coverage.

Firstly, it is essential to understand the difference between insurance excess and insurance premium. Your insurance premium is the amount you pay periodically, usually monthly or yearly, for your insurance coverage. On the other hand, your insurance excess is the amount you must contribute towards each claim that is covered by your policy. While these are separate payments, they are interconnected, as the amount of excess you choose can impact your premium.

When you take out a primary insurance policy, it typically comes with a predetermined coverage limit. If a claim exceeds this limit, your excess insurance policy will cover the additional amount, up to its specified limit. By having excess insurance, you can extend the coverage provided by your primary policy.

The cost of excess insurance is influenced by the level of risk it covers. Generally, higher excess amounts result in lower premiums, as you are assuming more risk yourself. Conversely, lower excess amounts lead to higher premiums because the insurance company takes on a larger portion of the risk. This shift in cost and risk is something to carefully consider when deciding on your excess amount.

Additionally, different types of claims may have different excess amounts. For example, some policies have an additional excess amount if the driver is under a certain age or is considered inexperienced. It is important to review your policy documents to understand the specific excess amounts that may apply to various situations.

Another factor that affects the cost of excess insurance is the number of claims made. Excess insurance typically applies to each separate accident or incident that results in a claim. Therefore, if you have multiple claims, you will need to pay the excess amount for each one.

When determining the overall cost of excess insurance, it is also worth noting that you may have the option to pay your excess in instalments in cases of financial hardship. This can provide some flexibility in managing the financial burden of excess payments.

In conclusion, the cost of excess insurance depends on several factors, including the excess amount, the number of claims, and the specific circumstances of each claim. By understanding how these factors interact, you can make informed choices about your coverage and excess levels to ensure you have adequate protection while managing your insurance expenses effectively.

Excess insurance and state guaranty funds

Excess insurance is a type of additional liability coverage that supplements the insurance policy of the policyholder. It is designed to provide extra protection in the event that the primary insurance policy's limits are exhausted or inadequate. Excess insurance carriers offer this additional layer of coverage, which is often purchased by businesses or individuals with high-value assets to ensure they are fully protected in the event of a significant loss.

State guaranty funds, on the other hand, serve a different purpose. They are non-profit organizations established by statute to protect policyholders in the event that their insurance company becomes insolvent or unable to fulfil its financial obligations. These funds are administered by U.S. states and are designed to guarantee payment of claims up to certain limits set by state law. All 50 states, along with Puerto Rico, the U.S. Virgin Islands, and Washington, D.C., have state guaranty funds, ensuring that policyholders are not left without recourse if their insurance company defaults.

State guaranty funds are funded primarily through assessments on insurance companies operating within the state. These assessments typically range from 1% to 2% of the net amount of insurance sold by the insurer within that particular state. The funds collected are then used to pay out claims to policyholders when their insurance company becomes insolvent. The state insurance commissioner or a designated representative oversees this process, ensuring that policyholders receive their entitled benefits.

It is important to note that state guaranty funds have coverage limits, which vary by state and type of insurance product. For example, individual annuities are typically covered up to $250,000, while life insurance death benefits may have a higher coverage limit. These limits are intended to provide a safety net for average policyholders while keeping the cost of the guaranty fund system manageable.

While excess insurance provides additional coverage beyond a primary insurance policy, state guaranty funds serve as a safety net for policyholders when their insurance company becomes insolvent. Excess insurance is purchased by individuals or businesses to enhance their existing coverage, whereas state guaranty funds are industry-funded mechanisms to protect policyholders in case of insurer insolvency.

Frequently asked questions