The following is from Sections 10.06, 10.07, 10.9, and 10.10 of Chapter 10 of the LexisNexis Practice Guide: North Carolina Insurance Litigation (2018 Edition). Chapter 10 is entitled “Excess and Umbrella Insurance” and was written by PCKB’s Rick Pinto. (Britney Boles assisted with this chapter.)

§ 10.06: Basic Concepts of Umbrella Policies.

An umbrella liability policy is a type of excess liability policy that provides additional higher limits over specifically listed underlying policies, and also may offer coverage not available in the underlying liability coverage. Most umbrella liability policies provide defense coverage if not provided in an underlying policy.

§ 10.07: Basic Concepts of Excess Policies.

An excess liability policy is designed to provide excess (higher) limits of coverage above the limits of a specific underlying coverage. It typically offers no broader protection than that provided by the underlying coverage. In some cases, excess policies can be even more restrictive than the underlying coverage.

§ 10.09 Excess Coverage.

[1] In General.

An excess liability policy comes in one of three basic forms:

1. A “following form” or “follow the form” policy which is subject to the exact same provisions as the underlying policy;

2. A “self-contained” or “stand alone” policy which is subject only to its own provisions; or

3. A combination of the two types above.

Additionally, when excess liability insurance applies above a retained primary layer instead of underlying insurance, two additional types of excess insurance policies are commonly used, particularly in connection with self-insured workers’ compensation obligations:

1. Specific excess insurance

2. Aggregate excess insurance

[2] Following-Form Excess Policies.

A following-form excess policy covers a liability loss that exceeds the underlying limits only if the loss is covered by the underlying insurance. For example, assume that an insured has an underlying liability policy with an each-occurrence limit of $500,000 and a follow-form excess policy with an each-occurrence limit of $1,000,000. If a claimant obtains a judgment of $1,750,000 against the insured for bodily injury or property damage covered by the underlying policy, the underlying policy would pay its occurrence limit of $500,000 and the excess policy would pay its policy limits of $1,000,000. The remaining $250,000 would not be covered by either policy.

Following-form excess policies state that except for the policy limits, all of the provisions, conditions, and exclusions of the underlying policy are incorporated into and adopted by the excess policy. The excess policy would not contain any other provisions.

[3] Self-Contained Excess Policies.

A self-contained or stand-alone excess policy is subject only to its own provisions. Therefore, coverage applies to the extent set forth in the policy. The policy does not depend on the underlying policy provisions to determine the scope of the coverage. This allows for coverage gaps between the excess and underlying policies. Self-contained policies apply to losses that exceed the underlying limits only if the loss is also covered under the provisions of the excess policy

There is, however, one exception to the general rule that the self-contained policy does not depend on the underlying policy provisions when determining the scope of the coverage. The exception occurs when the excess policy provides coverage in excess of a reduced or exhausted underlying aggregate limit. Some excess policies provide this coverage on their own provisions, while others provide this coverage based on the conditions of the underlying coverage that they are replacing.

[4] Combination Excess Policies.

Some excess policies combine the “following-form” and “self-contained” approaches by incorporating the provisions of the underlying policy and then modifying the provisions with additional conditions or exclusions.

“The purpose of excess insurance is to protect the insured against excess liability claims, not to insure against the underlying insurer’s insolvency,” unless the policy provides otherwise. North Carolina Ins. Guar. Ass’n v. Century Indem. Co., 115 N.C. App. 175, 185-186, 444 S.E.2d 464, 470 (1994).

Excess coverage “provides that if other valid and collectible insurance covers the occurrence in question, the ‘excess’ policy will provide coverage only for liability above the maximum coverage of the primary policy or policies.” Horace Mann Ins. Co. v. Continental Casualty Co., 54 N.C. App. 551, 555, 284 S.E.2d 211, 213 (1981).

§ 10.10 Umbrella Coverage.

[1] In General and “Drop Down” Coverage.

Umbrella coverage is “a form of insurance protection against losses in excess of the amount covered by other liability insurance policies.” Isenhour v. Universal Underwriters Ins. Co., 341 N.C. 597, 603, 461 S.E.2d 317, 320 (1995). It provides coverage above basic or normal limits of liability. The term “umbrella” liability is used to describe a type of excess insurance that is broader than ordinary excess liability policies. Umbrella policies serve an important function. Today, with large verdicts possible, umbrella coverage picks up exceptional hazards at a relatively small premium.

Umbrella policies perform three main functions:

1. Provide additional limits above the each-occurrence or aggregate limits of the insured’s underlying policies;

2. Take the place of the underlying insurance when underlying aggregate limits are reduced or exhausted; and

3. Cover some claims that are not covered by the insured’s underlying policies.

These last two functions are also referred to as “drop-down coverage.” Drop-down coverage is a coverage that is not dependent on the underlying policy paying its limits, but rather will provide coverage from dollar one if the underlying policy does not provide coverage for some reason.

In a “drop down” situation, an umbrella carrier assumes the first line of coverage for risks covered by the primary carrier in the event of the primary carrier’s insolvency or failure to pay for other reasons. Whether an excess carrier has assumed a drop-down obligation is a matter of contract interpretation. If the policy language provides for any “dropping down” by a secondary/excess insurer for losses not recoverable by reason of a primary carrier’s insolvency or other failure to pay, and absent evidence of some other action by an excess insurer creating a different understanding by the insured, a contract’s unambiguous language on that point must be enforced.

In order to assert drop-down coverage against an excess carrier in the event of the primary carrier’s insolvency or other failure to pay, an insured bears the burden of establishing that a claim is within the coverage provided by the excess carrier.

[2] Self-Insured Retention.

This is a term used to describe a retention of the risk by the insured, usually a fairly significant amount that is the obligation of the insured to pay before an underlying policy or umbrella policy is triggered.

[3] Required Underlying Limit.

This is a term used to refer to the amount of per person or aggregate limits required to be in place before an excess or umbrella policy is triggered.

Umbrella liability policies involve one comprehensive insurance agreement rather than many individual ones. Usually, the insurer promises to pay the “ultimate net loss” in excess of the “underlying limit” that the insured becomes legally obligated to pay as damages for bodily injury, property damage, personal injury, or advertising injury, arising out of an occurrence covered by the policy.