This policy is designed to provide additional protection against catastrophic liability losses at a much reduced rate. It generally is written over various primary liability policies, such as the commercial general liability policy, business auto policy, and employers liability coverage. The umbrella policy serves three purposes: it provides excess limits when the limits of underlying liability policies are exhausted by the payment of claims; it drops down and picks up where the underlying policy leaves off when the aggregate limit of the underlying policy in question is exhausted by the payment of claims; and it provides protection against some claims not covered by the underlying policies.
Example: A deck collapses at a local sports bar seriously injuring 5 and leaving one person a quadriplegic for life. After a long legal battle the suit is settled for 2.9 million dollars. The General Liability policy pays out 1 million dollars leaving the bar owner on the hook for $1,900,000.00. A commercial umbrella policy would have picked up the additional $1,900,000.00.