A Florida-based general contractor has an Umbrella Liability policy with a self-insured retention (SIR) of $25,000. They are sued for $1.2 million for bodily injury caused by their operations, and their underlying Commercial General Liability (CGL) policy has a limit of $1 million and a $10,000 deductible. How much will the Umbrella policy pay for this claim?
- A$190,000
- B$200,000
- C$225,000
- D$175,000
Show answer & explanationAnswer & explanation
Correct answer: B. $200,000
The Umbrella policy provides excess coverage. First, the underlying CGL policy pays up to its limit ($1,000,000). The deductible on the CGL ($10,000) is paid by the insured before the CGL pays. The Umbrella policy then covers the amount exceeding the CGL limit. Total claim = $1,200,000. CGL pays $1,000,000. The remaining balance is $1,200,000 - $1,000,000 = $200,000. The SIR applies only if the underlying policy doesn't cover the loss at all, or if the underlying policy's limits are exhausted and the umbrella policy is acting as primary coverage for an uncovered claim. In this case, the underlying CGL was exhausted, so the Umbrella pays the excess without an SIR applying.
Why the other options are wrong
- A. Incorrect calculation. The CGL deductible is absorbed by the CGL policy's payment and does not directly impact the Umbrella's payment when the underlying limit is exhausted.
- C. Incorrect calculation. This would be $200,000 + $25,000 SIR, which is not how SIR works when an underlying policy is exhausted.
- D. Incorrect calculation. This would be $200,000 - $25,000 SIR, which is also incorrect as SIR is not a deductible in this scenario.
Umbrella Policy - SIR
An Umbrella policy provides excess liability coverage. A Self-Insured Retention (SIR) is a deductible-like amount the insured pays only when the Umbrella acts as primary coverage for a loss *not* covered by any underlying policy.
- Provides broad coverage over primary policies.
- Acts as primary for some uncovered losses (then SIR applies).
- SIR does NOT apply when underlying policy limits are exhausted by a covered claim.
Memory trick: Umbrella's 'SIR' is for 'S.I.N.' - 'Self-Insured, Not' covered by underlying.