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Business Insurance Excess vs. Excess Cover: What's the Difference?
Confused? There are two very different types of 'excess' in the world of business insurance. One relates to a policyholder's contribution towards a claim, and the other relates to extra cover if a business needs a higher limit of insurance.
Policy Excess vs. Excess Coverage
The policy excess is the amount a policyholder pays towards a claim; on the other hand, excess cover or excess of loss cover is additional coverage that sits on top of a business's primary liability cover to protect against major incidents. Here's they how each work.
Definition: Business Insurance Policy Excess
The excess on an insurance policy is the amount a policyholder pays towards a claim. The excess can range from £0 to £1,000 or more on business insurance policies, and isn't payable on all types of claims.
Example: Business Insurance Policy Excess
- A management consulting company bought a £2 million professional indemnity policy with a £1,000 excess. They are subsequently sued by a client after a recommended merger leads to a large financial loss. The consulting company is found liable to pay damages of £150,000 to their client. The management consulting company pays £1,000 (the excess) and the insurer pays the remaining £149,000. (The insurer also pays the legal defense costs.)
No, not all business insurance claims are subject to an excess. For example, a professional indemnity policy excess doesn't generally apply to legal defense costs. And third party claims on a business car insurance policy don't require the policyholder to pay an excess. Beyond that, when the excess applies will vary by insurer and depends on the terms of your policy. Check your policy documents to accurately assess when an excess applies, and the size of your contribution.
Some insurers let the policyholder choose the excess they'd want to pay in event of a claim. The benefit of choosing a higher excess is that it can lower the insurance premium—a higher excess means the policyholder takes on a larger share of the risk, so the insurer charges less to issue a policy. However, a higher excess is not necessarily the best option for a policyholder if they'd have trouble covering the excess—and anyway, the money you save on the premium can be negligible.
Theoretically, if you think there's a very low risk you'll need to claim and you could easily cover the excess, then opting for a higher excess in order to lower your premium can be a good bet.
Definition: Excess of Loss Cover
Excess of Loss is additional liability insurance that sits above a business's primary liability coverage and protects against large claims that could essentially use up their primary insurance—it is also referred to simply as 'excess' cover, or sometimes as an 'excess layer'.
Excess of Loss cover is used when a primary insurer doesn't offer the limit of indemnity required by a business. The limit of insurance available in the Excess of Loss market is higher than you'll typically find in the primary market—up to £25 million, £50 million per line of business, or more.
The top-up policy only kicks in once the full amount of the underlying limit of indemnity on the primary policy has been exhausted.
Types of Excess of Loss Cover
Top-up liability cover is typically offered for the following types of products:
- Employers' Liability
- Public Liability
- Products Liability
- JCT 6.5.1. (for the construction industry)
- Professional Indemnity
- Financial Loss
What's a follow-form policy?
An excess cover policy can be dictated by its own terms and conditions; or it can be structured as a 'follow-form policy' that mirrors the terms and conditions of the underlying policy. Insurers offering follow-form policies will want to check that the underlying wording is acceptable.
How much does Excess of Loss cover cost?
An excess cover policy typically derives its premium from the main policy, subject to insurers' minimum premiums. For example, if you pay £1,000 for a £5 million public liability policy your £5 million excess of loss cover may cost £500. If your main policy premium rose to £2,000 the same amount of excess cover would rise in proportion.
Excess of loss insurance providers can typically cover a very wide range of business types across most industries, as they take their risk calculation cue from whichever insurer sets the premium for the primary policy.
Example: Excess of Loss
- A large chemical manufacturing company bought £10 million of excess employers' liability insurance, on top of their underlying £5 million of legally-required EL cover. A chemical spill results in serious injury to a number of employees, who subsequently sue the company. They are awarded £15 million in damages. The primary EL policy covers £1 million of legal fees and the first £4 million of damages; the remaining £11 million of damages is covered by the excess policy.