Property and Casualty Insurance Practice Exam

What happens if a loss is excluded under both an underlying policy and an umbrella policy?

1. The loss is covered under the umbrella policy

2. There is no coverage available for the loss

3. The insured can claim on both policies

4. The loss is evaluated separately by each insurer

The correct answer is: There is no coverage available for the loss

When a loss is excluded under both an underlying policy and an umbrella policy, the correct understanding is that there is no coverage available for that loss. This situation arises because an umbrella policy typically provides additional liability coverage beyond that of the underlying policies, but it does not create coverage for losses that are already excluded in those underlying policies. The essence of an umbrella policy is to enhance liability protection; however, it operates as a secondary layer of coverage and does not duplicate or override exclusions found in primary or underlying policies. If an exclusion exists in both policies, it means that the specific loss is not covered by either, leaving the insured without any coverage for that particular incident. In detail, if a certain type of damage or incident is clearly outlined as excluded in the underlying policy, the umbrella policy cannot extend coverage for that loss since it is mirroring the exclusions already present. Therefore, the insured would find themselves with no options for claiming coverage for that loss under either policy, thus confirming that there is no coverage available for the loss.