Georgia Property & Casualty Practice Exam

In the event of an accident that exceeds the limits of the underlying policy, how does the umbrella policy function?

1. A.) It covers the entire accident cost

2. B.) It supports claims only if the underlying policy remains valid

3. C.) It fills the gap between the liability limit and the claim amount

4. D.) It acts as the primary coverage in all cases

The correct answer is: C.) It fills the gap between the liability limit and the claim amount

The umbrella policy functions by filling the gap between the liability limit of an underlying policy and the total amount of a claim when that claim exceeds the limits of the primary coverage. This is a crucial aspect of umbrella insurance, which is designed to provide additional liability protection once the underlying policy limits have been exhausted. For example, if an underlying policy has a liability limit of $300,000 and an accident results in $500,000 in damages, the umbrella policy would cover the remaining $200,000. This function allows insured individuals to have peace of mind knowing that they have additional coverage available for large claims, reducing the risk of out-of-pocket expenses above what their primary insurance can handle. Other responses do not accurately represent the function of an umbrella policy. The umbrella does not cover the entire cost of the accident unless it is within the limits that it covers; it specifically comes into play when underlying coverage is insufficient. It does require the underlying policy to be valid but does not support claims based purely on that validity. Furthermore, it does not act as the primary coverage; instead, it serves as an excess policy that only activates after the limits of the primary insurance have been breached.