AAIS COMMERCIAL UMBRELLA
LIABILITY COVERAGE RATING CONSIDERATIONS
(October 2025)
Although there is no single
standardized method for calculating commercial umbrella liability premiums, the
American Association of Insurance Services (AAIS) offers a recommended rating
and pricing approach. However, this approach is neither filed nor mandatory.
Multiple methods and techniques can be employed to determine the premium of an umbrella
policy. This article reviews the AAIS recommended approach.
There are two ways to determine
the manual premium:
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Example: Dino's
Delicatessen is in an East Coast tourist town. It operates Monday through
Friday, serves breakfast and lunch, and closes at 2:30 p.m. It also
occasionally caters to off-site events and delivers sack lunches to businesses
that participate in Lunch 'n Learn meetings. Dino's package policy premium is calculated using standard
rates, with only a package credit applied to its property and liability
premiums because of its relatively small size. Dino’s owns two full-size
vans, which they use exclusively in the catering and delivery operations.
Coverage is written with a surplus lines insurance company due to catering and delivery operations, and the maximum
legally permitted scheduled debit factors are
applied to the premium rates. In this case, the umbrella carrier easily
determines the underlying premises/operations and products/completed work
manual premiums. The manual premise liability premium is $1,250, and the
manual product liability premium is $3,000. However, it takes more work and
creativity to arrive at a fair estimate of a "manual" auto
liability premium. After conducting a thorough analysis, the umbrella
carrier determines a total manual liability premium of $5,000 for the two
vehicles. |
This is the first step in
calculating the premium. For example, a risk might have a low underlying
premises exposure, moderate exposure for products/completed work, but a very
high commercial auto exposure. These hazard factors are used during
underwriting and influence rating and pricing. Consider these points at this
step:
These exposures are unlikely to
exhaust the underlying limits. Typically, offices and small retail exposures
fall into this category. Hired and non-owned auto represent a low hazard auto
exposure.
These exposures involve a
moderate risk of experiencing a catastrophic loss. This category often includes
multi-location retail stores, restaurants, and casual or artisan contractors.
Typical auto exposures in this group are contractors with low-weight vehicles,
company sales fleets, and local delivery services.
These exposures are significantly different
as they involve the highest risk of catastrophic loss. Examples include
manufacturing facilities, large public auditoriums, concert venues, and bridge
contractors. Auto exposures such as buses, cement trucks, and taxi fleets are
also classified as high-hazard.
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Example: Continuing
with Dino's, even though the premises/operations and products/completed work
exposures are reasonable, the umbrella carrier assigns a grade of low for the
premises liability exposures but a medium hazard grade for products because
of the possibility of food spoilage. It assigns a medium hazard grade to the
auto liability exposure due to its off-premises catering operations and
delivery in an urban setting, which often experiences high traffic congestion
during lunch-time deliveries. |
The
insurance company uses a table of factors based on coverage and hazard grades.
NOTE: Rating
a Businessowners policy is more complex because some policies are composite
rated. This means the premiums for premises/operations and products/completed
work are combined, not distinctly separated from the total premium. Sometimes,
this factor applies to the entire Businessowners premium; other times, it may
necessitate consulting the insurance company for clarification.
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Example: We
will keep going with Dino's. This is the preliminary premium calculation up
to this point.
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Example: Dino's
premium for the first $1,000,000 umbrella/excess liability is $1,713. This is
based on adding all three premiums from the table above. |
These credits or debits recognize special
risk characteristics that the rates do not reflect. The net credit or debit
determined under this rule applies to all other rating procedures. The total
credit or debit cannot exceed 25%, subject to individual state regulations.
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Example: After
thoroughly reviewing the application, previous loss experience, and loss
control report, the umbrella liability carrier decides not to credit or debit
the risk. |
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Example: Dino
wants umbrella liability quote options for limits of $2,000,000, $3,000,000,
$4,000,000, and $5,000,000. This chart outlines how this is done and the
premiums for each limit if the limits factor for each layer is .50.
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NOTE: The premium for each $1,000,000
is subject to a minimum premium per million, as determined by the insurance
company.
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Example: Dino
requests Commercial Umbrella Liability Coverage with a $4,000,000 limit for an
annual premium of $3,213. |
As mentioned in the introduction,
there is not a single, standardized method or formula for determining
commercial umbrella liability premiums. AAIS suggests using the approach
outlined above, but it is neither filed nor required. It is important to remember
that each insurance company may choose its own or multiple different methods.
Always verify which approach the
insurance company is using.
Related Article: ISO Commercial
Liability Umbrella Coverage Form Rating Considerations
Commercial umbrella liability coverage forms or policies may or may not be subject to audit. Typically, if the underlying commercial general liability premium is based on an auditable exposure, such as payroll or sales, then the umbrella policy is usually also subject to audit.