What is Horizontal Exhaustion?

Insurance can be confusing to understand and often comes with a lot of paperwork. It’s hard to keep track of every project’s requirements that you’re working on.

Often, questions such as these come into your mind:

• What happens if there is a claim? Am I covered?
• When does my Umbrella policy kick in?

What is important to know is that before your umbrella or excess policies can cover a claim, your primary policies occurrence or aggregate limits must first be “used up” or exhausted. This is known as horizontal exhaustion.

Understanding how Horizontal Exhaustion works

Horizontal Exhaustion is a term used to describe the complete erosion of underlying policy limits by the payment of claims. Typically, when a liability claim arises, the General Liability policy will be the first line of limits to be exhausted. If the claim(s) is larger than the occurrence or aggregate limits of the General Liability policy, the Umbrella policy would then come in to play and cover the remaining Liability payments of the claim.

Simply put, Horizontal Exhaustion means that the General Liability per occurrence and/or aggregate policy limits must be completely eroded before any Umbrella policies can contribute towards a claim payment.

Horizontal Exhaustion’s role in a subcontractor’s policy

Horizontal Exhaustion also comes in to play when contracting parties are designated as additional insureds on a subcontractor's policy. This includes questions such as:

• “Am I requiring sufficient limits of my subcontractor to adequately cover my exposure to the work subcontracted?”
• “Are the subcontractors limits impaired in any way by his prior claims experience?”
• “Is the subcontractor’s per-location aggregate limit capped by a policy aggregate endorsement?”
• “What is my exposure now, given the fact that my Insurance will potentially come in to play sooner than originally anticipated?”

Construction companies need to consider these questions and formulate a strategy in order to handle these and other situations that are likely to arise on a construction project.

If you have questions regarding Horizontal Exhaustion or other terms that can affect your coverages, give TSIB a call today at 201-267-7500!

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