Buffer Layer

Buffer Layer

Investopedia / Laura Porter

What Is a Buffer Layer?

The term buffer layer refers to insurance coverage that fills the gap between a primary insurance policy and excess protection. Buffer layers are used by insured parties to mitigate the costs associated with insurance payouts for large, complicated risks.

Buffer layers are commonly used as liability coverage but can also cover other kinds of claims. They are well-suited for individuals and businesses that may be harder to insure or those that may experience a higher degree of risk, such as trucking companies and condo associations.

Key Takeaways

  • The buffer layer is insurance coverage that protects against losses that occur between primary and excess insurance policies.
  • Buffer layers become necessary when the excess insurance kicks in at an amount that's higher than the primary insurer's cap.
  • This kind of insurance is commonly used for liability coverage in addition to other claims.
  • Purchase buffer layers during soft markets because they come in handy when things get tougher and the market becomes hard.
  • Buffer layers are best suited for companies with larger risks, such as trucking companies, condo associations, and apartment complexes.

Understanding Buffer Layers

Insurance policies provide individuals and corporations with protection against losses. In order to get coverage, they seek out the services of insurance companies. Insurers assess the level of risk through the underwriting process and set a premium that the insured party must pay to get covered.

Policies that cover triggering events are called primary insurance. A triggering event is anything that underwriters determine will cause the insurance company's liability to kick in. For instance, flood insurance pays out claims filed whenever there are instances of inland flooding. But this kind of insurance may only cover a certain level of risk or up to a certain dollar amount. As such, insured individuals may require extra protection, which is where excess coverage comes into play.

Excess insurance coverage allows insured parties to extend their coverage beyond their primary policies. But some insurers only allow claims above a certain amount. For example, if your primary insurer covers only $100,000 and the excess coverage only starts at $300,000, it leaves a $200,000 buffer.

A buffer layer fills in that gap. It is additional coverage that insured parties can purchase to protect themselves against any shortfalls not covered by their primary and excess policies. In the example above, the buffer layer covers the $200,000 gap. As noted above, it is commonly used as liability insurance but can also be used for other types of claims. We go into more detail below.

Buffer Layer Process

Let's say a company purchases an insurance policy that covers its estimated liability. But the amount it can purchase in one policy may not provide enough coverage for its perceived risk, so the company buys an additional policy to offset those extra risks.

When the second policy does not begin where the primary policy caps off, a layer of liability exists between the two policies, known as the buffer layer. The company may seek a third policy to cover this portion, otherwise, this ends up being the company's responsibility in the event of a loss.

Buffer layer insurance may also be called buffer liability coverage.

Special Considerations

Buffer layer insurance can be a boon to insured parties, especially during tough economic times. During a hard market, or when times get tough, insurers generally tighten up underwriting restrictions, making it harder and more expensive to get coverage Insurance premiums tend to be lower during a soft market or when the industry is doing well. This makes it a good time to get covered as insurers are more likely to give out policies.

Who Should Purchase Buffer Layer Insurance?

Buffer layer insurance may not be necessary for everyone but it is increasingly common for anyone with multiple, large, or complicated risks. As such, it is mainly used by commercial entities rather than retail consumers, especially those that have difficulty trying to secure policies.

If you're in the following businesses, you may want to consider taking out buffer layer insurance:

  • Trucking companies
  • Condominium associations
  • Apartment complexes

If you operate a company and have experienced a high number of claims or an excessive amount of loss, this may be a good option for you, too. People that work in certain fields may also benefit, such as doctors, dentists, and lawyers.

Consider taking out a buffer laying insurance policy if you run a company with a great amount of risk and you self-insure your workers rather than providing them with Workers' Compensation coverage.

Example of a Buffer Layer

Here's a hypothetical situation to show how buffer layers work. Consider a condo or homeowner association (HOA) with a master insurance policy that comes with liability coverage of $250,000, insuring the condominium against losses up to $250,000. The association decides it needs more protection against increased storm activity. The potential for losses could be as high as $500,000, so it takes out a policy to cover that amount.

But this additional policy only covers losses starting at $350,000. The difference between both of the association's policies is $100,000, which means that the buffer layer is $100,000. As such, the association would have to assume liability for that amount of loss. To avoid having to pay out that $100,000, the association seeks out a buffer layer or buffer liability policy to cover the remaining outlay.

Buffer liability insurance policies are available for companies to bridge the gap between primary and excess layers of insurance coverage. Companies need to decide what their perceived risks are versus the capital they need if a claim needs to be filed. If they prefer paying out of pocket to avoid higher premiums, they may opt to hold the two policies and pay any overage.

What Is the Difference Between a Hard and Soft Insurance Market?

Virtually every industry goes through different cycles. A contraction occurs when conditions get tough and expansion happens when the economy is faring well. The insurance industry is no exception.

A soft market occurs when players within the insurance industry ramp up competition for increased market share. As such, insurers lower their premiums, and underwriting regulations are much looser during this period. Insurers are usually willing to cover more risks, making it easier for individuals and companies to get coverage.

A hard market, on the other hand, is marked by increased demand for and little coverage. The number of policies drops as underwriting standards become stricter. Insurance premiums tend to be higher during hard markets.

What Is the Difference Between Primary and Excess Insurance?

Primary insurance is an insurance policy that provides coverage for a liability that occurs as a result of a specific event. This coverage goes into effect before any additional coverage.

Excess insurance, on the other hand, picks up where primary insurance leaves off. This means that it provides coverage for anything that the primary insurer doesn't cover.

What Is the Difference Between Excess and Umbrella Policies?

Excess insurance is coverage that an insured party takes out to provide additional coverage above and beyond their original insurance policy up to a certain amount. So if the insured suffers a loss of $100,000 and the primary policy only covers $75,000, the excess insurance policy pays the remaining $25,000, provided their policy covers that amount.

An umbrella policy, on the other hand, is a type of excess liability policy. As such, it provides additional protection against losses beyond what's covered in the original insurance. The scope of an umbrella policy may go one step further by covering certain claims that primary insurance doesn't cover like libel.