What Is the Buffer Layer?

The buffer layer is the amount that an insured party is responsible for between its primary policy and an ancillary policy. Usually, this amount refers specifically to liability coverage, but it can reference all claims.

Key Takeaways

  • The buffer layer is the risk that is still looming for an insured party between their main insurance policy and any additional insurance policy they purchased.
  • A company or any other insured party may have a primary policy that only protects them up to a certain dollar amount and an ancillary policy that covers them at a higher level.
  • In between those two coverage points is a layer of liability that companies must either decide to cover with an additional policy, or to risk having to pay out of pocket should a claim be filed.

Understanding the Buffer Layer

The buffer layer refers to the amount of risk that the insured party remains exposed to, even while holding multiple insurance policies. Insurance companies have begun writing policies with lower coverages due to changes in the insurance market. In response to insurers being less willing to extend primary policies to the upper limits, excessive claims and payouts have created an environment where multiple policies are becoming more common.

How the Buffer Layer Works

A company purchases an insurance policy that covers their estimated liability. Sometimes the amount that they can purchase in one policy may not provide enough coverage for what their perceived risk is, so the company will choose to purchase a secondary policy to offset additional 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. A company may seek a third policy to cover this portion, otherwise, this will end up being the company's responsibility in the event of a loss.

Companies that benefit most from insuring their buffer layer are trucking companies, condominiums and apartment complexes, and any companies that have experienced a high number of claims or an excessive amount of loss.

Buffer Layer Example

For example, consider a condominium association that carries a master insurance policy with liability coverage of $250,000, insuring the condominium against losses up to $250,000. The condominium association has decided it needs additional coverage due to increased storm activity in the area and determines the potential for loss could be upwards of $500,000. The association purchases an additional policy that covers the condos up to $500,000.

However, this additional policy only covers losses starting at $350,000. The difference between these two policies is $100,000, which means that the buffer layer is $100,000, which is the association's potential financial responsibility in a loss. To avoid having to pay out that $100,000, the association seeks out a buffer liability policy that covers the remaining outlay.

There are buffer liability insurance policies available to companies to bridge the gap between the primary and excess layers of coverage. Each company will need to decide what its perceived risks are versus the capital it would need to cover if a claim needs to be filed. If the company would rather pay out of pocket to avoid the possibility of higher premiums, it may opt to just hold the two policies and pay any overage.