DEFINITION of ‘Buffer Layer’
The difference between the primary limit of insurance and any excess layer of insurance. The buffer layer represents the amount of risk that the insured party is still exposed to, as it is above the standard limit of the policy but below any subsequent attachment layer.
INVESTOPEDIA EXPLAINS ‘Buffer Layer’
Companies that purchase insurance, such as liability insurance, may determine that the standard amount of coverage provided by the policy is insufficient, either for the entire risk or a subset of the risk. While the company may be able to purchase additional coverage, the level of loss at which that coverage starts may be higher than the standard limit of the primary policy. This gap is more likely to occur in situations in which insurance companies are less willing to underwrite a high limit primary coverage.
For example, consider an engineering firm that purchases an errors and omissions policy with a primary layer valued at $250,000. This means that losses up to $250,000 are covered. It may determine, however, that it needs additional coverage for pollution risk, and purchases an additional layer of insurance that provides coverage above $400,000. The difference between these two levels i.e. $150,000 represents the buffer layer.
Companies may purchase buffer liability insurance to bridge the gap between the primary and excess layers of coverage. The need to purchase this type of coverage is dependent on the amount of the buffer layer. A wide buffer layer exposes the company to more risk. For example, a trucking company may own several different insurance policies to cover different risks, such as general liability, employers’ liability, and auto liability, and each policy may have different primary layer limits. The company can purchase buffer layer policies to bring all the primary layers to the same level, and can then purchase an umbrella policy that covers all three risks for the remaining buffer.