An underlying policy is the base auto or homeowners policy that sits beneath an umbrella (excess liability) policy. The umbrella pays a liability claim only after the underlying policy's limit is exhausted, so insurers require you to carry minimum underlying liability limits before they add an umbrella on top.
Example: a driver with $250,000 in underlying auto liability causes $600,000 in injuries. The underlying policy pays its $250,000, then the umbrella covers the remaining $350,000 up to its limit.
Related: excess liability, liability coverage. See the umbrella insurance overview.