Chapter 15: commercial umbrella liability insurance.
An umbrella liability policy accomplishes three purposes: excess coverage over other liability insurance carried by the insured--the so-called "underlying insurance" (when loss in this area exceeds limits under primary cover, the umbrella policy becomes effective); coverage of liability exposures for which there is no primary insurance or where the primary policy contains an exclusion which is not similarly excluded under the umbrella policy--subject to a deductible or "net retention" (there is no coverage for losses specifically excluded by the primary and excess policies, as well as for losses not insured under primary coverage, but specifically excluded under the umbrella policy); and, replacement coverage for underlying liability policies which are reduced or exhausted by loss.
Note how this arrangement contrasts with the method of providing straight excess liability insurance. Under the excess approach, it is up to the insured (perhaps assisted by insurance advisers) to choose those exposures against which excess protection is desired, with the obvious disadvantage being the possibility of a wrong guess about such exposures. Under the umbrella liability contract, the principal guesswork is in the rating and, of course, those areas where underlying coverage is in order. But, as respects the possible catastrophic loss, umbrella liability coverage is more sound and sure.
Variety in Umbrella Forms
The Insurance Services Office (ISO) has introduced a "standard" form for commercial umbrella liability insurance, CU 00 01 12 04. But at this time, umbrella liability insurance policies are mostly not prescribed by any rating or advisory organization. Umbrella underwriting rules are largely a matter of the judgment of the insurer; and rating is almost entirely a matter of individual judgment, not only from insurer to insurer, but also varying with the individual risk.
While most umbrella policies do resemble one another in a broad, general way, significant individual differences will be found from one umbrella policy to the next. In fact, many of the umbrella provisions are negotiable with most underwriters. Umbrella underwriting is highly individualistic, and is quite responsive to individual risk differences and to changing conditions. This is true as to specific risks or classes of insureds as well as to general trends in underwriting profitability. Consequently, significant differences will often be found even in the provisions of the umbrella policies of the same insurer for different insureds or classes or the same insured at different times. So it is important that each umbrella policy be examined for its particular provisions.
Among the many differences commonly encountered among umbrella policies are the following:
* Definition of who is insured
* Coverage territory
* Limitations or restrictions on coverage--which may appear in the coverage description, the definitions, the exclusions, or the policy conditions--in such areas as advertisers liability; aircraft or watercraft liability; care, custody, and control; contractual liability; personal injury liability; pollution; punitive or exemplary damages; and war risks.
* Sublimits and use of aggregate limits
* "Pay on behalf" versus "reimbursement" insuring agreements
* Definition of bodily injury or personal injury, with some policies including mental injury coverage
In general, an umbrella liability policy is written only for a risk that has a broad and substantial program of underlying coverage--insurers usually require commercial general liability and automobile liability insurance with substantial bodily injury and property damage limits; a requirement of underlying liability limits of $1,000,000 is not uncommon. For insureds with severe advertising or other personal injury, or other special liability exposures, underlying coverage with high limits in these areas may also be required if these exposures are to be included in the umbrella coverage.
Policy conditions usually call for maintenance of the underlying coverage, with the umbrella insurer's part in a loss being determined as if the underlying contract were in force, even if it is not. The exception--an important one--is where an underlying policy is reduced or totally exhausted by payment of loss, in which case the umbrella policy drops down to replace the exhausted underlying protection. Note that drop down provisions usually exclude carrier bankruptcy and the failure of the insured to maintain insurance as reasons for a drop down.
Likewise, though there have been some fluctuations on this point, insurers require that the amount of loss absorbed by the insured as respects uninsured or self-insured exposures be a certain amount. When the umbrella policy was first introduced, most umbrella contracts were written with this amount--the "retention" or "drop down" limit--at $25,000; however, the amount can now range from zero dollars on up. Such flexibility in choice of retention limits no doubt has had much to do with the increased activity in this field.
A significant point of variation has to do with defense coverage. Practically all umbrella liability contracts have provisions which, in effect, protect the right of the umbrella insurer to take over or participate in the defense of a claim which may involve it. However, most of the original contracts did not provide any defense coverage with respect to claims which appeared likely to stay within the retention.
The tendency now is to include defense coverage for uninsured exposures even when loss does not appear likely to involve the umbrella contract. Also, some contracts include defense coverage of losses where, because the underlying insurance is exhausted by loss payments, the umbrella policy comes in as primary coverage. Another important difference is the inclusion of defense and appeal costs within the limits of coverage in some umbrella policies, while others provide them as supplementary payments outside the limits of coverage.
For a discussion of the fundamentals of umbrella liability insurance, the ISO form is used as a starting point.
The first insuring agreement states that the insurer will pay on behalf of the insured the ultimate net loss (a defined term) in excess of the retained limit (also a defined term) because of bodily injury or property damage to which the insurance applies; bodily injury includes mental anguish or other mental injury resulting from bodily injury. This protection is on an occurrence basis and applies anywhere in the world, during the policy period. Note that the BI or PD is not covered if an insured knew that the BI or PD had occurred prior to the policy period.
This insuring agreement also carries the insurer's promise to defend the insured against any lawsuit seeking damages. Note that this duty to defend comes into play when the underlying insurance does not provide coverage, or the limits of underlying insurance have been exhausted. The insurer also declares that, when it has no duty to defend, it still has the right to defend or to participate in the defense of the insured.
The second insuring agreement applies to personal and advertising injury liability. Personal and advertising injury is defined as on the general liability policy (CGL form). Coverage applies to personal and advertising injury caused by an offense arising out of the named insured's business, but only if the offense was committed in the coverage territory during the policy period.
The definition of insured includes individuals, partnerships and joint ventures, limited liability companies, and other organizations. Included, too, is any executive officer, employee, director or stockholder of the named insured while acting in his capacity as such. Any person or organization while acting as real estate manager for the named insured, any person or organization having proper temporary custody of the named insured's property if the named insured dies, and legal representatives if the named insure dies, are also included as insureds.
If the named insured is a partnership or joint venture, such partnership or joint venture and any partner (and spouse) or member of such organization (and spouse) is an insured under this policy, but only with respect to the conduct of the named insured's business. However, the partner or member is not an insured with respect to a covered auto owned by that partner or member or a member of the respective household.
As respects automobile coverage, the definition of "insured" includes any person while using any automobile owned by, loaned to or hired for use by or on behalf of, and with the permission of the named insured. There are exceptions to this omnibus coverage; the exceptions are similar to those found in the ISO business auto policy.
Still further, the definition of insured includes any additional insured included in the underlying insurance. As respects this particular type of additional insured, the umbrella policy is restricted to coverage no broader than that of the underlying contracts.
Limits of Insurance
The limits of insurance provisions are, of course, detailed. The limits shown in the declarations are the most the insurer will pay regardless of the number of insureds, claims made, or persons or organizations making the claims. There is an aggregate limit, an each occurrence limit, and a personal and advertising injury limit.
The insurer will pay the ultimate net loss in excess of the insured's retained limit. The term "ultimate net loss" has the following meaning in the ISO policy: the total sum, after reduction for recoveries or salvages collectible, that the insured becomes legally obligated to pay by reason of settlement or judgments or any arbitration or other alternate dispute method entered into with the consent of the umbrella insurer or the underlying insurer. The "retained limit" of the insured is defined as the available limits of underlying insurance scheduled in the declarations or the self-insured retention.
Terms defined in the umbrella liability policy include auto, mobile equipment, products-completed operations hazard, suit, temporary worker, pollutants, leased worker, employee, executive officer, insured contract --just about all the terms that appear on the ISO CGL form.
Retained limit, self-insured retention, ultimate net loss, underlying insurance, and underlying insurer are terms that are also defined and that mark the policy as an umbrella coverage form. As noted above, the retained limit is the available limits of underlying insurance that are scheduled in the declarations. Self-insured retention means the dollar amount listed in the declarations that will be paid by the insured before the umbrella insurance becomes applicable. Self-insured retention is similar to a deductible, but the ISO policy notes that the retention does not apply to occurrences or offenses that would have been covered by the underlying insurance but for the exhaustion of the applicable limits. Ultimate net loss, as noted above, means the total sum (after reduction for recoveries or salvages collectible) that the insured becomes legally obligated to pay by reason of settlement or judgments. Underlying insurance is any policy listed in the declarations under the schedule of underlying insurance. And, underlying insurer is simply the insurer that provides the policy listed as underlying insurance.
The umbrella liability policy has the exclusions that appear on the CGL form, such as, expected or intended, contractual, liquor liability, and worker compensation. Of course, since the umbrella policy applies to auto liability exposures, the auto exclusion is modified in that BI or PD arising out of the ownership, maintenance, or use of any auto is excluded, unless the auto is a covered auto (an auto to which the underlying insurance applies). The aircraft and watercraft exclusion remains. There are also exclusions pertinent to umbrella coverage: ERISA, employment-related practices, and professional services. With reference to this last exclusion, the professional services that are mentioned include: legal and accounting services, engineering, medical and therapeutic services, optometry, body piercing services, law enforcement, and embalming and burial services.
Just as there two insuring agreements on the umbrella policy, there are also two sets of exclusions. The personal and advertising injury liability insuring agreement has its own exclusions and these mirror those found on the CGL form. This set of exclusions also includes a professional service exclusion.
Most of the conditions of the umbrella liability policy have their counterparts in basic commercial general liability contracts.
There is a premium audit clause in the ISO policy, which states that the premium shown on the declarations page is a deposit premium only; the final premium is computed at the close of each audit period.
The insured is required to cooperate with the insurer in making settlements and is also required to enforce any right of contribution or indemnity against any person or organization that may be liable to the insured because of injuries or damages covered by the umbrella policy. The insurer requires the cooperation of the insured in the handling of a claim or lawsuit even though the insurer has reserved for itself the right to investigate and settle any claim or lawsuit that involves the umbrella policy. Also, if a lawsuit is brought in a coverage territory outside the United States, Puerto Rico, or Canada and the insurer is prevented by law from defending the insured, the policy calls upon the insured to initiate a defense. The insurer will reimburse the insured for the legal expenses.
The insured is required to maintain the scheduled underlying insurance (including renewals or replacements that are not more restrictive) except for any reduction of the aggregate limits because of claims. Failure of the insured to comply with this condition does not invalidate coverage under this policy, but in the event the insured fails to maintain underlying coverages, the umbrella insurer is only liable to the extent that it would have been liable had the insured been in compliance. To simplify administration and to minimize the possibility of violation of the underlying insurance requirement, it is obviously desirable that the umbrella liability policy and underlying primary policies have concurrent inception and expiration dates.
The ISO form has an appeals clause wherein the insurer claims a right to appeal a judgment in excess of the retained limit if the insured or underlying insurer elects not to do so.
Other conditions include an other insurance clause, loss payable clause, bankruptcy clause, and a transfer of defense clause. The bankruptcy clause states that the bankruptcy of the insured or of the underlying insurer will not relieve the umbrella insurer of its obligations; however, the clause also contains an anti-drop down provision in the event of the bankruptcy or insolvency of the underlying insurer. As for the transfer of defense clause, the umbrella insurer declares that when the underlying limits of insurance have been used up in the payment of judgments or settlements, the duty to defend is transferred to the umbrella insurer.
1. An umbrella liability policy has a net effect of providing the insured with an "umbrella" of blanket catastrophe liability protection at a relatively small cost in premium. And, the premium paid for the umbrella coverage is a legitimate business expense that can be deducted from tax liabilities.
2. Many (if not most) of the business entity's liability risk exposures have been transferred. And, after a covered loss occurs, the insured can rely on the insurance company to handle most, if not all, of the legal work and other paper work.
3. Since umbrella policies are usually non-standard, the insured can have its umbrella policy written to suit its particular risk exposures.
4. When the underlying policies have exhausted the limits of liability due to claims, the umbrella liability policy is there to assume the defense and indemnification of the insured.
1. The insurance premium spent by the insured is money that the insured business does not have for any of its business plans.
2. Possible disputes over coverage between the umbrella insurer and the primary insurer can impact upon the insured.
3. The umbrella liability policy does have its own set of exclusions and limitations, so the protection afforded to the insured is not an all risk, open perils type of coverage.
4. If the primary insurer becomes insolvent, the umbrella insurer usually does not have the duty to drop down and assume the duties of the primary insurer. The insured will have to pick up the burden left by the primary insurer and handle claims and payments until the amount of loss reaches the umbrella policy limits of insurance.
WHERE CAN I FIND OUT MORE ABOUT IT?
1. FC&S[TM] Online, http://www.fcands.com (Cincinnati, OH: The National Underwriter Company, updated monthly).
2. The Umbrella Book (The National Underwriter Company, updated quarterly).
QUESTIONS AND ANSWERS
Question--What are the three purposes of an umbrella liability policy?
Answer--Excess coverage over underlying insurance; coverage of exposures for which there is no primary insurance coverage; and replacement coverage for underlying liability policies reduced or exhausted by loss payments.
Question--What is a self-insured retention?
Answer--The dollar amount that will be paid by the insured before the umbrella insurance becomes applicable.
Question--What is the ultimate net loss?
Answer--The total sum that the insured becomes legally obligated to pay by reason of settlement or judgments.
Question--What is the coverage territory of the umbrella liability policy?
Answer--Anywhere in the world
Question--What are some areas that differ among umbrella policies?
Answer--The definition of insured; sublimits and use of aggregate limits; definition of bodily injury or personal injury.
Question--Which entities can be considered as insureds under the umbrella policy?
Answer--Individuals, partnerships, joint ventures, limited liability companies, and other organizations.
END OF CHAPTER REVIEW
1. Umbrella underwriting rules are largely a matter of judgment of the insurer.
2. An umbrella liability policy is written only for a risk that has a broad and substantial program of underlying coverages.
3. The umbrella policy does not require the insured to maintain its underlying coverages.
4. Umbrella policies require the umbrella insurer to take part in the defense of lawsuits against the insured.
5. The definition of insured includes any additional insured included in the underlying insurance.
6. If the insured decides not to appeal a judgment against it, the umbrella insurer is bound by this decision.
7. The bankruptcy of the underlying insurer requires the umbrella insurer to drop down and assume coverage for the insured.
8. Umbrella coverages extend to ERISA claims and other employment-related practices claims.
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|Publication:||Tools & Techniques of Risk Management for Financial Planners, 2nd ed.|
|Date:||Jan 1, 2007|
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