While some insurance people think that commercial umbrellas cover all liability claims, some losses might be covered by some umbrellas and not by all umbrellas. In this article we will not quote specific contract clauses. The loss situations presented here can be compared with the umbrella(s) you use.
If you contact your underwriter(s) for answers to commercial umbrella questions, my recommendation is not to accept the underwriter's opinion unless the underwriter can point out the exact clause(s) in the policy that answers your questions. Why is it important to understand specifically where the coverage answers are provided?
First, if you have a large loss where coverage is an issue, the claim department might not accept the underwriter's interpretation. Second, it is possible for an underwriter to tell you one thing and then, at the time of the large loss, give a different opinion. Finally, it is possible that when the loss occurs, the underwriter whom you talked to may no longer being with the insurer or may be located in a different office.
Additional insureds
Let's assume a contractor we'll call General Contractor, Inc. (GCI), signed a contract with a developer (Developer, LLC) to build a shopping center. The construction contract required GCI to have at least $1 million in general liability limits and for Developer to be added as an additional insured to GCI's liability insurance. Developer was added as an additional insured to GCI's general liability policy, but GCI's commercial umbrella contract was not endorsed to add Developer as an additional insured.
As a result of an accident at the construction site, both GCI and Developer were sued. Developer was held to be mostly at fault. Because of the additional insured endorsement on the commercial general liability policy, this policy's entire limits were exhausted paying on behalf of Developer. During the discovery process prior to the trial, Developer's attorneys learned that GCI also had an umbrella contract. Upon studying the umbrella contract, they learned that it was a "following form" umbrella. This meant that the umbrella would always have coverage at least as broad as the underlying commercial general liability contract. Developer demanded that the umbrella limits be made available to them. GCI's insurer refused to allow the umbrella to provide insurance for Developer.
To resolve the impasse, GCI took the policy to a court for a declaratory judgment. As is typical in such cases, the court was not to make a decision regarding whether General Contractor or Developer was negligent. The court was simply to decide whether or not the commercial umbrella policy for GCI would also provide coverage for Developer. Based upon the "following form" wording in the commercial umbrella policy, the court decision was that GCI's umbrella did provide protection for Developer. Because of this, the entire umbrella limit was used to pay on behalf of Developer. There were no limits remaining on the commercial umbrella policy to pay on behalf of GCI.
In commercial umbrella contracts, one of the features that indicates a good policy is that the umbrella is following form. Following form means that the umbrella will always provide coverage at least as broad as any of the underlying policies. Most times, the following form feature is a very good coverage to have. However, in the scenario just given, following form resulted in the insured's not having any protection because the umbrella protected the additional insured on the underlying commercial general liability contract.
There are situations where the commercial general liability contract's limits and the umbrella limits are needed to satisfy the insurance requirements found in a construction contract. In cases like this, there is nothing that can be done except to add the additional insured to the commercial umbrella of the firm required by the contract to provide the coverage.
When the umbrella limits are not needed to satisfy the insurance requirements of the additional insured for a particular job, consider endorsing the umbrella to delete any additional insured coverage that might exist.
ERISA liability
Another key area to examine in relation to umbrella coverage is liability under ERISA (the Employee Retirement Insurance Security Act). An actual case history, from some 15 years ago, will illustrate. The case concerned a key employee of a metal fabricating firm who retired after 25 years of service. The employee took his entire amount of retirement money from the firm. One year later, the retired employee sued his former employer on the basis that he would have had more retirement money if the employer had used a different funding firm or vehicle. The allegation was that the retirement fund would have been 25% larger if any of several different firms had been used to take charge of managing the retirement fund. This one claim from just one employee was for several hundred thousand dollars.
Any account that has a pension or a profit-sharing plan will most likely have liability protection for claims in regard to the Employee Retirement Income Security Act. For even a medium-sized firm, a pension or a profit-sharing plan can have millions of dollars in it. One potential claim is that the employer did not put the proper amount of money into the fund. The other potential claim results from the plan itself. This would be where a person covered by the pension or profit-sharing plan brings a claim stating that the employer chose the wrong money management firm into which to put the retirement money. If the employer had used a different insurance company, financial firm or whatever, the employee's retirement account would have grown.
These potential claims could result in large judgments. To have adequate protection for your client, my recommendation is that ERISA liability be listed as one of the underlying coverages on the commercial umbrella policy.
Employee benefit plan liability is another important coverage for any entity that provides life, disability, medical and other coverages to employees. Sometimes unexpected claims can develop. Some 20 years ago we witnessed a situation involving a man who refused to buy life insurance coverages, offered under a cost sharing program with his employer, because of his religious beliefs.
The man, in his early 30s, died in an accident. Subsequently, his widow (with three children) put in a claim for the life insurance that her late husband had elected not to take. She said that she was not of the same religion as her late husband and, therefore, she wanted the life insurance benefit.
She sued for the face amounts of the coverage the company would have paid for and what the employee could have purchased. The total claim was for several hundred thousand dollars. If several employees had been killed in the same accident, it would have been possible for this claim to result in payments totaling millions of dollars.
My recommendation is that employee benefit plan liability be added to the list of underlying coverages for any entity that provides employee benefits such as life, disability, medical and hospitalization coverages.
Coverage under umbrella?
When you add the employee benefit plan liability coverage, check to be sure that the umbrella policy will respond for these types of claims. Many umbrella contracts provide coverage for bodily injury, property damage, advertising and personal injury losses. As I understand them, none of these four "insured losses" includes coverage for employee benefits or ERISA liability. If the umbrella you are using has a true "following form" clause, you may be o.k. However, I prefer that the commercial umbrella be specifically endorsed to state that it is following form for Employee Benefit Plan and Employee Retirement Income Security Act coverages.
Umbrella vs. excess coverage
An excess policy pays above whatever limits are shown on its schedule of underlying coverages. If the schedule shows $500,000 as the underlying commercial general liability coverages, the excess policy will pay only for losses in excess of $500,000. True umbrella policies will cover above the limits shown on the schedule of underlying coverage. In certain circumstances, an umbrella will respond above limits that are less than those shown on the underlying schedule.
For example, consider a fictitious firm called Road Construction, Inc., which has a commercial general liability policy with limits of $500,000 per occurrence and $500,000 annual aggregate. Both the commercial umbrella and commercial general liability policies have the same inception date of July 1. On August 3, Road Construction has an accident resulting in a claim of $350,000 that is paid by the general liability policy. This means that the commercial general liability contract has only $150,000 of limits remaining for the next claim.
A second claim originates from an October 14 loss. This claim is for $800,000. Because the commercial umbrella had a "dip down" or "drop down" feature, it responded above the $150,000 limits remaining on the general liability contract. Were it not for this feature, the umbrella would have started to pay above the $500,000 limit as given on the umbrella's schedule of underlying coverages.
You probably will not find the terms "dip down" or "drop down" in any commercial umbrella. These expressions are used to convey an idea regarding a coverage feature. When reading an umbrella form to find this feature, look in the section of the contract called "Limits Of Insurance." Then look for a paragraph that starts off by saying, "In the event of reduction or exhaustion of limits" or some similar wording.
There are many commercial umbrella contracts. Even for the most experienced and knowledgeable insurance person, it is difficult to read and understand all of the coverage nuances of the various policies. Some forms are titled "umbrella coverage" when they are actually excess liability forms.
The presence of the "dip down" or "drop down" features, as well as the following form clause, indicates very quickly that it is an umbrella policy. Usually, those contracts that include both the following form and "dip/drop down" features will have good contractual wording and features throughout the contract. My experience has been that any contract that does not have both the "dip/drop down" and following form features will have restrictive coverage provisions throughout the form. Several of these forms were titled "umbrella coverage" even though they were only excess liability forms.
Real property--care, custody and control
A commercial general liability (CGL) policy automatically provides $50,000 of coverage in the situation where a tenant causes a fire that damages the landlord's building. It is comparatively easy to raise the $50,000 limit to $500,000, a common required underlying limit for commercial umbrella contracts. You might raise the CGL's fire damage limit to $500,000, show the CGL as underlying insurance on a commercial umbrella contract and presume that the umbrella will respond above the $500,000 fire damage limit. However, be sure to check whether the umbrella contract you are using will respond for fire damage that a tenant does to the landlord's building. Not all umbrella policies will automatically cover as excess over a commercial general liability policy's fire damage coverage.
While the commercial general liability policy will provide coverage for fire damage to the landlord's premises, it will not cover damage by other perils. A tenant could be responsible for damaging the structure when a lift truck knocks out a key building support. A tenant could bring about a substantial "water loss" by damaging the automatic sprinkler system riser pipe. In short, there are any number of claim situations where a tenant damages the landlord's real estate.
The tenant can buy coverage for these types of losses by buying ISO's Legal Liability Coverage FormCP 00 40. When CP 00 40 is used in conjunction with ISO's Causes of Loss - Special Form CP 10 30 (CP 10 30 is a form commonly used when writing building and contents insurance), you are providing virtually "all-risk" coverage for the damage that a tenant can do to a landlord's building. If you are using the legal liability coverage form for your tenant, consider adding it to the commercial umbrella's schedule of underlying coverage. Also, when you add the legal liability coverage to the schedule of underlying coverages on an umbrella, check to determine if you might also need to remove the umbrella's "care, custody and control" exclusion as it pertains to the tenant's damaging real property.
Summary
Here are the key points that were discussed in this article:
* When an additional insured is added to the commercial general liability policy that is used for the underlying coverage of a commercial umbrella, make a conscious decision regarding whether or not the umbrella should also cover the additional insured.
* The Employee Retirement Income Security Act and the Employee Benefit Plan can be large loss exposures for an insured. Consider adding them to the umbrella. Determine if the umbrella contracts you use have the "dip down" or "drop down" feature. Without this feature you probably have an excess contract, and the entire policy will be providing less coverage than a true umbrella.
* Tenants can insure, on a risks of physical loss basis, against the exposure of damaging a landlord's real property. If you insure this exposure for the tenant, add it to the tenant's commercial umbrella. As some umbrellas have an exclusion pertaining to damage done to real property, that exclusion will need to be modified so the umbrella will cover above the property legal liability coverage form. *
The author
LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.
©COPYRIGHT: The Rough Notes Magazine, 1998