PF&M AT A GLANCE
Commercial umbrella (aka excess) liability insurance is an important source of protection that supplements the limits of an insured's underlying policies such as general liability, automobile liability, and employers liability. Umbrellas also protect insureds from exclusions and gaps that exist in their primary liability insurance. Covered causes of loss that are not normally included in primary policies are subject to a self-insured retention (SIR), which is the responsibility of the insured to pay. SIRs in the amounts of $10,000 or $25,000 are common. An umbrella policy's coverage is triggered when the limits of the underlying insurance have been exhausted. Less commonly, an umbrella may also respond to a claim that is not covered by an underlying policy, but only when the loss amount exceeds the self-insured retention.
A typical commercial umbrella liability policy offers features such as worldwide coverage; personal injury coverage; blanket contractual liability protection (for both written and oral agreements); care, custody, and control coverage; non-owned aircraft liability; watercraft liability; advertisers liability; liquor law liability; XCU liability; and an extension of protection to additional insureds.
Underwriters and companies that issue umbrella coverage have a primary objective of dovetailing their excess program with the newer commercial general liability forms (both the claims-made and occurrence versions). They have a major stake in ensuring that their policies carry out their coverage intent without problems and uncertainties. Agents, brokers, consultants, and risk managers share the responsibility to verify that the coverage issued fills their clients' coverage needs.
The domestic market for umbrella liability insurance is large and continues to grow as many companies participate in this dynamic market. Although vendors such as ISO and the American Association of Insurance Services (AAIS) have standard forms available (as well as Lloyd's), umbrella liability policies in the domestic market still vary considerably among insurance carriers because many companies continue to use their own forms.
Following form policy
Umbrella liability insurance indemnifies the insured for loss in excess of the total applicable limits of liability stated in the schedule of underlying primary insurance policies. The umbrella liability policy is typically a "following form," meaning that it tracks with the provisions of the underlying insurance. For losses that are not covered by underlying insurance, the umbrella policy generally does not apply.
With respect to any occurrence not covered by underlying insurance, or damage that is not covered by underlying insurance but that results from an occurrence covered by underlying insurance, the umbrella policy indemnifies the insured for its ultimate net loss. The loss must exceed the insured's self-insured retention limit ($10,000 or $25,000, for example) and must involve damages that the insured is legally obligated to pay by reason of liability imposed by law or assumed by the insured under contract. Further, the damage must involve personal injury, property damage, or advertising injury (all as defined in the Definitions section of the policy) caused by an eligible occurrence.
When a loss that is eligible for umbrella coverage is either not covered or only partially covered by underlying insurance (including incidents where no other insurance exists), the umbrella insurer has the right and duty to defend any suit against the insured. It is also permitted to investigate any loss and settle any claim or suit as it chooses. In case an insurer is prevented from defending an insured, the insurer will reimburse any defense costs and expenses. However, the expenses must be incurred with the insurer's written consent. This last provision allows the insurer to exercise some control over its loss exposures.
Besides the named insured, other parties that gain insured status under an umbrella liability policy are any person or organization that a named insured agrees to protect under a written contract. The policy also protects an insured business's executive officers, regular employees, directors, and stockholders, at least for losses occurring while these individuals are acting within the scope of their duties. Note that protection for additional insureds does not apply when a loss involves motorized vehicles, watercraft, or aircraft.
Like many other policies, a commercial umbrella policy defines a number of terms to clearly express how coverage applies. Some defined terms are advertising injury; completed operations; hired aircraft, hired automobile, and hired watercraft; immediate underlying insurance; named insured's products; non-owned aircraft, automobile, and watercraft; occurrence; and personal injury.
Maintain underlying insurance
The umbrella liability policy has a critical requirement. It holds the insured accountable for maintaining the policies listed in the schedule of underlying insurance. They must be kept in force, without alteration of terms and conditions, during the term of the umbrella liability policy. The one notable exception is for the reduction or exhaustion of any underlying aggregate liability limits that is caused by response to an eligible loss.
The insured should immediately report to the insurer any change in the underlying insurance or the purchase of insurance for perils previously uninsured by underlying insurance. Further, the named insured must promptly notify the insurer of the addition of parties who must be treated as named insureds.
An umbrella policy is excess coverage, so the insured's right of recovery against any other entity cannot be exclusively subrogated to the insurer. In case of any payment under the policy, the insurer will work with all parties that have an interest regarding the exercise of recovery rights.
In the event the insured or the insured's underlying insurers elect not to appeal a judgment in excess of underlying limits, the company may elect to do so at its own expense. The insurer would also be responsible for any taxable costs, disbursements, and interest related to its decision to appeal. However, the ultimate net loss amount still represents the maximum amount the insurer will pay (plus any incidental costs) for a single occurrence.
If other valid and collectible insurance is available to the insured, other than insurance that is in excess of this umbrella policy, the insurance provided by this policy is in excess of that available coverage.
Single limit of protection
An umbrella liability policy is written on the basis of a single limit of protection (e.g., $10 million) per occurrence for personal injury, property damage, and advertising injury. The self-insured retention or "drop down" deductible in connection with occurrences not covered by the underlying primary policies but within the scope of the umbrella may vary from $10,000 to $25,000 or higher. The level depends on the particular insurer's requirements and is commonly based on the size of the insured and the level of exposure not protected by underlying insurance. Depending on circumstances, an umbrella carrier may require a higher retention by the insured or require the purchase of additional underlying coverage as a condition of writing umbrella coverage.
Certain risks are not acceptable to many underwriters, while others require careful inspection and thorough review before acceptance (or rejection). Touchy umbrella exposures include:
* Aviation
* Railroads
* Vessels
* Coal mines
* Oil
* Marine liability
* Media and professional liability
* Utilities
Key questions
Why should a business, whether of modest size or a large corporation, buy commercial umbrella liability insurance in addition to commercial general liability, automobile liability, and workers compensation insurance?
What do you tell a business insurance buyer who wants to know precisely the coverage advantages, other than additional limits of insurance, that an umbrella liability policy would provide that are not afforded by the buyer's existing liability insurance? In particular, what would an umbrella policy cover (subject to the retained limit) that a commercial general liability policy would not? Answers to these important questions may be found in a record of claims that have actually been covered by umbrella policies.
Please note that this is only an overview of commercial umbrella liability coverage. A thorough discussion of the program may be found in the PF&M Analysis from The Rough Notes Company.
The Agency OnLine subscribers, please refer to PF&M Section 275.4-2, ISO Commercial Liability Umbrella Coverage Form Analysis. Also refer to PF&M Section 275.1-1, Commercial Umbrella Loss Examples. *