PF&M at a Glance
Commercial liability umbrella
The Insurance Services Office (ISO) Commercial Liability Umbrella is a stand-alone form having its own coverage, exclusions and conditions. It provides excess limits over General Liability, Automobile Liability, Employers Liability and other underlying liability coverage forms or policies. Because it is a stand-alone coverage form, it may also include coverages not provided in the underlying coverages. While it contemplates that the underlying coverages are written on an occurrence basis, if a particular underlying coverage is written on a claims-made basis, an endorsement can be added so that it also works with the claims-made coverage.
Eligibility criteria are very broad and apply to all commercial exposures, except for one limitation with respect to its use with farm operations. It can be used in conjunction with the coverages written on a farm operation only when CG 00 01-Commercial General Liability Coverage Form (Occurrence Version) provides the underlying liability coverage, along with FL 04 11-Farm Premises Liability Endorsement. However, if the underlying liability coverage is provided under FL 00 20-Farm Liability Coverage, the Farm Umbrella Coverage Form must be used instead.
Underwriting a given umbrella risk takes a number of issues into account. In some cases, underwriting may be done rather quickly, because the umbrella is usually placed after the primary coverages are arranged. On the other hand, underwriting must be thorough because of the limits involved. Except for a few insurers, the typical insurance company’s commercial umbrella book of business is relatively small and consists primarily of account risks. This means the umbrella coverage written is primarily or exclusively on accounts having some or all of their primary insurance with that carrier. For this reason, the underwriting criteria used to evaluate the primary coverages may simply be extended to apply to the umbrella as well. A byproduct of this approach is avoiding risks that fall outside the carrier’s underwriting appetite or “comfort zone,” in addition to high-hazard risks or exposures, such as aviation risks, professional liability, asbestos, high-risk construction projects and hazardous products liability exposures.
Seasoned and experienced specialists able to evaluate the loss potential presented by a specific risk usually underwrite umbrellas. Because of the long tail liability considerations, these underwriters must approach umbrellas from a different underwriting perspective. Since the primary focus is loss severity, 10 or more years of claim information may be required. Underwriting may also include use of sophisticated research tools and skills to identify and evaluate emerging issues that may affect loss severity for a specific insured. Consider a few of the emerging issues that have developed in just the past few years:
• Commerce-related treaties, such as the effect of the North America Free Trade Act (NAFTA) on trucking
• Environmental liability
• Insurance-related legislation
• Privacy issues
• Employment-related practices, including workplace violence
• Electronic data issues
• Silica injuries
• Toxic mold
• Trends in jury verdicts for certain types of injuries
Another important underwriting concern is whether the underlying coverage is written on an occurrence or claims-made basis and how closely the excess coverage dovetails with the primary coverages. Underwriting acceptability becomes a more important issue in cases having significant potential for drop down liability.
Umbrellas written over another carrier’s underlying policies must take into account the underlying carrier’s financial solvency. This is because the umbrella carrier assumes the defense if the underlying carrier cannot, in its effort to keep a claim from penetrating into the umbrella layer.
Umbrella underwriters must know everything about the underlying coverage forms and any endorsements that affect or modify coverage. If the underlying coverage is narrower than that provided by the umbrella, the umbrella coverage “drops down,” subject to the self-insured retention, to respond to and cover any gaps in coverage, if it is not endorsed to provide the same coverage as the underlying coverage. If the underlying coverage is broader, the umbrella underwriter either charges for the broader coverage required or notifies the producer of the differences in coverage. These clarifications help avoid disputes following a loss.
Numerous endorsements are available to modify and tailor the coverage provided. Some are mandatory and required for specific classifications and types of business. Others are optional and permit customizing a standard form to match the coverage requirements of a specific risk. Coverage can be broadened, restricted, deleted, modified or added by use of endorsements.
Rating an umbrella is often more art than science. There is no single or particular filed rating approach or formula used to develop commercial liability umbrella premium. ISO has a recommended approach, but its use is neither filed nor mandatory. Numerous methods and techniques are available and used to price umbrella coverage.
Please note that this is only a brief overview of the coverages available in this program. The PF&M Analysis from The Rough Notes Company, Inc., contains broader and more thorough discussions of this and other related subjects. Producer OnLine subscribers can refer to PF&M Section 275.4-2, CU 00 01-ISO Commercial Liability Umbrella Coverage Form Analysis, for a detailed evaluation, discussion and additional information on this and related subjects. *