Commercial umbrella liability: Vital backup for excess losses

Today's soft market shows little sign of tightening

By Phil Zinkewicz

Aficionados of television crime dramas—“Law & Order,” “CSI,” “NCIS,” “Bones” and all the other variations of these same-theme shows—probably are not able to get through an evening’s entertainment without hearing the phrase “Call for backup!”

Backup, of course, means the extra police officers who will provide assistance to the protagonists. They don’t have names and you barely see their faces because they are little more than a sea of uniforms called upon to protect the show’s heroes so that the series doesn’t end abruptly and unexpectedly.

The insurance industry has its own backup plans. For example, primary insurers buy reinsurance to protect themselves from excess losses and possible ruin; in turn, reinsurers buy protection from retrocessionaires.

For the buyers of primary insur­ance, however, the backup is called simply “umbrella” coverage. This type of insurance provides additional coverage when the limits of coverage in an underlying policy are exceeded. Simply put, if an insured has $1 million of coverage under a general liability policy, but a claim settlement of $1.5 million is reached, the umbrella policy will pick up the additional amount.

The Insurance Services Office (ISO) Commercial Umbrella Liability Policy is a stand-alone form that contains 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. In addition, and because it is a stand-alone coverage form, it may include coverage not provided in the underlying forms or policies.

In years past, commercial liability umbrella coverage was purchased primarily by large commercial insureds, but as the litigation explosion began to filter down the insurance chain, smaller risks decided that they too needed this backup.

Buyer’s market

As in the primary property/casualty market, the availability and cost of commercial umbrella liability coverage tend to fluctuate depending on claims experience, economic conditions, and insurers’ investment results. Today’s insureds are taking advantage of a prolonged buyer’s market for umbrella liability insurance, and there’s no sign that it is about to change.

Mike Bruzzi Jr., senior vice president of AmWINS Brokerage of New York, an MGA, describes today’s umbrella market as “very, very soft.” Says Bruzzi: “I don’t know how insurers are making money in today’s environment. Someone will get a quote on a piece of business from one carrier and, no matter how low that quote is, another carrier will beat it. We base our growth opportunities on attracting new retail agents. Because we are an MGA, our representatives travel the country making presenta­tions to retail agents. We tell them about our markets and how we can get them the quotes they need.”

AmWINS provides umbrella coverage for general liability, property and workers compensation. An umbrella policy can be designed to fit the specific needs of the retail agent’s client, Bruzzi says. “We have a stand-alone umbrella. The retail agent comes to us and says he or she has a client who sells business supplies. We can construct an umbrella that fits what the agent’s client wants.”

The commercial umbrella liability sector industry faces some problems today, Bruzzi observes, and they vary from one part of the country to another. “In the Northeast, the New York State Labor Law is a problem. On the West Coast, there are residential contract issues.”

Overall, Bruzzi remarks, the soft market is hurting everyone in the business. “The soft market is going to hurt everyone’s bottom line. I don’t see any change coming, at least in the immediate future. Something very dramatic has to occur to bring about a hardening of the market. For example, if the government hadn’t bailed out AIG, that might have caused a turnaround. We’ll just have to wait and see.”

From one retail agent’s point of view, today’s umbrella market is “pretty flat.” Jon Ziman of the Capacity Coverage Company in Mahwah, New Jersey, says he sees no rate increases in this arena. “There’s still a good deal of competition in the marketplace,” he says. “Insurance companies are not making money on the investment side, so they’re writing as much business as they can to bring in more premium dollars. It’s crazy. I’m just riding the market out.”