ISO Products Perspective

Umbrella liability policies: Extra coverage for a rainy day

Routinely large judgments point to the need in both personal lines & commercial lines

By Lloyd Steinberg and Tracey Waller

Large liability lawsuits can devastate a family financially. They can cause a smaller business that took years to build to close its doors. Umbrella liability policies are a valuable risk management tool for both individuals and businesses to protect their assets. These policies can give your clients the protection they need by making higher liability limits available, extending primary coverage once underlying limits are exhausted, and providing "drop down" coverage for certain exposures excluded from underlying policies.

Getting personal

While most people think of big corporations when multimillion-dollar awards occur, the truth is that individuals can also find themselves in danger of being involved in expensive litigation. Take the following actual lawsuit scenarios:

• A driver crashes into the rear of another car on a rainy night. A mother and child are critically injured. After a year of litigation, the driver settles the lawsuit for more than $3 million in damages.

• A couple hosts a backyard barbecue. A guest begins jumping on the couples' trampoline, falls off, and sustains serious ankle and neck injuries and sues for unspecified damages.

• A personal injury lawsuit leads to a multimillion-dollar award for posting defamatory messages about a person on the Internet.

Without appropriate personal umbrella insurance, the defendant in each scenario could be forced to tap into his or her savings to cover the damages. On the other hand, if the defendant has a personal umbrella policy, which typically provides $1 million liability limits or more, those hard-earned assets may be protected.

What's more, premiums for personal umbrella policies may be surprisingly less than your clients expect.

A personal umbrella policy sits atop the liability coverage provided by homeowners, personal auto, and/or other stand-alone personal liability policies. The umbrella's liability coverage limits generally apply in excess of underlying insurance limits and may provide certain coverage not found in underlying policies.

For instance, personal injury coverage, which generally provides coverage with respect to offenses such as libel and slander, is not typically covered in an unendorsed homeowners policy. Unlike traditional media sources, anyone sitting at home with a computer and an Internet connection has the ability to publish something that can be broadcast to the world in a matter of seconds.

ISO designed its Personal Umbrella Liability Policy DL 98 01 to handle scenarios such as the ones described above. Additionally, the policy form provides coverage for personal injury exposure as well as for occurrences or offenses that take place anywhere in the world.

Ask your client if he or she operates a home-based business such as a craft or bicycle repair business. Optional endorsements are available under the ISO program with respect to such risks.

Taking care of business

The first million-dollar jury verdict in a liability tort case reportedly was not handed down until 1962. The numbers have certainly climbed since then: In 2010, the median products liability jury award was reported to exceed $2 million. The search for deep pockets is no longer limited to major corporations. Smaller businesses and even nonprofit enterprises, such as condominium or co-op associations, may be susceptible to multimillion-dollar lawsuits.

The following scenarios serve as examples:

• A trucking company's delivery driver fell asleep at the wheel, causing a multi-car accident. The victims sue for their injuries.

• A condominium association faces legal action for improper removal of a board member or hiring incompetent contractors.

In each of these actual cases, the business owners faced major liability lawsuits that could possibly have pierced the limits of their primary liability policy. Without commercial liability umbrella insurance to cover losses, the defendants' ability to stay in business may have been significantly impaired, or the insureds may have had to pay for the loss out of their own pockets.

Commercial liability umbrella policies typically sit atop commercial general liability (CGL) or businessowners, commercial auto, or employers liability policies. Similar to personal umbrella policies, commercial umbrella policies generally apply in excess of underlying insurance limits and provide certain broader coverage not found in underlying policies.

Here's an example of the broader coverage: Many commercial liability umbrella policies include worldwide coverage for injury or damage; primary policies often limit the coverage territory to the United States (its territories and possessions), Puerto Rico, and Canada. Such broader coverage may be especially relevant in today's business environment, because many businesses, including small businesses, have international exposures.

ISO designed its Commercial Liability Umbrella Program to accommodate some of the previously mentioned scenarios and others. For example, CU 00 01 addresses worldwide injury or damage coverage. And if your client is a condominium or co-op board, ISO recently introduced a Condominiums, Co-ops, Associations—Directors And Officers Liability Coverage Endorsement CU 04 12 to provide D&O type coverages with respect to those types of insureds.

An important feature agents should be aware of, as found in ISO's and many other personal and commercial umbrella policies, is a provision that addresses the maintenance of underlying insurance. For example, if underlying auto insurance is not maintained, an umbrella insurer would not be liable for the underlying coverage, thereby leaving a gap in coverage by the failure to maintain the underlying auto policy.

Your understanding of the liability insurance protection provided by personal and commercial liability umbrella policies is an important step to ensure that your clients obtain adequate protection against expensive lawsuits and associated exposures. By making available personal and commercial liability umbrella policies, such as the ISO Umbrella programs, your clients can have better peace of mind on that proverbial "rainy day." n

The authors

Lloyd Steinberg is senior consultant, Personal Lines at ISO, a member of the Verisk Insurance Solutions group at Verisk Analytics. Tracey Waller is senior analyst, Commercial Casualty at ISO, a member of the Verisk Insurance Solutions group at Verisk Analytics.