Umbrella Insurance
Chapter 4
Umbrella Policy Characteristics
While every type of liability policy has some familiar aspects, there are also differences among the types. Companies that issue umbrella policies provide additional liability coverage, either as part of other policies or as an additional policy form.
Excess Liability Insurance:
Umbrella liability insurance may also be referred to as excess liability insurance. Excess insurance can cover all types of benefits, but we will only be looking at liability coverage. It is called excess insurance because it provides benefits in excess of the underlying or primary coverage.
Surplus line insurance is often associated with excess insurance, although definitions are actually different. Surplus line insurance is typically defined in reference to difficulty in placement of the insurance in the normal markets. In addition, surplus line insurance is not necessarily a large benefit policy.
Excess liability insurance, usually referred to as umbrella policies, have seen a great need. The last few years have seen many variations of this policy type. Many of the policies are nonstandard, but even those that follow a standard pattern will have important differences. The development has been from an extremely broad all-risks liability contract outline in the 1950's (through Lloyd's of London) to a more restricted form used today. However, even though today's form is more restricted than its original development in the 1950's, umbrella coverage is still quite broad in its present context.
Excess In 3 Ways:
Umbrella policies supply "excess" liability coverage for the insured. It is "excess" in three ways:
1. It provides extra limits (higher limits) with a combined blanket single limit over other existing liability policies, which are usually required before the umbrella policy can be written.
2. It is extra coverage for other liability exposures which would not be covered by the underlying liability contracts, above a self-retention limit of usually $25,000.
3. It provides automatic replacement for existing coverages which have been paid out due to losses.
Million Dollar Limits:
The maximum limit of umbrella policies are high; at least $1 million typically and often higher than that. In fact, it is common to see policies written for $5, $10 or $20 million. Corporations and other specialty businesses will have substantially higher liability coverage amounts. The retention deductible for smaller companies may be lowered from the standard amount of $25,000 to as low as $10,000 by a special rider.
An Indemnity Policy:
An umbrella liability policy is an indemnity. It will protect the insured for a wide variety of possible liability losses for which the insured is legally liable. Contract forms do vary, but they tend to follow this basic outline:
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Type of Liability: |
Normal Underlying Policy Limits: |
$10 Million Single-Limit Coverage: |
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Bodily injury (auto & general) |
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per person: |
$100,000 |
$100,001 to $10 million |
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per occurrence: |
$300,000 |
$300,001 to $10 million |
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Property damage (auto & general) |
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per occurrence: |
$ 50,000 |
$ 50,001 to $10 million |
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Products |
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Aggregate per year: |
$300,000 |
$300,001 to $10 million |
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Employer's |
$ 25,000 |
$ 25,001 to $10 million |
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Contractual-blanket |
None |
$ 25,001 to $10 million |
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Water damage |
None |
$ 25,001 to $10 million |
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Personal injury |
None |
$ 25,001 to $10 million |
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Aircraft and watercraft |
None |
$ 25,001 to $10 million |
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Worldwide operations |
None |
$ 25,001 to $10 million |
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Malpractice |
None |
$ 25,001 to $10 million |
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Advertiser's |
None |
$ 25,001 to $10 million |
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Property in care, custody, or control |
None |
$ 25,001 to $10 million |
Types of liability covered are not limited to these shown here. Other examples could include bailee liability, protective liability, and liquor law liability.
As we have discussed, umbrella liability coverage takes over when other underlying limits are reached. Umbrella liability policies may add coverages that the business does not usually have in its underlying insurance, such as water damage legal liability or malpractice coverage. For insurance agents, it could include Errors and Omissions insurance. Where no coverage exists in the underlying policies, generally the defendant must pay the first $25,000 in claims. This could be considered a policy deductible, which is referred to as the insured's retention limit. Umbrella policies are often considered to be catastrophe liability protection because they guard against the gigantic liability claims that could occur.
Businesses especially are becoming conscience of liability exposures that may not be covered by their standard policy benefits. Employees who are found negligent can cost a business millions of dollars in liability claims. We have seen examples of this: the polio vaccine that caused rather than prevented polio; airline crashes; and intentional employee misconduct aimed at causing harm to the company's creditability.
Premium rates have had their ups and downs. Originally, before the flood of lawsuits we now see, rates were fairly modest. Today, they can be high for some categories, but the premium cost is usually considered modest when compared to the potential for financial loss. Rates will be based on the type of business, or the potential for loss faced by an individual.
Bumbershoot:
In the marine field, umbrella liability coverage is typically called bumbershoot. The purpose is to provide excess limits coverage above the primary marine protection and indemnity coverage. This type of coverage is unique to this field of liability possibilities.
Comprehensive Ceiling Coverage:
Lloyd's of London developed a combination of both all-risks property and all-risks third-party liability coverage in a single excess contract known as comprehensive ceiling coverage. This type of policy was offered in the mid-1960's and afforded a very flexible, broad liability coverage. Limits were available in excess of $10 million over the basic fire, business interruption, crime and liability contracts of the insured.
Excess Personal Liability Coverage:
Of course, not only business enterprises need liability protection. Individuals also face risks of being sued. When the insurance is on individuals, it is often referred to as excess personal liability coverage. Excess personal liability coverage is one of the few great untapped markets that agents should begin to focus on. In fact, currently only three fields of insurance is greatly undersold: long-term care products, disability insurance and excess personal liability coverage.
It is easy to present excess liability products. Anyone who reads the newspaper or watches television knows that lawsuits are on the rise. Settlements are often in the millions of dollars, even when negligence is questionable. Business enterprises, corporations and professional people are especially being targeted by lawsuits. That includes, it should be noted, insurance agents and insurance companies.
Personal excess liability plans (umbrella insurance) typically includes the entire family, their residence, personal injury, automobile, employer's (for the baby-sitter and gardener), aircraft, sports, and watercraft liability. Sometimes excess major medical coverage is also included.
Excess Liability versus Excess Coverage:
Although umbrella insurance is excess liability coverage, excess insurance can be coverage for other things besides liability. The term excess coverage literally means insurance coverage with high limits which are used to supplement basic policies of a substantial risk-retention program.
Simply put, umbrella policies provide:
1. extra insurance above the limits offered by other policies;
2. broader coverage than offered by other policies; and
3. catastrophic protection for liability claims.
Exclusions in Coverage:
Like all types of insurances, there are exclusions in coverage. Actual exclusions will vary from policy to policy, so the agent needs to be aware of how his company practices in this area. Generally, though, personal liability policies will not pay for business claims. That also works the other way around: business policies will not pay personal claims.
Claims that have been or should be covered by workers' compensation, occupational disease, unemployment compensation, or disability benefit laws are not covered under liability insurance policies.
Claims which are connected with nuclear energy are not covered.
Claims which were incurred by anyone in his or her capacity as a corporate officer or a member of the board of directors of any corporation are not covered.
Claims involving uninsured or no-fault automobile insurance are not typically covered.
Risks that are not covered are usually disclosed in a separate section of the policy called exclusions. Some of the exclusions may be covered under other policies, or they may simply be uninsurable under any policy.
Legal Contracts:
Insurance policies are actually legal contracts. Contracts are entered into by two or more entities, depending upon the terms of the document. One or more of the entities, for a specified payment, agrees to do or refrain from doing, some specific act or acts. In order for the contract to be binding, there must be five basic requirements:
1. an offer and an acceptance of the terms;
2. some form of material payment, in this case a premium;
3. entities entering into the agreement or contract must be legally competent to do so;
4. a legal reason for the contract; and
5. in the case of insurance, a written contract.
Offer & Acceptance:
Every agent has had experience with the offer and acceptance of an insurance contract. That is what the selling presentation is all about. The agent explains the policy and offers it to the consumer. The consumer must either accept or reject it. When it is accepted, the agent has made a sale.
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When it comes to umbrella liability coverage, in most cases, the agent cannot bind the policy. |
The opposite is also true; the applicant makes an offer and the insurance company either accepts or rejects it. Once the consumer has accepted the offer of the insurance agent to apply for the insurance, the tables are turned. Now it is the consumer who makes the offer by filling out the application for insurance and the insurance company who either accepts the offer or rejects it. In the case of property-casualty insurance, the agent can usually bind coverage and make it effective immediately, but he or she is doing so on behalf of the insurance company. The insurer (insurance company) still retains the right to investigate, underwrite and cancel the coverage, in accordance with the policy and state laws, if the risk does not meet the company's underwriting requirements. If the company rejects the applicant, it probably means that important information was not given to the agent at the time of application. When it comes to umbrella liability coverage, in most cases, the agent cannot bind the policy. It must be submitted for acceptance to the insurance company's underwriting department.
A Premium Must Be Paid:
No policy is valid unless a premium is paid. The premium is the value placed on the promise of protection against specific financial risks. Not only does the consumer promise to pay the premium, however; he or she also promises not to act in an unsafe manner. That is what underwriting is all about. If it is discovered that the applicant has a history of claims (due to negligence), the company will feel that he or she will not keep their promise to act as a prudent man would act in similar circumstances. If they do not feel the applicant will keep their promise to behave safely, the company will deny the policy.
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The premium is the value placed on the promise of protection against specific financial risks. |
The amount of money each party promises is seldom equal. For example, the umbrella liability policy will have a limit (or a promise to pay) of $1 million or more, yet the premium will probably be no more than $500 to $1,000 per year. Obviously, the amount of premium paid does not equal the amount of protection received. The amounts are unequal. It is this unequal concept that has made the insurance industry what it is today. The consumer knows they will be protected from large losses (claims) by agreeing to a small loss (the premium).
Legal Competence:
To enter into any contract, the parties or entities involved must be legally competent to do so. Any person who had been judged to be incompetent could not sign a contract. If they did sign one, it would not be legally binding. Each state has a specific age that a person must reach before they can be considered competent parties, usually age 18 or 21. Some states, however, may have exceptions, so it is necessary to consult with a local attorney.
In some cases, even adults are not considered able to bind a contract. For example, an officer of a corporation must have legal authority, through the articles of incorporation, to sign a contract. If the articles of incorporation have not given such authority, the officer may not bind a contract.
A Legal Reason:
Any contract needs to have a legal purpose; a legal reason for entering into the contract. Without a legal purpose, the contract would not be enforceable. The key word here is legal. Some acts are illegal, so no contract would be enforceable. For example, Joe might contract to buy a quantity of cocaine for resale, but the contract is not enforceable, because the act itself is illegal. A binding contract can only be for a legal purpose.
In the case of insurance contracts, there are specific legal forms that are used. Unless otherwise required by law, it is legal to have oral contracts, which are spoken rather than written. Of course, that would never be possible when it comes to insurance. In order for the insurance contract to be valid, it must be in a specific legally written form. Most states mandate at least some portions of the insurance contract. Once a policy is issued, changes may be made only by endorsement.
Once acceptance by both parties has taken place, a promise has been made. The consumer has promised to pay a premium and the insurance company has promised to deliver specifically stated financial protection.
The Liability Policy:
Liability policies may be either designed for an individual or for a business. It was not until 1960 that a personal catastrophe liability policy came into existence. Policies tend to be developed as needs develop and it became obvious by 1960 that there would be a market for such a product. Originally it was felt that buyers would consist of professional people, wealthy individuals, and public figures, such as actors. These three groups were commonly the target of liability lawsuits and often resulted in large settlements. Today we see all types of people targeted with liability lawsuits regardless of financial standing. In addition, today's awards commonly exceed the basic limits of liability benefits offered by the average homeowner or auto policy.
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Liability policies may be designed either for an individual or for a business. |
No Standard Form:
There is no standard umbrella form for personal policies. Each company developed their own form. As a result, coverage and appearance will vary, unless particular states have mandated forms in some way. Because of this, it is important that the selling agent completely understand what they are selling.
As we previously stated, there is actually a difference between an excess policy and a true umbrella policy, although the names are often interchanged. An excess policy provides additional layers of coverage above the amount furnished by the underlying or primary policies. Normally an excess policy has the same terms and conditions as the underlying policy. An umbrella liability policy provides excess coverage, but also covers risks which may be excluded in the underlying policies. Therefore, the difference between an excess policy and an umbrella policy are the risks that are covered, with the umbrella policy providing broader benefits.
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Umbrella policies give broader coverage than excess policies. |
Catastrophic Coverage:
Personal umbrella contracts are truly the catastrophic policy of the liability field. They are designed not for the small claims, but for the catastrophic (extremely large) ones. As a result of the catastrophic nature of umbrella policies, personal umbrella contracts that cover loss exposures that are not covered by the underlying policies are subject to deductibles called retentions. For personal policies (not business policies), the deductible can be as low as $250, but typically it is much higher. If a covered risk is not otherwise insurable because of some unusual exposure, the deductible is bound to be much higher.
Primary Purpose:
The primary purpose of personal umbrella insurance is to provide million dollar-plus excess limits and to also broaden the types of risks covered. Although policies vary, typically they will:
1. apply worldwide benefits, unless prohibited by law, without territorial restrictions.
2. provide liability coverage for those who use specific types of automobiles, watercraft and aircraft, when this benefit is excluded under their homeowner's policy.
3. include liability coverage for negligence assumed under certain oral or written agreements.
4. cover a wide range of personal injury risks for such things as libel, slander, false arrest, humiliation, defamation of character, false imprisonment, wrongful eviction, wrongful detention, malicious prosecution or invasion of privacy, and
5. provide payment for defense costs when the underlying policies would not cover such costs.
Personal umbrella policies add an additional amount of liability coverage above the limits provided by the underlying policies, such as a homeowner's policy and auto insurance. The amount added should be enough to be considered catastrophic protection. An important feature is the additional protection against risks not covered in homeowner's and auto policies.
Characteristics of Personal Umbrella Policies:
Although policies will vary, there will be some features that tend to be common to all policies of this type. It should be noted that business policies will not necessarily be the same as personal policies. Some of the characteristics include:
1. These are unilateral contracts, which means the insurer makes an enforceable promise to meet its contractual obligations; the insured makes no promises that he or she can legally be compelled to keep. Of course, the insured must make their premium payments in a timely manner in order to keep the policy in force. It should be noted that if the insured violates certain conditions of the contract he or she may be prevented from collecting benefits when a claim occurs.
2. The contract is one of adhesion. This term is used in insurance to indicate that it is a one-sided contract, favoring the insurance company, since they drafted it. Although the insurance company drafted the policy, the insured must accept or reject it; there is no negotiation available as to the provisions contained in the contract. There have been policies that were so one-sided that the individual states stepped in and mandated certain provisions as a form of consumer protection legislation. Courts will not enforce some provisions in contracts of adhesion if they are unfair or oppressive to the party who had no input in the document. Any ambiguity will be decided in favor of the insured, and any exclusion in the contract must be clearly and conspicuously stated.
3. Insurance contracts are aleatory, which means they depend upon gambling or luck. This is the basic foundation of all insurances, with only a few exceptions. No one knows for sure if they will experience a loss, so they pay their premiums without knowing if there will be any benefits received in return. Consumers want to lose on some insurance contracts. For example, even though we might carry health insurance, that does not mean we wish to have a large claim, because it would mean ill health. No one really wants to die, either, in order to collect on a life insurance policy. Consumers generally plan to experience a small loss in the form of the premiums they pay, to prevent a large loss in the form of a liability claim. Ultimately, though, insurance contracts are a gamble. Consumers are gambling that they will have a loss (covered by the insurance contract) and the insurance company is gambling that there will be no loss to cover.
4. It is a conditional contract, meaning that there is a continuing relationship created between the insured and the insurer. The insured must pay the premiums in order to keep the policy in force, but they may also have to meet other conditions. Policies may specify specific duties that are required in order to keep the policy active. Insurance companies may not have to pay benefits when those specified duties have not been met.
5. Personal liability policies insure specific persons only. As a result, the rights under the contract cannot be assigned to another person without the written consent of the insurer.
6. Liability contracts, like other types, contain a certain amount of good faith. Although underwriting is involved, the insurer must assume that the applicant told the truth when filling out the application. The applicant must also assume that the coverage is correctly represented. If the applicant intentionally misrepresents or omits pertinent information he or she may actually void the entire policy.
7. Umbrella policies are an indemnity contract. There are always those people who would use an insurance policy to gain financially. The aim of insurance is never to allow the insured a profit, but rather to prevent loss from financial claims. Therefore, umbrella policies contain conditions which are designed to prevent the insured from benefiting from a loss.
Policy Layout:
Each issuing company will determine, according to their preferences, how the umbrella policy is designed. Consequently, there will be variances from company to company. Variations will also exist between amounts of coverages, price and requirements. Despite the differences, there will also be similarities, which include the following:
1. Declarations. Most policy types contain declarations, which identify the persons involved, what is insured, premium amounts, and the length of time insured. It is often said that this section is the "who, what, when, where, and why" of the policy.
2. Definitions. Each policy must list commonly used words and phrases and their definitions to ensure that the applicant fully understands what is and is not covered. Although there are variations, usually there are two parts to this policy section. One part explains the terms applied to the person buying the policy and the insurance company issuing it. The other part will alphabetically list the commonly used terms and their definitions (as they apply to this issued policy). When these definitions are used in the policy they are typically boldfaced or italicized. Sometimes both boldfaced and italicized. While many of the terms seem obvious, they are still defined to prevent any misunderstanding.
The definitions section is very important to the insuring company. Courts tend to rule in favor of the insured when there is an ambiguous provision, so the company's possibility of loss could be great if the policy is not clear as to what is and is not covered.
When policy language is well defined, many courts have ruled that the policy is understandable and the insured's failure to read his or her policy does not automatically mean they should collect benefits. Of course, it is the job of the agent to fully explain the policy, but even if he or she fails to do this, that failure does not permit the policyholder to collect benefits that are not due under the terms of the policy. Therefore, every agent (even if the policy has been explained) should encourage their policyholders to also read the policy they have purchased.
3. Insuring Agreements. In a way, insuring agreements are the promises made by the insurance company to pay for certain financial losses, under specific circumstances. This component of the policy lists those promises and obligations assumed by the insurance company that issued the policy. For umbrella policies, those obligations are typically those sums for which the insured is legally responsible, the costs of a defense, and any other benefits stated in the policy. The insurance company will provide these benefits when each party has met their requirements, as listed in the policy.
One of the first requirements listed is typically the most obvious: listed coverage will be provided as long as premiums are paid in a timely manner. If premiums are not paid, benefits will not be due either.
Other requirements will also be listed. The insured may be required to meet certain conditions in order for benefits to be paid by the insurance company. Remember: the insurance contract is an agreement between two parties, and each party must meet their required conditions. Since no policy covers every conceivable loss, the insured should look in the Insuring Agreements for words or phrases which would restrict or limit coverage. It should also be noted that no one section states every condition. The policy needs to be read in its entirety for an understanding of all covered items and exclusions.
4. Exclusions. No policy pays for all losses under all conditions. The section listing exclusions tells the policyholder precisely what is not covered. Many professionals feel it is more important to the applicant to read what is not covered than it is to read what is covered.
Exclusions can vary, but typically they will include:
ü obligations assumed by worker's compensation, unemployment, or disability benefits or laws;
ü under a personal liability umbrella policy, business pursuits, professional services and liability resulting from owned or rented aircraft and watercraft;
ü property damage to property in the care, custody, or control of the insured;
ü any act committed by or at the direction of the insured with the intentional desire to cause harm, whether physical or material; and
ü injury to a person or property for which there is insurance under a nuclear energy liability policy.
5. Conditions. Insurance policies are conditional contracts, which means that each party must meet required conditions. Those insured must meet policy requirements in order for a loss to be covered. The section on conditions list these requirements. The insurance company's promises of payment under the Insuring Agreements are only enforceable if an insured peril actually occurs, and if the insured has complied with certain conditions that are contained in the issued policy. For example, premiums must be paid in a timely manner. Grace periods applying to premiums would be a condition of the policy.
The insureds easily understand that they must pay the premiums. Sometimes it is harder to get the insured to understand they must also meet other conditions if benefits are to be paid. Insurance agents should also check out the policy before it is delivered to the insured to be sure that it was issued in the manner the agent expected. If it was not, either the policy needs to be corrected, or the change or difference needs to be fully explained to the consumer so that he or she has the chance to either accept or reject the issued policy. When the consumer is fully aware of both their rights and their obligations under the contract, there will be fewer problems later on.
6. Miscellaneous Provisions. Not all policies have miscellaneous provisions, but they are common in most. This policy component is utilized because there are conditions or duties which exist that may not fit correctly or uniformly into the other sections of the policy.
Endorsements may be attached to the policy with the intent of clarifying, extending or restricting coverage, or addressing coverage times and premium amounts. When an endorsement is used, typically it overrides any other conflicting statement or clause within the policy. The exception to this would be any item or restriction mandated by state law.
A Risk Management Field:
Insurance is a risk management field that offers protection while attempting to avoid severe losses to the insuring company. All of these policy characteristics are designed to do that. Those that design policies are gamblers to some extent because they are using design techniques that, while proven from past experience, are not fool-proof.
Society relies upon insurance policies to prevent losses that, as individuals, could not easily be coped with financially. Many aspects of our society could not function as they currently do without insurance products. As such, agents and insurance products are extremely important to our culture.
End of Chapter 4