Excess Liability vs. Umbrella Liability

Excess Liability Provides coverage up to its limit of insurance for a covered loss above a specified amount. A pure excess liability policy is not broader than the primary insurance – it does not extend coverage to any exposures that are not covered by the primary insurance. It may, however, be narrower because of additional exclusions added.

Umbrella Liability A form of excess liability insurance providing coverage when the limits of insurance of the underlying policies have been exhausted. Broader than a straight excess policy because it extends or expands liability protection by covering some losses that would be excluded under the underlying insurance. Though umbrella policies have the potential for “drop-down” coverage should it cover something the primary does not, the goal of a good underwriter is to not drop down at all. Allowing for drop-down coverage puts our UM policy at risk for acting as primary coverage for certain exposures.

XS vs. UM The coverage form included in the policy should alert the processor as to which type of coverage it is. Just as we use the CG 00 01 form for general liability policies, we use the AES 3100 for Umbrella policies and the AES 3101 for Excess policies.

Reading the Intro Umbrella: We will pay on behalf of the "Insured" those sums in excess of the "Retained Limit" that the "Insured“ becomes legally obligated to pay by reason of liability imposed by law or assumed by the "Insured" under an "insured contract" because of "bodily injury," "property damage," "personal injury," or "advertising injury" that takes place during the Policy Period and is caused by an "occurrence" happening anywhere. The amount we will pay for damages is limited as described below in the Insuring Agreement Section II. Limits Of Insurance. The best way to determine which is which is to carefully read the opening paragraph of the coverage sections.

Reading the Intro Excess: We will pay on behalf of the Insured the amount of "loss" covered by this insurance in excess of the "Underlying Limits of Insurance" shown in Item 5. of the Declarations, subject to Insuring Agreement Section II., Limits of Insurance. Except for the terms, conditions, definitions and exclusions of this policy, the coverage provided by this policy will follow the "first underlying insurance."

XSUMB Excess Umbrella is an additional, excess, layer of coverage over an umbrella policy Any given policy could have one or more excess umbrella layers to obtain the capacity required for higher limits of liability coverage

Question When Robert purchased an umbrella policy, the maximum limit of insurance the company would issue was $5M. However, Robert is very wealthy, and he was afraid that his underlying policies and the umbrella policy might not provide sufficient protection if he should be sued. So Robert purchased an excess policy with a $5M limit of insurance. This policy will apply only in excess of his UM policy. In what order will Robert’s liability policies probably pay if he is sued?

Answer When Robert purchased an umbrella policy, the maximum limit of insurance the company would issue was $5M. However, Robert is very wealthy, and he was afraid that his underlying policies and the umbrella policy might not provide sufficient protection if he should be sued. So Robert purchased an excess policy with a $5M limit of insurance. This policy will apply only in excess of his UM policy. In what order will Robert’s liability policies probably pay if he is sued? Underlying Primary  UM Liability  XS Liability

Minimum Acceptable Underlying Limits (where applicable) General Liability $1,000,000/$2,000,000/$1,000,000 Auto Liability $1,000,000 combined single limit Employers Liability $500,000/$500,000/$500,000 Directors & Officers Liability $1,000,000/$1,000,000 All of these coverages do not have to be included in an underlying policy; however, if they are, the above are the limits they must have before we will cover them at Great American.

Other Underlying Requirements Defense costs outside the limits Risk location inside the covered territory Primary carrier ratings of A- VI or better Inception and expiration dates are the same as the UM Other requirements deal primarily with when the umbrella insurer has the potential to step in and the financial security/stability of the underlying carrier.

Question Why should the inception and expiration dates of an insured’s underlying commercial liability policies and commercial umbrella liability policy be the same? To ensure nonconcurrence To relieve the paperwork load for the insurer To align the reporting periods To avoid gaps in coverage

Answer D. If an umbrella and its underlying policies have aggregate limits, they should have the same effective dates to avoid any possible gaps in coverage

Example: UM = XS and/or Extended Liability An insured has a primary liability policy with a $1 million limit of insurance, and an umbrella liability policy with a $2 million limit of insurance. Both policies cover products liability. UM will not pay a products liability claim until the primary policy’s $1 million limit of insurance has been exhausted. Primary does not cover liability claims arising from discrimination, but the UM does. In this case, the UM would pay such claims after the insured has paid a $5,000 self-insured retention. In essence, an umbrella policy can act as both an excess and an extended liability policy.

Avoid Drop-Down With an UM policy, the carrier agrees to cover any BI/PD not excluded. If the underlying policy has an exclusion that the UM policy does not, the UM will drop down to cover it. That is why it is again a very important goal of umbrella underwriters to be sure to carefully examine the underlying coverages to ensure that the umbrella carrier does not drop down.

Other underlying policies D&O; LIQUOR; GKLL; Real Estate Prof. Liability can act as underlying policies; however certain limits would be required. It would be the job of the umbrella underwriter to examine the underlying policies to determine if additional premium is needed for the coverages provided. Each underlying policy is unique with its own restrictions and specifications, and the carriers may also vary in their respective requirements, so the underwriter must carefully evaluate exactly what they are over before determining premiums, limits, and endorsements.

Stand Alone UM Policy Does not rely upon the provisions of the underlying insurance. Stands alone and depends only upon its own insuring agreements, policy terms, exclusions, and conditions. Some of these provisions may differ from those of the underlying insurance and provide broader or narrower coverage. Other provisions may not be included at all in the underlying insurance Stand Alone policies may be seen in health insurance or disability coverage

Follow-Form Excess Policy So called because its insuring agreements, policy terms, exclusions, and conditions are nearly identical to – or follow – those of the underlying insurance. XS does not pay until the insured has paid the stated amount of the loss. Defense coverage is usually provided by the underlying policy. In practice, however, a follow form excess policy is subject to the terms of the underlying insurance only in areas that do not conflict with the excess policy’s terms, and if they do conflict, the excess policy’s terms prevail.

Creating a Follow-Form UM Carefully adding various follow-form endorsements will shrink the UM coverage to the size of an XS policy The goal of the underwriter is not to allow broader coverage, but merely to extend the limits of coverage over the underlying The umbrella insurer must trust the underwriting of the primary insurer as well as doing his or her own policy analysis

“Right” and “Duty” to Defend For UM policies, we have the “right” and “duty” to defend For XS, it is stated that we have the “right” This implies that with XS policies, we can choose whether or not to step into the courts to defend a claim For the UM, “duty” is added because of the drop-down potential

First-Dollar Coverage Insurer pays for all expenses once an insured event occurs Usually a (high) maximum amount limiting first-dollar coverage Policy does not include a deductible, coinsurance, or anything else Insurer is responsible for all expenses up to that maximum amount Because these plans carry more risk for the insurer, first-dollar coverage comes with higher monthly premiums

First-Dollar Defense Coverage Coverage feature in which retentions do not apply to defense costs, even if no indemnity payments are made in conjunction with a claim If an insurer were to expend $10,000 on defense of a claim and nothing for indemnity, the insured would not be required to pay any out-of-pocket costs for defense. First-dollar defense coverage can also be found in umbrella or professional liability policies where the insurer agrees to indemnify the insured for costs of claims defense in the self-insured retention area.

Claims the UM will Defend Those that are not payable under any underlying insurance, but are covered by the umbrella policy Those that would be payable by the underlying policy except that policy’s limit is exhausted

Question An umbrella liability policy requires an insured to notify the insurance company about which of the following? Claims that have actually been filed against the insured only Occurrences that may result in a claim or suit against the insured only Suits that have actually been filed against the insured only Claims and suits that have actually been filed against the insured and occurrences that may result in a claim or suit against the insured

Answer D. The insured’s responsibility is not usually limited to notifying the company of an actual claim or suit. Any occurrence that might result in a claim or suit must also be brought to the company’s attention

Retention Limit Insuring agreements may require the insured to meet a specified retention limit for certain coverages. Policy will state that the insurance company will pay only that portion of the covered damages which exceeds the retained limit. Often, the amounts of the retained limits for the specified coverages are the same as the required limits for the underlying policies.

Potential Retention Limits The minimum limits of the underlying insurance that must be maintained in force, as shown in the Declarations The total limits of the underlying policies or other insurance which is available and applies to the occurrence The applicable self-insured retention limit amount indicated in the Declarations (When there is this self-insured retention requirement, it applies to losses for which there is no applicable coverage by the underlying policies)

Self-Insured Retention (SIR) Similar to a deductible. Applies to occurrences that are not covered by underlying insurance. Limits vary by company and particularly by an insured’s needs. Commonly for commercial risks, the SIR is $10,000 or $25,000. An umbrella policy may or may not provide defense coverage for claims that do not exceed the SIR.

SIR Application Question The insured has primary liability insurance with a limit of $1 million per occurrence, and an umbrella policy with a $3 million limit and a $10,000 self-insured retention limit. The insured was sued for $25,000. Unfortunately, the loss is not covered under the primary liability coverage. But, fortunately, the loss is covered by the umbrella policy. How will this case likely be resolved? The insured will have to pay the entire $25,000 The insured must pay $10,000, and the UM will pay $15,000 The primary will pay $10,000, and the UM will pay $15,000 The UM will pay the entire $25,000

SIR Answer The insured has primary liability insurance with a limit of $1 million per occurrence, and an umbrella policy with a $3 million limit and a $10,000 self-insured retention limit. The insured was sued for $25,000. Unfortunately, the loss is not covered under the primary liability coverage. But, fortunately, the loss is covered by the umbrella policy. How will this case likely be resolved? The insured will have to pay the entire $25,000 The insured must pay $10,000, and the UM will pay $15,000 The primary will pay $10,000, and the UM will pay $15,000 The UM will pay the entire $25,000

Endorsement Verification Read! If a certain exposure is excluded on the underlying, the UM policy should include the same exclusion. There is no simple trick to this. Attention to detail is the key. In order to verify that the endorsement on the underlying policy matches the Lead Umbrella Policy, the underwriter must carefully read every endorsement

Use of Lead and Mold Exclusions Business Auto Businessowners Liability Commercial General Liability Premises Liability Coverages Excess policies Umbrella policies

Purpose of Lead and Mold Exclusions Ensure that property damage (including loss of use of property), bodily injury, or personal injury indirectly or directly caused by or arising out of lead and mold are not covered by the insurance policy

Why are Lead and Mold Bad? “Long-tail” injuries Ben ingested lead-based paint chips at age 4 and did not discover any side effects until many years later At age 18, Ben filed a claim for this injury His insurance company was not prepared for this, so the loss reserves maintained were inadequate to cover the loss Adding these exclusions protects the insurance company from potential insolvency due to unknown health risks arising from lead and mold.

Exceptions to the Inclusion of the Mandatory Lead Exclusion Location was built during the 1978 year, or anytime thereafter. Location is a Condominium, Cooperative, or Homeowner’s Association and was built prior to 1978 but has underwent a complete gut rehab in 1978 or anytime thereafter (gut rehab must include the removal of all paint surfaces) Location is a Condominium, Cooperative, or Homeowner’s Association that was built before 1978 and meets all of the following criteria: Has completed a supplemental lead questionnaire for the location(s) seeking exception Underlying GL policy does not have a specific lead-based exclusion or contain a sub-limit on lead coverage Has never been sued, been notified of any intent to sue, or been requested to pay damages, related to the actual or alleged presence of lead-based paint at the location seeking exception. Under no circumstances will the lead exclusion be removed for rental risks built prior to 1978. It is illegal to exclude Mold in the state of New York.

Non-Contributory Stipulates the order in which multiple policies triggered by the same loss are to respond. For example, a contractor may be required to provide liability insurance that is primary and non-contributory. This means that the contractor’s policy must pay before other applicable policies (primary) and without seeking contribution from other policies that also claim to be primary (non-contributory). At Great American, we might add this as an endorsement, such as a “Blanket AI – Primary-Non-contributory” endorsement.

Questions?