. Excess Liability and Commercial Umbrella Coverages

. Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. The instructional materials provided by The Insurance Community Center and its authors is intended as a general guideline and any interpretations provided by The Community do not modify or revise insurance policy language. Information which is copyrighted and proprietary to Insurance Services Office, Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized Representatives is limited to use solely on behalf of one or more ISO Participating Insurers. The authors of these materials, Segale Consulting, LLC and The Insurance Community Center assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Segale Consulting, LLC Copyright 2010 All Rights Reserved 2

. Purpose of Excess Liability Policies  To provide high limits of liability over primary coverage.  May provide broader coverage for losses not covered by underlying policies.  May “drop down” and become primary when underlying policy aggregate is exhausted.

. Types Of Excess Liability Policies

. Excess Liability  The excess carrier effectively writes its own version of the coverage provided.  There may be areas where the coverage is narrower than the primary.  A duty to defend is often not included in this type of policy.

. Follow Form Excess Liability  A true follow form policy mirrors exactly the underlying policies.  Very limited market today for this type of policy.  Today the term often indicates that the excess carrier is using the primary policy(ies) as a starting point.

. Follow Form Excess Liability  Always obtain a copy of the policy form being used by the quoting insurance company.  Never use the term “follow form excess” unless it absolutely follows the underlying policy(ies) terms and conditions exactly.

. Typical Following Form Language:  “Except to the extent the insuring agreements, terms, definitions, conditions and exclusions of this policy differ, the coverage provided by this policy shall follow the insuring agreements, definitions, conditions and exclusions of the first underlying insurance policy as shown in the schedule of underlying policies.”

. Umbrella  The policy has a drop—provision in the event of reduction of underlying insurance.  This type of policy should contain at least one enhanced area of coverage that is not found in the underlying insurance policy(ies).  This type of policy typically contains a duty to defend the insured.

. Excess Layers - Umbrella  This policy should follow the terms and conditions of the underlying umbrella.  Used when additional limits are needed than is available with the company providing the umbrella.

. Typical Terms and Definitions

. Self-Insured Retention (SIR)  The term is typically used with umbrella liability policies.  The total amount the insured is legally obligated to pay as damages for a covered loss.  This only applies when the underlying policy does not cover but the umbrella does cover the loss.

. Self-Insured Retention (SIR)  This may or may not include defense costs.  The application may ask if the insured wants first dollar defense.  By checking yes, you are asking that the SIR not apply to defense expenses.

. Self-Insured Retention (SIR)  Check the policy language to make sure the policy was issued in this manner.  "Self-insured retention" means the dollar amount listed in the declarations that will be paid by the insured before this insurance becomes applicable only with respect to "occurrences" or offenses not covered by the "underlying insurance".

. Self-Insured Retention (SIR)  The "self-insured retention" does not apply to "occurrences" or offenses which would have been covered by "underlying insurance" but for the exhaustion of applicable limits.

. Underlying Insurance Requirements  Excess Liability typically requires the insured to carry at least one primary coverage line.  These coverage lines are submitted to the excess liability carrier on the application and will have required limits of insurance.

. Underlying Insurance Requirements  The underlying policies are sometimes referred to as the “burning layer”  The underlying coverage must be exhausted either by the “occurrence” limit or the aggregate or both before the next layer is accessed for payment of either defense or damages

. Common coverage lines and required minimum limits include:  Commercial General Liability  $1,000,000 per occurrence and  $1,000,000 General Aggregate and Products and Completed Operations aggregate  Employee Benefit Liability at  $1,000,000 per occurrence and  $1,000,000 aggregate  Commercial Auto  $1,000,000 per accident

. Common coverage lines and required minimum limits include:  Worker’s Compensation Employer’s Liability  Per Accident - $100,000 / Disease –  $100,000 per person / Disease –  $500,000 aggregate  The underlying policies carried are scheduled on the Excess Liability Policy Declarations Page

. Structuring an Umbrella/Excess Liability Program - Single Policy:  $5,000,000 Excess Liability Policy  $1,000,000 Underlying (Primary) Policy

. Structuring an Umbrella/Excess Liability Program – Layering:  First layer (burning layer) is first to pay and last to recover  The second layer follows primary policies limits and requires approval of the underlying primary limits, companies and coverages  3rd and successive layers must approve all coverage language underneath

. Maintenance of Underlying  May have egregious maintenance of underlying condition (impaired aggregate).

. Sample Language:  “The Limits of Insurance of this policy shall not apply in excess of any reduced or exhausted underlying aggregate limit of liability to the extent that such reduction or exhaustion is the result of any injury, damage, expense, cost, loss, liability, or legal obligation which is not covered by this policy.”

. Maintenance of Underlying  Material Change to underlying policies  Bankruptcy or insolvency of the underlying insurer

. Notification of Occurrence  Notification of occurrence or reduction of underlying limits:  Does the umbrella / excess policy state that notice to any underlying carrier is automatic notice to them?  Could the insured impair their coverage due to failure to notify timely?

. Excess Liability Concepts, Important Policy Provisions and Exclusions

. Standardized Policy Forms - ISO  ISO recently promulgated a standard form of coverage.  Most carriers are still using their own language.  Excess liability market is in a continuous state of change.

. Standardized Policy Forms - ISO  Policy language changes continuously and typically becomes more restrictive.  Obtaining high limits often need many layers of coverage to obtain.  Companies often use non-specific titles such as Catastrophe Coverage.

. Pay On Behalf  The carrier assumes the obligation to pay on the insureds behalf all sums the insured is obligated to pay.  The insured has no responsibility to pay out any sums other than any SIRs under the policy provisions.  Most policies are pay on behalf of contracts.

. Pay On Behalf - ISO Commercial Umbrella Insuring Agreement We will pay on behalf of the insured the "ultimate net loss" in excess of the "retained limit" because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages when the "underlying insurance" does not provide coverage or the limits of "underlying insurance" have been exhausted.

. Indemnify  Subjects the insurer to no obligation to provide payment for damages to the insured until the insured is legally obligated to pay such damages.  At that time, the insurers will indemnify the insured or be responsible for providing payment when the legal obligation is finally determined.

. Indemnify  This means the insured may have to use their own funds for defense, damages, or supplementary payments before the carrier becomes obligated to reimburse the insured.  If so, does the policy specify exactly when the insured will be reimbursed?

. Indemnify  Most indemnity wording is softened by the carriers requirement the insured only be OBLIGATED to pay rather than actual payment of damages, as the main criterion for indemnity.

. Umbrella and Excess Liability Coverage Issues

. Insureds  Named Insureds  Other Insureds  Fellow employee - coverage may be afforded for bodily injury to fellow employee.  The insured definition or additional insureds- may include prior entities, subsidiaries, etc.  “Insured" - automatic coverage for subsidiaries or companies under the insured's management or obligated by contract to insure

. Insureds  Automatic Additional Insured  Some policies require notification when adding additional insured’s to any underlying policy.  Some provide AI status as long as the underlying reflects the change.

. Insureds  If using any form of blanket AI on any underlying policy, verify that that is acceptable to the upper layers.  The insured definition or additional insureds - may include prior entities, subsidiaries, etc. If this is the case, will the policy agree to drop down to primary for defense and damage payment for these insured’s without applying the SIR?

. Defense Coverage  Defense costs may be included in the limit of insurance as opposed to outside the limit.  Defense costs may be included in the self- insured retention.  Remember, first dollar defense.

. Territory  Not defined  United States of American, its territories and possessions, Puerto Rico and Canada.  Worldwide  Check for the insurance company’s ability to respond in any country in which the insured might be sued.

. Coverage Trigger  Occurrence  Coverage applies on an occurrence basis as defined in the policy typically meaning an “accident”.

. Coverage Trigger  Some umbrella or excess forms are on a claims-made basis.  When Employee Benefit Liability Insurance is shown as an underlying coverage, it is likely to be a claims-made coverage form.  The excess liability policy will have to be modified to respond similarly.

. Personal Injury  Personal Injury definition may include any or all of the following:  Mental anguish  Mental injury  Discrimination  Emotional distress  Humiliation  Invasion of privacy, including of an employee

. Difficult Coverage Areas  Non-owned watercraft and aircraft  Owned watercraft in excess of 26 ft.  Aircraft chartered with or without a crew  May be able to provide coverage when contractually obligated to insure.

. Difficult Coverage Areas  Many policies completely exclude any property in the care, custody or control of any insured.  Example: “The policy does not apply to any liability arising out of damage to real and personal property of others in the care, custody or control of any Insured.”  UM / UIM  Most policies do not include this coverage.

. Difficult Coverage Areas  Pollution exclusion often follows the underlying insurance policy(ies) language  May specifically exclude punitive damages.  May remove all liquor liability protection.  Host liquor coverage is not always included as we think of in the CGL.

. Difficult Coverage Areas  Injury to Fellow Employee  Employment Related Practices  Professional

. Restrictive Endorsements  Companies often use special endorsements that restrict coverage.  For example, many underwriters dislike watercraft or aircraft exposures and totally exclude from the form.  Known or continuing loss exclusion.  Typically an endorsement used when writing contractors.  Eliminates coverage when the occurrence began prior to policy period or is known to the insured prior to policy inception.

. Known Loss Sample Wording: “This insurance does not apply to any loss, claim, suit or other proceeding which alleges bodily injury, property damage, personal injury or advertising injury which first became “known” to any insured prior to the effective date of this policy, regardless of whether there is continuous or progressive exposure during the policy period, or whether the injury or damage continues during the policy period.”

. Other Considerations  Discuss the problems concerning the concurrency of underlying policy inception dates and excess liability inception dates.  Provide solutions to the concurrency date coverage issues.  Discuss problems concerning language concurrency of underlying policy and excess liability policies.

. What Is Meant By The Term “Concurrency”?  This means that any liability policy with an aggregate limit and your umbrella or excess policy(ies) should have the same inception and expiration dates.

. Sample Concurrency Language:  “It is a condition of this policy that the policies referred to in attached “Schedule of Underlying Insurance” shall be maintained in full effect during the policy period without reduction of coverage or limits except for any reduction in the aggregate limits contained therein solely by payment of claims in respect to accidents and/or occurrences occurring during the period of this policy. Failure of the named insured to comply with the foregoing shall not invalidate the policy but the underwriters will be liable to the same extent as they would have been had the named insured complied with the said condition.”

. Solutions For A Concurrency Problem  Underlying policies and the Umbrella to be concurrent as to dates  Not all umbrella or excess policies contain this language  So how do you fix this situation?  Non-concurrency Endorsement.(Best)  Reinstate aggregate.(Next best)  Cancel and rewrite the underlying primary policy. (Not a good solution)

. Non-Concurrency Endorsement  “In the event of reduction or exhaustion of the aggregate limit or limits designated in the underlying policy or policies solely by payment of losses in respect to accidents or occurrences during the period of such underlying policy or policies, it is hereby understood and agreed that such insurance as is afforded by this policy shall apply in excess of the reduced underlying insurance…

. Who Needs An Umbrella?  All insureds  There isn’t any insured/entity that is not susceptible to a high loss, judgment/award against them in today’s legal climate  The award is based on the injured party’s worth, not necessarily the insured’s  Quoting an Umbrella good defensive move from an Agents Errors & Omission point of view  The insured needs to sign off on quote

. Summary  Common policy to discuss with clients  Care should be taken to quote high limits  Many different types of business are more prone to frequent and severe loss  Normal activities, such as driving, can result in large settlements