UNDERSTANDING UMBRELLA INSURANCE

Transcription

1 07/04 UNDERSTANDING UMBRELLA INSURANCE (203 & CATASTROPHE INSURANCE 204E)

2 PUBLISHER S NOTE Imprtant Ntice Every care has been taken t ensure that the infrmatin in this curse material is as accurate as pssible at the time f publicatin. Please be advised that applicable laws and prcedures are subject t change and interpretatin. Neither the authrs nr the publisher accept any respnsibility fr any lss, injury, r incnvenience sustained by anyne using this guide. This infrmatin is intended t prvided general infrmatin and backgrund and is distributed n the basis that the authrs are nt engaged in rendering legal, accunting, r any ther prfessinal service r advice. This guide was designed t prvide yu with an verview f the infrmatin presented and is nt a substitute fr prfessinal cnsultatin. Cpyright 2003 AHI Insurance Services 09/02, 6/04 Cpyright 2003 AHI Insurance Services All rights reserved. Printed in the United States f America. N part f this publicatin may be used r reprduced in any frm r by any means, transmitted in any frm r by any means, electrnic r mechanical, fr any purpse, withut the express written permissin f AHI Insurance Services, Inc. Making cpies f this bk fr any purpse ther than yur wn persnal use is a vilatin f the United States cpyright laws. AHI CE Services W Grand Av Franklin Park, Il tll free: (800) (847) fax: (847) internet: i

3 CONTENTS PUBLISHER S NOTE i CHAPTER 1: WHY LIABILITY INSURANCE 1 LIABILITY & THE LAW...1 THE PROTECTIONS OFFERED BY LIABILITY INSURANCE...2 COMPONENTS OF AN UMBRELLA POLICY...2 COMMON UMBRELLA POLICY EXCLUSIONS...2 COMMON CONDITIONS UNDER AN UMBRELLA POLICY...3 IMPORTANT DEFINITIONS TO KNOW...3 Chapter 2: UMBRELLA POLICY BASICS 8 The Need fr Umbrella Plicies...8 Special Prtectin... 8 Standard Plicies and Variatins... 9 Cverage... 9 Deductible... 9 Other Exclusins... 9 CHAPTER 3: RISK MANAGEMENT 10 The Prcess f Risk Management...10 ii

4 Identifying the Lss Prperty Lss Expsures Liability Lss Expsures Evaluating Lss Expsure Handling the Risk...12 Implementing a Risk Management Plan...13 Mnitring the Plan Primary Insurance Plicies Handling Liability Lss Expsures Persnal Injury Liability The Structure f Primary Plicies...15 CHAPTER 4: IDENTIFYING THE NEED FOR UMBRELLAS 16 Liability Issues...16 Cverage and Liability Identifying Gaps in Liability Cverage...17 Persnal Umbrella Plicies...18 Special Characteristics f Umbrella Plicies CHAPTER 5: BASIC POLICY COMPONENTS 19 Persnal Umbrella Liability Plicies...19 The Plicy Structure...20 Declaratins Page Insuring Agreements Definitins Cnditins Exclusins Miscellaneus Prvisins Requirements f a Legal Cntract...22 Offer and Acceptance Cnsideratin Cmpetent Parties Legal Purpse Legal Frm CHAPTER 6: COMMON CONDITIONS 24 Reviewing The Plicy Cnditins...24 Cmmn Persnal Umbrella Cnditins Understanding Insuring Agreements Cverage Restrictins Insured Ultimate Net Lss and Retained Limit...26 Persnal Liability Excess vs Persnal Umbrella Liability Insurance...27 Required Underlying Limits Failure t Prvide Underlying Limits Summary CHAPTER 7: RESTRICTIONS AND EXCLUSIONS 29 Cmmn Exclusins...29 Understanding Plicy Restrictins Reasns fr Exclusins Cmmn Persnal Umbrella Exclusins Wrkers' Cmpensatin Care, Custdy r Cntrl Nuclear Energy War Risks Intentinal Acts Aircraft Watercraft Recreatinal Vehicles Business Pursuits Prfessinal Liability Insurance...33 Directr's and Officer's Liability iii

5 CHAPTER 8: THE UNDERWRITING PROCESS 35 Evaluating Lss Expsure...35 Identifying and selecting a Risk Analyzing Underwriting Infrmatin Persnal Infrmatin Prperty Lss Expsure General Insurance Infrmatin...36 Accepting r Rejecting the Risk...37 Pricing the Risk Issuing the Plicy Mnitring the Risk CHAPTER 9: COMMERCIAL UMBRELLA POLICY 39 POLICY CONDITIONS CHAPTER 10: Small Business Liability Insurance 40 Cverage fr certified public accuntants Bundled Cverage Accunts Receivable Cverage Emplyee benefits cverage Emplyee benefits liability Business persnal prperty insurance Cmputer cverage Cyber Crime Crime insurance Errrs & missins liability cverage Emplyment practices liability insurance (EPLI) Business interruptin insurance Licensing cverage Mney and securities cverage...44 Valuable papers r recrds cverage Outdr sign cverage Umbrella cverage Wrkers cmpensatin CHAPTER 11: CRIME INSURANCE 44 Intrductin...44 THE NEED FOR CRIME INSURANCE CRIME COVERAGE POLICIES...45 Hmewner's Insurance Cverage A Dwelling Cverage B Appurtenant Structures Cverage C Unscheduled Persnal Prperty Tenants (Renters) Insurance Autmbile Insurance Prperty Insurance Guards with Respect t Prperty Insurance Business Interruptin Insurance Marine Insurance Marine Adventure Insurable Interest Ship Freight Gds Types f Cntracts Cvering Sales F.O.B. (Free n Bard) C. & F. (Cst and Freight) C.I.F. (Cst, Insurance, Freight) THEFT COVERAGES...61 Intrductin Rbbery Larceny Burglary iv

6 Safes Disappearance Cverage Extrtin Frgery Insurance Dishnesty and Fraud Insurance Fidelity Bnds Rules f Bailment Risk Redlining Underwriting Preventive Measures Crime Insurance Rating CHAPTER 12: TERRORISM & CATASTROPHE INSURANCE 73 TRIA...73 KEY BENEFITS MAJOR FEATURES OF THE LEGISLATION FLOOD INSURANCE...76 FAIR PLAN...77 What cnstitutes high-risk? FAIR Plans Beach and Windstrm Plan Hurricanes and Hmewners Insurance Trnades, Earthquakes, Lightning Identity Theft...80 What is Identity Fraud? Mld and the Insurance Industry...81 THE NEED FOR LITIGATION PROTECTION...82 THE TORT SYSTEM AND LIABILITY INSURANCE LEGAL DEFENSE COSTS COST OF CLAIMS AND LIABILITY LIMITS MEDICAL MALPRACTICE GENERAL LIABILITY INSURANCE PRODUCTS LIABILITY ASBESTOS LIABILITY DIRECTORS AND OFFICERS LIABILITY INSURANCE SECURITIES LITIGATION URBAN INSURANCE ISSUEs...85 Underwriting, the task f deciding what risks t insure, allws insurers t discriminate between gd and bad risks Prperty Insurance A LITTLE BACKGROUND Prperty Insurance Aut Rates In Central Cities Credit Histry and Aut Insurance...90 What is an insurance scre? Why insurance scres? Infrmatin affecting insurance scres Islated prblems n credit reprts Imprving the insurance scre?...91 Infrmatin abut insurance scres Cntrversy Over Credit Scring Pricing Plicies INDUSTRY FINANCIALS AND OUTLOOK...92 Factrs Affecting Hmewners Insurance Premiums Chapter 13: ETHICS ISSUES FOR P&C AGENTS 93 Ethical VIEWS...93 Ethics fr The Prperty/ Casualty Agent...94 ETHICS FOR INSURANCE BROKERS...94 CHARACTERISTICS OF A PROFESSIONAL...95 FIDUCIARY RESPONSIBILITies...96 The Cncept f Agency...97 The Agent as a Fiduciary...98 Lyalty t the insurer Skill and perfrmance v

7 Full disclsure Fllw up Handling f premiums Aviding cnflicts f interest Respnsible slicitatin Cmpetitive integrity CAPTIVE VS INDEPENDENT AGENT...98 duties TO CONSUMERS & CLIENTS duties TO THE GENERAL PUBLIC THE ENFORCEMENT OF ETHICs Subscribing t a CODE f ETHICS Cde f Prfessinal Ethics Canns and Rules vi

8 CHAPTER 1: WHY LIABILITY INSURANCE LIABILITY & THE LAW Liability insurance prvides prtectin fr certain vilatins f civil law. Civil law is invlved when an individual takes actin against anther individual wh has suffered a lss as a result f anther persn s actins. There are tw frms f civil vilatins. There is the vilatin f cntract law r the vilatin f a trt. Cntract law is vilated when ne individual enters int a cntractual agreement with anther and then vilates the agreement thus causing harm t the secnd party. Trt law is vilated when an individual s legal r natural rights are vilated, a destructin f smene s prperty, their persn, r their well-being. Individuals we ther individuals the respnsibility nt t deliberately act in a manner that might cause injuries t that ther individual r their prperty. Liability insurance usually applies t an individual s unintentinal trt r wrngding. Trts are categrized in three categries- intentinal, strict liability and negligence. Intentinal is a guided actin perfrmed with a deliberate intent t harm anther individual. A strict liability is a liability impsed as a matter f law, even thugh the individual may nt have caused the damage intentinally. Negligence is defined as the failure t use care. T establish negligence fur criteria must be met: A legal duty must be wed by the wrngder t the claimant; A breach f duty must be established; Actual damage must be suffered; Direct causal relatinship must be established. There are three frms f negligence: Grss negligence; Cntributry negligence; Cmparative negligence. Grss negligence ccurs when there is a ttal disregard fr the safety f thers. Cntributry negligence ccurs when ne party s care fr themselves falls belw a required standard and tgether with the ther parties negligence cntributed t their harm. Cmparative negligence ccurs when a weighing f the seriusness f negligence n the part f each party is measured in a cntributry negligence case. An imprtant factr in a negligence case wuld be; did the individual willfully and knwingly expses himself r herself t the pssibility f injury r harm. This factr is knwn as the Assumptin f Risk factr. An individual s willingness t be invlved in the risk ften weighs heavily n cmpensatry damage payuts. Liability insurance prvides prtectin in the event f a lawsuit by an aggrieved individual. There are three types f liability cverage: Persnal; Business; Prfessinal. Persnal liability invlves a hme, a car, persnal activities, and indirect r vicarius respnsibilities fr acts f children, pets etc. Business liability invlves the peratin f a business, a stre, a manufacturing plant r a service type establishment. Business liability claims can arise frm: 1

9 The wnership, maintenance r use f stres, warehuses, plants, ffices, etc. The use f autmbiles, trucks and ther vehicles. The actins f emplyees, agents, cntractrs, sub cntractrs r ther representatives. Extensin f liabilities thrugh cntractual agreements with ther parties. Defects in gds r services. Prfessinal liability invlves pssible errrs r missins in the pursuit f a prfessin such as accuntant, dctr, lawyer, real estate agent, etc. THE PROTECTIONS OFFERED BY LIABILITY INSURANCE Liability insurance prtects the insured frm the financial lss, shuld a claim arise, by transferring the risk t an insurance cmpany in exchange fr a premium. The mst cmmn cverage is against bdily injury and prperty damage. Basic cverage is nrmally nt universal and has limitatins. T prvide cverage ver and abve the basics prvided by mst plicies umbrella liability insurance was created. An umbrella prvides prtectin ver a brad range f factrs r elements. Umbrella liability frms an umbrella ver a brad range f ther liability insurance t prvide supplemental prtectin fr lsses, which wuld nt therwise be cvered. Umbrella insurance can prvide: Cverage fr catastrphic situatins; Higher limits f liability fr lsses nt typically cvered by the primary plicy; Cverage fr lsses nt typically cvered. COMPONENTS OF AN UMBRELLA POLICY The Declaratin page cntains infrmatin abut the risk that is used fr cverage and rating purpses. The Insuring Agreement prtin f the plicy defines what the insurance cmpany willing t d fr the insured. The limit f insurance prtin utlines the limit at which the cmpany is n lnger bligated t pay. Other cmpnents f an umbrella plicy that will be discussed in later chapters include: 1. Retained limits; 2. Self-insured Retentin; 3. Defense and Settlement limits; 4. Territry f cverage. Typically it might be nted that a plicy cvering defense csts will cver bail bnds up t a specified limit, pay premiums n appeal bnds, curt csts, and interest accruing after a judgment is entered. COMMON UMBRELLA POLICY EXCLUSIONS Because umbrella plicies are nt standardized, exclusins will differ frm cmpany t cmpany. The mst cmmn exclusins include: Obligatins under wrkers cmpensatin; Obligatins under unemplyment cmpensatin; 2

10 Obligatins under disability benefits; Damage t prperty wned, rented, leased, r ccupied by the insured; Damage t prperty in the insured s care, custdy r cntrl; Damage t premises that have been sld, abandned, r given away; Watercraft and Aircraft; Uninsured r underinsured mtrists; Intentinal injury r damage; Punitive damages; Nuclear hazard r Pllutin; War. COMMON CONDITIONS UNDER AN UMBRELLA POLICY The fllwing are representative f cnditins included in mst umbrella liability plicies: 1. Ntice f ccurrence in writing; 2. Cmpanies right f appeal at it s wn expense; 3. Lss payable cnditin; 4. Legal actin against the cmpany; 5. Other insurance cnditins; 6. Maintaining the underlying insurance cnditin; 7. Right t recver payment r subrgatin clause; 8. Changes r waivers must be in writing; 9. Cancellatin stipulatins; 10. Separatin f insured's cnditin; 11. Bankruptcy r Inslvency cntinued prtectin cnditins. IMPORTANT DEFINITIONS TO KNOW Aggregate limits are the verall limits f insurance that will be paid during a specified plicy perid. 3

11 Assumptin f Risk is the willing and knwledgeable expsure f neself r prperty t the pssibility f injury. Smene wh knws the danger but vluntarily takes the risk. Attractive nuisance is a structure r artificial cnditin r artificial cnditin that is especially attractive t trespassing children and which might result in danger t them. Avidable Cnsequences are cnsequences that are caused by lack f care n the part f an individual, and that culd have been avided if prper care had been exercised. Basic Limits are the minimum amunt f insurance cverage a plicy will prvide. Bdily Injury refers t injury t the bdy f a persn as defined in the plicy cntract. Cancellatin defines the terminatin f an insurance plicy befre the end f the plicy perid as specified in the plicy. Catastrphe defines an event that causes a lss f extrardinary large values. Claim is a demand t recver under an insurance plicy fr lss. Claims Made Plicy is a cmmercial liability plicy that pays fr events ccurring during a specified perid and fr which a claim is made during the plicy perid, subject t stipulated limitatins and extensins. Cmmercial General Liability Insurance is a line f insurance available t cmmercial risks and prviding cverage n behalf f insured fr sums they may be legally required t pay t thers as a result f the insured s actins r negligence. Cmmn Law a standard f rules f actin arising frm usage and custms r frm curt judgments that recgnize and enfrce custm. Cmmn law is unwritten and never been enacted int statue law. Cmparative Negligence refers t the relative degree f negligence by each party invlved. Cmprehensive Persnal Liability Plicy is a plicy that prvides brad cverage fr an individual r family s liability expsure fr bdily injury r prperty damage. Cncurrent Insurance is insurance under tw r mre cntracts, all terms f which are identical except that they may vary in amunt r plicy date. Cntract is a legal agreement between tw r mre parties. An insurance plicy is a cntract. Cntract Law is a type f civil law invlving a written r stated agreement between tw r mre parties fr sme specific prmise f actin. Cntractual Liability is assumed in a cntract r agreement. Cntributry Negligence is negligence n the part f bth parties invlved in a suit. If the plaintiff is fund t have cntributed t the lss the plaintiff cannt cllect damages. Cverage is the guarantee t pay fr specific lsses as prvided under the term s f a plicy. Cverage Territry is the gegraphic area within which damage must ccur in rder t be cvered. 4

12 Cverage Trigger is the event that activates cverage under a certain insurance plicy. Degree f Care is the extent f duty wed by ne persn t anther. Disability is the inability t carry n ne s nrmal ccupatin due t injury r illness. Earned Premium is that prtin f the premium that represents cverage already prvided. Emplyer s Liability Insurance prtects an emplyer against the claims fr damages, which arise ut f injuries t emplyees in the curse f wrk. Endrsement is an amendment in writing, including printing r stamping, added t and made part f an insurance plicy fr the purpse f mdifying the riginal cntract. Excess Insurance is cverage that pays nly after ther insurance has been exhausted. Exclusin is anything stated in an insurance plicy as nt cvered by the plicy. Extended Reprting Perid, applies t cmmercial liability claims, is a perid fllwing plicy expiratin during which claims may be made r during which the insurer may be ntified that an event has ccurred that culd result in a claim. Fellw Servant Rule is a cmmn law defense that allws emplyers t escape liability fr injury t an emplyee, if anther emplyee s carelessness had cntributed t the lss. First Named Insured is the individual r rganizatin named first in the Declaratins f a plicy. First Named Insured-Cmmercial Plicy has rights and respnsibilities nt specifically assigned t ther named insureds. Flat Cancellatin is the cancellatin f the plicy at r befre it becmes effective, with all premiums refunded. General Aggregate is the ttal limit f insurance cverage in a cmmercial liability plicy that will be paid in ne plicy year fr certain cverage. Grss Negligence is the failure t use rdinary care r a ttal disregard fr the safety f thers. Hazard is anything that increases the chance f lss. Indemnificatin is a principle f insurance, which states that the individual shuld be restred t the apprximate financial psitin he was prir t the lss. Insured is the persn r rganizatin cvered by an insurance plicy. Insured Cntract is a very specifically defined cntract that des nt invalidate cverage under a cmmercial liability cntract. Insurer is the insurance cmpany that issues a given plicy t prvide cverage as specified. Insuring Agreement is that prtin f an insurance plicy that expresses the insurer s agreement t prvide cverage. 5

13 Intentinal Trt is a wrng perfrmed by ne party with the deliberate attempt t harm anther. Legal Liability is a liability impsed by law, as ppsed t cntract agreement. Limits f Insurance is the greatest amunt f insurance a plicy will prvide. Negligence is the failure t use the care that is required t prtect thers frm unreasnable chance f harm. Occurrence is defined in a liability plicy as an accident r cntinuus expsure t substantially the same general harmful cnditins. Occurrence Plicy is a cmmercial plicy that pays fr events that happen during the plicy term, regardless f when the claim is filed. Per Occurrence Limit is used in a cmmercial plicy t represent the maximum that a plicy will pay fr lsses in a single ccurrence. Persnal Injury a harm that cmes t a persn that is nt bdily injury. Things like false arrest, slander, r vilatin f privacy. Plicy Cnditins specify the duties and respnsibilities f bth insured and insurer. Plicy Declaratins is where infrmatin is stated regarding wh is insured, where and hw, all summarized in a single dcument. Pllutin Exclusin is a cmmercial liability plicy exclusin whereby cverage is denied fr mst frms f pllutin that results in bdily injury, prperty damage, and cleans up csts assciated with pllutin. Prejudgment Interest refers t interest that a claimant requests in additin t the judgment fr actual claim. This is based n the premise that earlier awarding f the judgment wuld have resulted in the claimant having earlier use f the award. Prejudgment interest in nt autmatically awarded t a claimant. Primary Insurance is the plicy that applies first when tw r mre insurance plicies apply t a lss. Prducts-Cmpleted Operatins Aggregate is the ttal limit f insurance cverage, in a cmmercial liability plicy, that will be paid in ne plicy year fr lsses that fall within the prducts cmpleted peratins hazard. Prducts-Cmpleted Operatins Hazard is bdily injury and prperty damage that ccur smewhere ther than the insured s premises and invlved the insured s prducts r wrk. Prperty Damage is physical damage t tangible prperty and t lss f use f tangible prperty, whether r nt physically damaged. Pr Rata Cancellatin is the cancellatin by an insurance cmpany f a plicy befre it expires and returning t the plicyhlder an amunt f premium prprtinal t the un-expired days f the plicy. Prximate Cause is a direct causal relatinship between the breach f duty wed t anther party and the damage sustained by that party. 6

14 Punitive Damages are awards t a plaintiff that punish the defendant fr anti-scial actins, rather than reimbursing the plaintiff fr lss. Renewal is the reinstatement f an insurance plicy beynd the riginal expiratin date, either by endrsement, certificate, r a new plicy. Retentin Limit is the amunt the insured must pay fr a lss nt cvered by an underlying plicy, befre the umbrella will begin t cver lsses. Retractive Date is a date stipulated in the Declaratins as the first date n which an event may ccur and be cvered by the plicy if a valid claim is filed. Shrt Rate is a methd f figuring the return premium when a plicy is cancelled by the insured. A prtin f the unearned premium is kept by the cmpany fr expenses. Strict Liability is liability that arises frm deliberately pursuing actins that are ptentially hazardus. Subrgatin is the transference t the insurance cmpany f the insured s rights t cllect damages frm anther party. Supplementary Payments refers t payments that may be made t the insured in additin t the payments made fr the cverage prvided. Trt is a civil wrng, nt arising, frm a cntract, but frm which mney damages may be had. Ultimate Net Lss is the amunt the insured is legally bligated t pay as damages fr a cvered claim r suit. The amunt usually includes deductins fr recveries and salvages. The amunt des nt usually include expenses in cnnectin with defending the claim r suit. Umbrella Liability Plicy is a plicy that prvides brad cverage fr an insured liability ver and abve liability cvered by underlying cntracts r retentin limits. Unearned Premium is that prtin f the premium that cvers the unexpired part f the plicy term. Vicarius Liability is negligence that is nt directly attributable t the persn claimed against, but t anther fr whm the persn claimed against is in sme way respnsible. Watercraft Endrsement is an add-n t the Hmewners cntract that prvides cverage fr watercraft that is excluded under the base plicy. FOCUS POINTS Liability insurance prvides prtectin fr certain vilatins f civil law There are tw frms f civil vilatins cntract law and trt. Cntract law is vilated when ne individual breaks an agreement with anther, causing harm t the secnd party. Trt law is vilated when an individual s legal r natural rights are vilated. Liability insurance applies t an individual s unintentinal wrngding. Strict liability is a liability that is impsed as a matter f law Negligence is defined as the failure t use care. 7

15 The elements f negligence include having a legal duty, a breach f duty, actual damage, and direct casual relatinship. There are three frms f negligence grss, cntributry, and cmparative. Grss negligence is a ttal disregard fr thers. Cntributry negligence is when bth parties fail t take prper care. Cmparative negligence is the weighing f each persn s negligence. Assumptin f Risk is an individual s willingness t be invlved in the expsure f injury r harm. There are three types f liability cverage- persnal, business, and prfessinal. Persnal liability invlves a hme, a car, persnal activity, and vicarius acts f thers. Business liability claims arise frm wnership, use f vehicles, actins f emplyees r cntractrs, cntractual agreements, and defects f gds r services. Prfessinal liability invlves pssible errrs r missins in the pursuit f a prfessin. Liability insurance transfers risk t an insurance cmpany. The mst cmmn liability cverage is against bdily injury and prperty damage. Basic cverage is nrmally nt universal and has limitatins. Umbrella liability prvides cverage ver and abve a basic plicy. Umbrella plicies d nt cver bligatins ver and abve wrkman s cmpensatin. Umbrella plicies d nt cver premises that have been sld, abandned, r given away. Umbrella plicies d nt cver punitive damages. Umbrella plicies require ntice f ccurrence in writing. Umbrella plicies require maintaining the underlying insurance cnditin. Umbrella plicies have bankruptcy r inslvency cntinued prtectin cnditins. CHAPTER 2: UMBRELLA POLICY BASICS THE NEED FOR UMBRELLA POLICIES There are many situatins where a standard liability plicy is simply nt enugh cverage. An umbrella plicy allws an individual t prtect themselves against majr lawsuits in tw ways: The umbrella prvides excess liability ver underlying cverage; The umbrella prvides liability cverage that may be excluded by hmewners r aut plicies. Often referred t as a persnal catastrphe plicy, a persnal umbrella plicy, supplements the basic persnal liability cverage prvided under hmewners and aut plicies. The umbrella was created t prtect peple frm large lsses. Special Prtectin Persnal injury lsses that may be limited r excluded under mst hmewner s plicies will receive brader cverage under an umbrella plicy. As a rule, persnal injury des nt have a unifrm definitin; hwever, mst umbrellas will refer t persnal injury t include bdily injury. Mst plicies als include in the definitin f persnal injury: Mental anguish, false arrests, wrngful evictin, wrngful detentin, malicius prsecutin, invasin f privacy, assault and battery, slander, libel and defamatin f character. 8

16 Standard Plicies and Variatins There is n standard persnal umbrella plicy. The insurance cverage, as well as the exclusins, will vary by cmpany. It is imprtant t cmpare the csts against the cverage the plicy prvides. In sme cases, it is mre imprtant t knw what is excluded frm cverage. Additinally, investigate what cverage and limits are required n the underlying hmewners and aut plicies. Cverage GENERALLY, AN UMBRELLA POLICY PAYS ALL OF THE COVERED LOSS THAT EXCEEDS THE limits f the base r underlying plicy. If, fr example, the basic plicy paid $200,000 n a slip and fall injury and the claim was fr $250,000, the umbrella wuld cver the $50,000 ver the basic plicy's $200,000 limit. Deductible Usually umbrella liability plicies have tw types f deductibles. These are als referred t as retained limits. Depending n the lss, ne f them pays first befre the umbrella pays. If the lss is cvered by the underlying plicy, that plicy, pays first up t its maximum limit and then the umbrella plicy cverage are applied. Anther cnsideratin is that a lss may ccur and is cvered by the persnal umbrella but nt by an underlying plicy. In this case, the insured must meet a deductible that is referred as the SIR, which stands fr Self-Insured Retentin. Fr example, a $1 millin umbrella usually has a $250 SIR that the insured must pay befre the umbrella cverage is applied. Other Exclusins Typically, the umbrella plicy excludes lsses that are better cvered under ther plicies. Althugh there are differences, mst umbrellas will nt cver the fllwing: Obligatins under wrkers' cmpensatin r similar laws If a dmestic emplyee is injured, cverage is affrded under wrkers' cmpensatin and will nt be duplicated under the umbrella plicy. Damage t prperty wned by the insured This precludes any cverage fr prperty damage best insured under sme frm f prperty (hmewners) r inland marine (jewelry flater) insurance. Damage t prperty n which an individual agreed t prvide insurance The intent is t prevent the insurance cmpany frm paying fr a lss that shuld be insured under sme frm f prperty insurance, especially since the insured has agreed t prvide cverage. Disability arising ut f a business pursuit If a hmewner s plicy cvers sme business pursuits (i.e., an ffice at hme), the umbrella will als extend cverage. Sme plicies als prvide cverage t persns wh are invlved in civic activities, ther than a persn's regular emplyment, that may prmpt lawsuits. Liability arising frm rendering (r failing t render) prfessinal services This typically excludes malpractice, which is better cvered by malpractice insurance. Liability arising frm the wnership, maintenance r use f any aircraft Such ptentially catastrphic lsses are excluded. Liability arising frm the wnership, maintenance r use f watercraft nt cvered under the hmewners plicy (subject t certain restrictins) The umbrella cvers small bats that are typically affrded cverage under the hmewner s plicy; hwever, large watercrafts are excluded because f the increased liability risk. Liability cvered by a nuclear energy plicy Nuclear energy plicies cntain a persn s insured r "mnibus" clause that encmpasses virtually everyne wh may be respnsible fr a nuclear accident, barring nly the U.S. gvernment. If a persn shuld becme invlved in a nuclear incident cvered by a nuclear energy plicy, such a persn wuld be cvered by that plicy and wuld nt need prtectin under the umbrella. Therefre, cverage is excluded under the persnal umbrella plicy. FOCUS POINTS Umbrella plicies permit an individual t prtect themselves against majr lawsuits. Umbrella plicies prvide excess liability ver underlying cverage. Umbrella prvides liability cverage that may be excluded by an underlying plicy. Umbrella plicies are ften referred t as a persnal catastrphe plicy. There is n standard umbrella plicy. Exclusins vary frm plicy t plicy. 9

17 Requirements f underlying plicies vary with different umbrella plicies. Umbrella plicies pay all f the cvered lss that exceeds the limits f the base underlying plicy. Umbrella plicies nrmally have tw types f deductibles. A self-insured retentin is a frm f umbrella deductible. Damage t prperty wned by the insured is an exclusin in an umbrella plicy. Umbrella plicies exclude damage t prperty n which an individual agreed t prvide insurance. Liability arising frm rendering r failing t render prfessinal services is nrmally excluded under an umbrella plicy. Large aircraft and watercraft are excluded under an umbrella plicy. CHAPTER 3: RISK MANAGEMENT THE PROCESS OF RISK MANAGEMENT Different individuals handle risk differently. Past persnal experience, typically determines hw an individual will respnd t uncertainty. Befre determining the best way t handle a risk, an individual must identify risk prbability and severity. This is referred t as risk management. It is the prcess f: Determining what expsures t lss exist; Determining the seriusness f expsures; and Develping a way f minimizing the effect f the lss expsure. The gal f risk management is t make the best pssible arrangement ahead f time s that serius financial harm des nt result when a lss ccurs. Risk management is intended t prtect incme and assets against unfreseen, unintended r accidental lss. A risk manager fllws five basic steps in the risk management prcess: Identifies the lss; Evaluates the expsure and eliminates the severity and frequency; Selects the mst ecnmical way f handling the risk; Frmulates a risk management plan; Revises and mnitrs the risk management plan. Identifying the Lss Befre risk can be managed it is necessary t identify all the pssibilities f lss r the lss expsures t which an individual is subject and which can be guarded against in sme way. The term lss expsure is used t describe the prperty r persn facing a cnditin in which lss is pssible and unpredictable. Ptential prperty lsses include direct and indirect lsses; ptential liability lsses are thse assciated with trts r, t a much lesser extent, breach f cntract. Prperty Lss Expsures The individual risk manager begins the risk management prcess by cmpiling an inventry f all real and persnal prperty, indicating the amunt f prperty wned and its present value. Real prperty cnsists f land and, generally, whatever is erected r grwing upn r affixed t it. The definitin f real prperty includes the earth's surface, the air abve and the grund belw, as well as all appurtenances t the land, including buildings, structures, fixtures, fences and imprvements erected upn the land. Excluded are grwing crps. The term als includes the interests, benefits and rights inherent in the wnership f real estate. 10

18 Persnal prperty cnsists f tangible, mvable pssessins and includes things such as furniture, jewelry, autmbiles and recreatinal vehicles. After the inventry is cmplete, the risk manager can identify the pssible prperty lss expsures that shuld be addressed. The pssible causes f prperty lsses that shuld cncern prperty wners are numerus. Tw basic types f risk that may cause financial lss may classify these lsses. These risks include: Direct physical damage t prperty caused by perils such as fire, wind, water and ther perils that may damage r destry the prperty; Indirect lss that ccurs fllwing a direct lss t prperty by an insured peril and that included additinal lss expenses fr the extra cst f fd, transprtatin and husing incurred by the insured. Prperty may be damaged r destryed by physical perils, such as fire, smke, explsin, hail, etc. Deviatins frm expected individual cnduct, such as theft, vandalism, r arsn, may be termed scial perils that cause prperty lss. Finally, certain ecnmic perils, which ccur less frequently, may result in prperty lss. Fr example, peple prtesting a factry layff may cause damage t nearby prperty. Tw r mre perils, such as fire and vandalism, may be invlved in a lss. Liability Lss Expsures The term liability is used in a number f ways. Generally, the term is synnymus with mral r legal respnsibility and invlves the cncept f facing a penalty when a particular respnsibility is nt met. Legal liability is defined as the cnditin f being bund in law t d (r nt t d) smething that may be enfrced in the curts. The law des nt recgnize mral respnsibility alne as legally enfrceable, but peple wh d nt meet their mral respnsibility may als becme legally bligated t pay fr anther's injuries. Under ur legal system, a persn may be held respnsible fr causing injury t anther persn r damage t anther's prperty. Peple are faced with the pssibility f having t defend themselves against a lawsuit, even if the suit is grundless. The risk f being held financially respnsible fr judgments, legal defenses and curt csts, as well as the indirect expenditures f time, energy and mney, is the greatest risk that mst peple face. Therefre, in additin t prperty lss expsures, risk managers must identify tw basic types f liability lss expsures: Casualty lss that results frm perils such as rbbery, burglary, vandalism r arsn; and Liability risk where the law f negligence is used as the basis t determine whether an individual may be held respnsible fr the financial cst f ther peple's bdily injuries r fr damage t their prperty. An individual may incur liability lss expsures in a number f ways. An individual may be held legally respnsible fr injuries r damages that result frm: Ownership f an aut, recreatinal vehicle, watercraft r residence premises; Persnal r business activities; frm bligatins assumed under a cntract; The emplyment f dmestic wrkers; frm libel, slander and ther persnal injury ffenses; A number f ther events; Individuals may be held criminally r civilly liable, depending n the nature and frm f their actins. Criminal liability is clearly established by statute r administrative rules. In a criminal actin, a district attrney r attrney general f either the state r federal gvernment initiates the criminal actin against the accused wrngder. Fr example, a district attrney will file charges against an accused murderer. If the accused is cnvicted, the state r federal gvernment impses penalties. Civil liability is established by statutes, administrative rules and prir curt decisins that utline the rights f the parties, as ppsed t each ther. One party against anther party fr the wrngs alleged nrmally brings a civil liability actin. These legal actins are brught by the litigants at their wn expense (with the curt csts usually impsed n the lsing party). The surces f civil liability are classified as thse arising frm: Cntractual r similar agreements; Trts, which are acts r missins ther than breach f cntract; Equitable actins such as fraud, errrs r mistakes; 11

19 Actins that d nt fall int the first three categries. Remedies based n cntractual agreements and trt actins seek mnetary damages; thse based n equitable actins usually seek sme ther remedy, such as perfrmance f a cntract. Evaluating Lss Expsure In the secnd step f the risk management prcess, the risk manager must evaluate the lss expsures and decide which risks are intlerable, which are difficult t tlerate and which are tlerable. Intlerable risks are thse that are s large that a lss frm ne might cause a persn's bankruptcy. These risks typically include liability risk and the risk f the destructin f a hme because f a natural disaster. Difficult t tlerate risks are thse that wuld cause the individual a significant financial lss but that wuld nt lead t bankruptcy. An example wuld be the destructin f an autmbile. Finally, tlerable risks include lss r damage t persnal prperty that might be large but are nt intlerable in terms f the individual's finances. An example wuld be replacement f a brken windshield. Having identified the risks, the risk manager then estimates bth the maximum pssible lss and the maximum prbable lss the prperty wner faces. These tw estimates are useful in determining the best way r ways t handle a lss expsure. The maximum pssible lss is the wrst lss that culd pssibly happen, while the maximum prbable lss is the wrst lss that is likely t happen. Fr example, it is pssible fr a huse lcated in Arizna t be cmpletely destryed by fld; hwever, it is unlikely that such a lss will ccur. Therefre, if a huse is nt lcated in a fld area, it is usually unnecessary (and smetimes impssible) fr the insured t purchase fld insurance. After the risks have been classified in this way, the risk manager then evaluates the frequency and severity f each lss. Frequency is a measure f hw ften a particular event has ccurred; severity is a measure f the damage caused by each incident. Fr example, cunting the number f times a persn's dg has bitten a neighbr is a frequency measurement, but calculating the medical and legal csts f thse bites is a severity measurement. After this step has been cmpleted, the risk manager can decide hw t effectively deal with his prperty and liability lss expsures. HANDLING THE RISK The risk manager may select ne r mre risk management techniques t handle the identified risks. These techniques include avidance, retentin, lss cntrl, nn-insurance transfer and insurance. When cnsidering which f the risk management techniques t implement, the risk manager cnsiders three general, practical rules f risk management: The size f the ptential lss must relate favrably t the resurces f the ne wh must bear the lss; The pssible benefits f taking a risk must be reasnably related t the pssible csts; The amunt f ptential lss can usually be reduced r prevented thrugh effective lss cntrl prgrams; The risk manager must determine whether it is best t reduce, eliminate r transfer the risk. Selecting a technique begins by using infrmatin gathered in the secnd step f the risk management prcess. The risk manager has apprximated the ttal lss frm ne event, r ccurrence, and has estimated hw ften a particular lss is likely t ccur (lss frequency) and hw much culd be lst if a certain event shuld ccur (lss severity). Fr example, if a hmewner is estimating the ptential lss frequency and severity f a fire, the fllwing lsses are pssible: Direct fire and smke damage t the huse and its cntents; Indirect damage in the frm f burn injuries t a visitr in the huse; Damage t neighbring prperty if the fire spreads; Lss f use f the prperty because the fire damage makes it necessary fr the hmewner t mve t anther lcatin, at least temprarily. The risk manager shuld determine the prbability and pssibility f each type f lss, as well as the lss f frequency and severity f thse lsses. Then, the risk manager must determine the amunt f mney that will be available t meet the ptential lss. This amunt will vary widely by individual. T find ut hw much a persn is wrth requires cmpletin f a persnal balance sheet. This is a financial inventry f all 12

20 persnal assets (that which is wned) and liabilities (that which is wed). The difference between assets and liabilities is a persn's net wrth. The balance sheet prvides an individual with a recrd f his financial prgress and can help with future savings and investment prgrams. By determining net wrth n an annual r semiannual basis, it is pssible t verify whether net wrth is increasing, decreasing r remaining the same, and if the net wrth is keeping pace with the rate f inflatin. It is als pssible t determine what prtin f assets can be cnverted int cash in the even f a prperty r liability lss and a need fr cash t pay fr the lss. Finally, the benefits and csts f any available alternative methd f handling the risk in certain situatins must be cnsidered. In many cases, insurance is the answer; hwever, ther risk management techniques, such as lss preventin r self-insurance, may als be viable ptins under varius circumstances. IMPLEMENTING A RISK MANAGEMENT PLAN The furth step f the risk management prcess is executing the plan that the risk manager has devised. Insurance cverage, which is the fcal pint f mst individual plans, is usually purchased. The risk manager's bjective is t purchase plicies that will prvide the mst cmprehensive cverage at the mst reasnable cst. Insurance cntracts will be ne f three types: Primary insurance required by law (e.g., autmbile liability insurance) r by cntract (e.g., hmewners insurance required under a mrtgage cntract); Desirable insurance that prvides prtectin against lsses that culd financially harm an individual but that wuld nt cmpletely destry his savings (e.g., physical damage insurance prtects against damage t the insured's aut); and Catastrphic insurance that prvides prtectin against lsses that culd financially destry an individual (e.g., fld, earthquake and persnal umbrella liability insurance prvide prtectin against devastating lsses). The risk manager selects limits f liability that adequately cver the risk's prbable maximum lss, as well as reasnable deductibles that help t reduce the annual premium fr insurance cverage. Because sme f the risks faced by the individual may nt be insurable, these risks must be handled in sme ther way. Fr example, war risk is nt cvered by insurance s individuals must retain that risk. In ther wrds, if prperty is damaged r destryed by an act f war, prperty wners must pay fr the lss themselves. Mnitring the Plan The final step in the risk management prcess invlves a well-planned prgram fr mnitring and updating the riginal plan. This cnsists f regularly identifying any changes in the risk manager's lss expsures, net wrth, ability t persnally bear financial lsses and s frth. All f these are very imprtant cnsideratins fr individuals. Risk management as a prcess grew ut f businesses' insurance management, but insurance is hardly the sle methd f treating risk. There are varius alternative methds. Fr example, as a persn's net wrth increases, there is a greater need fr mre insurance t prtect the pssible financial cst f lsses t that prperty, the lss f use f that prperty and additinal expenses that culd arise frm such lsses. Hwever, increased wealth might mean that an individual feels cmfrtable retaining mre lsses and may, therefre, take a larger deductible t reduce the cst f his insurance premiums. When an insurance agent participates in the risk management prcess with a client, he/she assumes imprtant respnsibilities. The client lks t the agent as a prfessinal wh can prvide sund advice and, when necessary, can wrk with ther experts in applying the principles f risk management. When insurance prtectin is necessary fr transferring a risk, the agent will be expected t prpse a practical and effective insurance plan that prvides prper cverage in the crrect amunts t ffer adequate prtectin at the mst reasnable cst. Primary Insurance Plicies The average persn selects insurance, with sme retentin in the frm f a deductible, as his primary risk management technique. Mst peple will purchase a hmewners and/r a persnal aut plicy t cver their lss expsures. The plicies are referred t as primary, basic r underlying insurance plicies. Althugh varius hmewners and persnal autmbile frms are in use, mst fllw a frmat similar t the prgrams develped by the Insurance Services Office (ISO). Handling Liability Lss Expsures Mst peple handle the risk f legal liability arising ut f their persnal acts with persnal liability insurance. Because liability lsses invlve a third party, a determinatin f fault must be made by the insurance cmpany r the curt. In the event f a lawsuit invlving bdily injury r prperty damage t anther persn, the insurance cmpany will prvide a legal defense and will pay thse sums the insured is legally bligated t pay, up t the limits f the plicy. Bdily injury refers t bdily harm, sickness r disease, including injury that results in death. Cverage als applies fr any required care r lss f services f anyne whse bdily injury is negligently caused by the insured. 13

21 Fr example, at cmmn law, a husband may be entitled t mnetary cmpensatin if his wife is injured in an accident and unable t prvide certain duties wed her husband under the marriage cntract. These duties are cllectively call cnsrtium and the spuse may be cmpensated fr lack f cnsrtium. Additinal cverage called prperty damage cverage applies t damage t r destructin f tangible prperty, including the lss f such prperty. Persnal liability insurance may be purchased as a separate plicy r, mre cmmnly, it is prvided as part f a package plicy, either an aut r a hmewner s package. Because these liability cverages are quite similar, we will primarily discuss the hmewners liability cverage. The liability sectin f the hmewners plicy prtects the insured in at least tw ways: If a claim is made r a lawsuit is brught against an insured, the plicy will pay fr damages fr which the insured is fund legally liable, up t the plicy's limit f liability, typically $100,000 per ccurrence. Higher limits may be btained fr an additinal premium. Typically, cverage will apply fr claims arising ut f the wnership r use f the insured lcatin; persnal activities, such as sprts r scial activities n r away frm the insured premises; and actins f a residence emplyee, such as a ck, maid, nanny r baby sitter, in the curse f emplyment. In additin t the limits f liability, the insurance cmpany must defend any claim r lawsuit that is brught against the insured fr bdily injury r prperty damage - even if the claim is false, baseless r grundless. In cme cases, the plicy specifies that the insurer's bligatin t settle r defend claims ends when the amunt the insurer pays fr legal defense equals the plicy's limits f liability. As a practical matter and t avid expensive litigatin, mst persnal liability lawsuits are settled ut f curt. Individuals wh wn r perate autmbiles may purchase liability prtectin in the frm f an autmbile plicy. The Persnal Aut Plicy, fr example, includes Part A - Liability Cverage, which prvides prtectin against ecnmic lss t an insured fr "bdily injury" r "prperty damage" that arises ut f the peratin, maintenance r use f an insured autmbile. Under this plicy sectin, the insurance cmpany makes tw prmises t the insured: T pay damages n behalf f the insured fr which he becmes legally respnsible because f an accident; and T settle r defend any claims under the plicy, up t the plicy's limit f liability. It is imprtant t nte that the insurer has n duty t defend lawsuits r t settle any claims that are nt cvered under a particular insurance plicy. Fr example, an insurer wh prvides autmbile r hmewners insurance is nt required t defend an insured wh is sued by a neighbr fr intentinally using a mtr vehicle t damage the neighbr's lawn because intentinal damage is nt cvered. Persnal Injury Liability The persnal liability prvided under the ISO hmewners plicy specifically cvers tw types f liability: Bdily injury, meaning bdily harm, sickness r disease, including required care, lss f services and death that results; and Prperty damage, meaning physical injury t, destructin f r lss f use f tangible prperty. The plicy des nt mentin cverage fr persnal injury lsses meaning any injury t anther's persn, rights r reputatin, including trts such as libel, slander r invasin f privacy. Many insurers cntend that they did nt intend t prvide cverage fr persnal injury liability under a standard hmewners plicy and cverage is ften denied n that basis. When cverage is nt prvided by the hmewners plicy itself, a persnal injury endrsement may be added t the plicy t prvide cverage fr certain ffenses cmmitted during the plicy perid. The ISO persnal injury endrsement des nt prvide cverage fr liability: Arising ut f disputes between insureds; Frm cntracts nt related t the premises; Frm the injured persn's emplyment by the insured; Invlving a vilatin f a penal law; Arising ut f business pursuits; 14

22 Arising ut f civic r public activities perfrmed fr pay. Persnal injury liability prtectin may als be extended by a persnal umbrella liability plicy. THE STRUCTURE OF PRIMARY POLICIES Prperty-casualty plicies usually cntain the same plicy elements, regardless f what type f prperty r liability cverage they prvide. Each plicy begins with a Declaratins page that cntains infrmatin fund n the client's applicatin fr insurance and any infrmatin that is unique t that particular plicy. A Declaratins page usually cntains the name and mailing address f the insured(s), the name f the insurance cmpany prviding cverage, the plicy number, the inceptin date and expiratin date f the plicy, the dllar amunt f the applicable plicy limits and deductibles, the numbers and editin dates f any frms and endrsements and the premium. Plicies usually cntain a separate Definitins sectin that explains the meaning f certain wrds that are used in the insurance cntract. The defined wrds may appear in bldface type, italics r within qutatin marks. Fr instance, this sectin ften explains that thrughut the plicy the named insured is referred t as "yu," "yur" and "yurs" and the insurance cmpany is referred t as "we," "us" and "ur." If a wrd is nt defined in the Definitins sectin r in the bdy f the plicy, rules f cntract interpretatin are used t determine the meaning. Fr example, technical wrds are interpreted accrding t their rdinary technical meaning and legal wrds are assigned their usual legal meaning. The plicy's Insuring Agreements prvisin sets frth the insurance cmpany's prmise t pay the insured (r t pay n behalf f the insured) fr a cvered lss. In return fr the insurer's prmise, the insured must pay a premium and cmply with certain plicy requirements, which are spelled ut in a sectin call Cnditins. The Cnditins sectin states that the insured must, in additin t paying a specified premium, reprt lsses prmptly, cperate with the insurer in settling a lss and avid anything that might harm an insurer's right t recver damages frm a respnsible third party. If the insured fails t cmply with these cnditins, the insurer may be relieved f its bligatin t pay fr the lss r defend a lawsuit. Plicies als cntain a number f cverage exclusins that restrict r eliminate insurance cverage fr specified lss expsures. These exclusins appear thrughut the plicy as well as in a separate sectin call Exclusins. Finally, sme plicies may cntain varius amendments r Endrsements t the basic plicy prvisins, which must be issued by the insurance cmpany r its duly appinted agent. FOCUS POINTS Risk management is the prcess f determining the expsure, determining the seriusness f the expsure, and develping a way f minimizing the effect. Risk management is pre-planning ahead t prevent serius financial harm frm ccurring. Risk management is intended t prtect incme and assets against unfreseen r unintended lss. Risk management plan invlves identifying the lss, evaluating the expsure, handling the risk, a management plan and revising and mnitring the plan. Lsses include direct and indirect lsses. The definitin f real land includes the earth s surface, the air abve and the grund belw, as well as appurtenances t the land. Persnal prperty cnsists f tangible and mveable pssessins. The tw risks that cause financial lss are direct physical damage and indirect lss. Legal liability is defined as the cnditin f being bund in law t d r nt d smething that may be enfrced in the curts. Liability lss expsures include casualty lss and liability risk. Intlerable risks are thse that are s large that a lss frm ne might cause a persn a bankruptcy. Difficult t tlerate risks are thse that wuld cause the individual a significant financial lss but nt lead t bankruptcy. Tlerable risks include lss r damage t persnal prperty that might be large but nt intlerable. Maximum pssible lss is the wrst lss that culd pssibly happen. 15