Personal Umbrellas - How Do They Work... and When Don t They Work? SPONSORED BY

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1 Personal Umbrellas - How Do They Work... and When Don t They Work? SPONSORED BY

2 Personal Umbrellas How Do They Work? and When Don t They Work??? Michael C. D Orlando, CIC, LIA, CPIA Insurance Training & Consulting Services 11 Lake Shore Drive Amesbury, MA (978) mcdorlando@aol.com

3 General Overview * Special Note: Umbrellas are not standardized and they can vary dramatically from carrier to carrier. With regard to coverages, exclusions and other provisions, if you represent ten different carriers, you are probably writing ten different Umbrellas! In this outline, we will focus on the general terms and concepts which apply to most Umbrellas and Excess Policies, however, it is very important that every Umbrella and Excess policy is carefully reviewed to assure that it meets the needs of our clients. Historical Overview The term Umbrella is like the terms All-Risk, Comprehensive and Dinosaur. When Lloyds first introduced the Commercial Umbrella in the 1940 s, there were very few exclusions and the word Umbrella may have been an appropriate term. In the 1960s, Lloyds and American insurers began writing Personal Umbrella Policies. Numerous unanticipated losses generated more and more exclusions and today s Umbrellas might be better described as Excess liability policies. As a starting point, we will take a look at the original concept of the true Umbrella as compared with a following form Excess Liability policy. Today s Umbrellas are better categorized as Hybrids, but we will use the term Umbrella for discussion purposes.

4 I. WHY PURCHASE AN UMBRELLA? Umbrellas can serve two primary functions: A. Provide Excess Limits Over Primary Liability Insurance for Many Exposures Most primary policies (Auto, Homeowners, Watercraft, etc.) are limited by manual rules and/or company specific filings and underwriting rules regarding the maximum dollar amount which can be written B. Can Provide Broader Coverage Than the Primary Policies There are a wide range of exclusions and limitations on all primary policies... the following are examples of exposures where coverage is broader in many Umbrellas than the primary policies: 1. Worldwide auto liability 2. Personal Injury 3. Property in the insured s care, custody or control 4. Loss Assessment 5. Watercraft

5 II. Personal Umbrella, Excess Personal Liability and Hybrid Personal Liability Policies A. Traditional True Umbrella 1. Provides excess coverage over underlying primary policies 2. Can provide primary coverage in areas not covered by the underlying policies 3. It is a stand-alone policy with its own insuring agreement, own definitions, own provisions, own exclusions and own limitations

6 B. Following Form Excess Personal Liability Policy 1. Provides excess coverage only over areas covered by the underlying policies 2. Generally has the same insuring agreement, definitions, provisions, exclusions and limitations as the underlying policies

7 C. Hybrid Excess Personal Liability Policy 1. Contains broader ( True Umbrella) coverage for some exposures 2. Contains excess Following Form coverage for specific exposures Typical Following Form exposures are autos, watercraft, and recreational vehicles: 3. Contains language which is narrower than underlying coverage in some areas

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9 Policy Number: DECLARATIONS Named Insured & Mailing Address: Agency Name & Address: Primary Residence Address: (If different than above) Policy period: From To (12:01 a.m. Standard time at the address of the Named Insured as stated herein) Limit of Coverage: $ each occurrence $ Aggregate Premium $ Self-insured Retention: $ each occurrence Forms included at issue: REQUIRED BASIC POLICIES It is agreed by you and your Relatives that you will carry an Automobile liability policy and a comprehensive personal liability policy (or homeowners policy) covering both you and your Relatives for at least the minimum limits listed below. If your Relatives are not covered under your polices for at least the minimum limits listed below, they must be covered under another automobile liability policy and another comprehensive personal liability policy (or homeowners policy) for at least the minimum limits below. If you or your Relatives own Recreational Vehicles, Watercraft or have any household employees, you or your Relatives, as the case may be, agree to carry the appropriate policy (or endorsements) listed below covering both you and your Relatives for at least the minimum limits listed below. TYPE OF POLICY MINIMUM LIMIT OF COVERAGE A. Automobile Liability Bodily Injury $ each person $ each occurrence Property Damage $ each occurrence or Bodily Injury and Property Damage Combined $ each occurrence B. Personal Liability Homeowners or Comprehensive Personal Liability (Including watercraft liability for boats 25 ft. or less and 50 HP or less) Bodily Injury and Property Damage Combined $ each occurrence C. Other Coverage Limit

10 III. DECLARATIONS PAGE A. Policy Period B. Named Insured C. Policy Limits 1. Per Occurrence 2. Aggregate (may be a new term for personal lines client) D. Self Insured Retention (if policy has one) E. Underlying requirements and limits

11 IV. UNDERLYING COVERAGE A. Umbrella Policies require the insured to maintain underlying (i.e. primary) policies which must respond first for certain exposures Once the underlying limits are exhausted, the Umbrella Policy will respond as excess coverage B. Most Umbrellas require underlying policies for: 1. Existing exposures Ex. Homeowners, Auto and Watercraft when the insured owns a home, auto or watercraft 2. Potential (probable) exposures Ex. A Non-owned Auto policy for someone who doesn t own an auto, but may rent or borrow one on occasion, or a Comprehensive Personal Liability policy for someone who doesn t have a Homeowners policy C. Underlying primary policies typically must be listed on the Declarations Examples: 1. Personal Auto Policy 2. Homeowners or Comprehensive Personal Liability 3. Watercraft Policy if insured owns a boat 4. Other liability policies for owned exposures such as recreational vehicles, snowmobiles, motorcycles, motor homes, etc. 5. Types of underlying policies required may vary by carrier

12 D. Required Minimum Underlying Limits 1. Homeowners or CPL typically $300,000 (some carriers require as little as $100,000 and others as much as $500,000) 2. Auto typically $250/$500/$100 or $300,000 CSL (some carriers as low as $100/$300/$50 and others as high as $500/$500/$100) 3. Watercraft typically $300,000 (again ranging from $100,000 to $500,000) E. Maintenance of underlying insurance 1. Failure to maintain the required underlying coverages and limits will obligate the insured to pay the difference between the actual limit in force and the required limit, before the Umbrella policy will pay 2. Some Umbrella contracts require that the carrier be notified if the underlying limits are not maintained, are changed or are replaced 3. Concurrency of the underlying policies and the Umbrella is a major concern F. Underlying carrier considerations 1. Financial condition of the underlying carrier 2. Umbrella carrier may not be responsible for required underlying limit if underlying carrier goes bankrupt 3. Some Umbrella carriers will only write coverage over their own underlying policies

13 Sample Wording Example #1: We will not be required to assume any obligation of any primary insurance company which is deemed uncollectible or invalid by its bankruptcy or insolvency. If you do not maintain the other insurance, this policy will apply the same way it would have applied had you maintained the other insurance. The bankruptcy or insolvency of an insurance company providing the other insurance will not affect this condition. Example #2: B. Primary Insurance Requirements - You must have primary insurance, including liability insurance for: 1. any premises owned by, leased to, furnished or available for the regular use of, you or a family member; 2. any auto or recreational vehicle owned by, leased to, furnished or available for the regular use of, you or a family member: 3. any watercraft owned by, leased to, furnished or available for the use of you or a family member. You must keep the primary insurance coverage at or above the minimum limits shown on the Declarations. If the primary insurance does not provide at least the limits indicated, you will be responsible for the loss up to the required limits. We will only pay for the amount of loss which is: 1. above the required primary insurance limits; and 2. above any other insurance collectible for an occurrence. Example #3: Maintenance of Underlying Insurance You must maintain the "underlying insurance" at the full limits stated in the Declarations with no change to more restrictive conditions during the term of this policy. If any "underlying insurance" is cancelled or not renewed and not replaced, you must notify us at once. If you fail to maintain "underlying insurance", we will not be liable under this policy for more than we would have been liable if that "underlying insurance" was in effect.

14 G. Examples of Umbrella/Excess Liability loss situations 1. EXAMPLE #1: SAMUEL SOUTHBY PERSONAL UMBRELLA UNDERLYING REQUIREMENTS: Personal Auto Policy $300,000 Homeowners/Personal Liability Policy $300,000 Watercraft Policy If Insured Owns Watercraft $100,000 Self-Insured Retention $250 Mr. Southby fails to renew his Homeowners policy and a visitor subsequently falls on the front steps of his home and suffers a serious injury. The visitor's bodily injury claim is held to be worth $500,000. Homeowners Policy pays $ Mr. Southby pays $ Umbrella policy pays $

15 2. EXAMPLE #2: SAMUEL SOUTHBY PERSONAL UMBRELLA UNDERLYING REQUIREMENTS: Personal Auto Policy $300,000 Homeowners/Personal Liability Policy $300,000 Watercraft Policy If Insured Owns Watercraft $100,000 Self-Insured Retention $250 Mr. Southby renews his homeowners policy with a Section II Liability limit of $100,000 and a visitor subsequently falls on the front steps of his home and suffers a serious injury. The visitor's bodily injury claim is held to be worth $500,000. Homeowners policy pays $ Mr. Southby pays $ Umbrella policy pays $

16 V. SELF-INSURED RETENTION (SIR) A. Definition An amount indicated in the Declarations of the Umbrella which will be paid by the insured for loss which is not covered by the underlying policy, but is covered by the Umbrella with no underlying requirement Ex. Libel and slander are not covered on the unendorsed ISO Homeowners policy, but are covered on many Umbrella policies without a requirement for underlying coverage Ex. The PAP does not provide worldwide coverage, but many Umbrellas do provide worldwide coverage with no underlying requirement while outside the auto coverage territory Sample wording We will be liable for only that portion of damages, subject to the Each Occurrence limit stated in the Declarations, in excess of the retained limit, which is the greater of: The total amounts stated as applicable limits of underlying policies listed in the Schedule of Underlying Insurance and applicable limits of any other insurance providing coverage to the insured during the policy period; or The amount stated in the Declarations as Self-Insured Retention as a result of any one occurrence not covered by the underlying insurance listed in the Schedule of Underlying Insurance nor by any other insurance providing coverage to the insured during the policy period.

17 B. Application of the Self-Insured Retention 1. Similar to a deductible, but Only applies if loss is not covered by an underlying policy and there is no underlying requirement for that coverage 2. Insured is responsible for paying the SIR, however, unlike most deductibles, the carrier often pays the claim and seeks reimbursement of the SIR from the insured 3. Most common SIR amounts are $250, $500 or $1, No SIR in following form policies EXAMPLE: SELF INSURED RETENTION - SAMUEL SOUTHBY PERSONAL UMBRELLA UNDERLYING REQUIREMENTS: Personal Auto Policy $300,000 Homeowners/Personal Liability Policy $300,000 Watercraft Policy If Insured Owns Watercraft $100,000 Self-Insured Retention $250 Mr. Southby calls the local high school principal incompetent at a Parent's night reception. The principal sues Mr. Southby for $500,000 for slander and wins. Mr. Southby's homeowners policy does not provide personal injury coverage, but his Umbrella policy does, with no underlying requirement. Homeowners policy pays $ Mr. Southby pays $ Umbrella policy pays $

18 VI. KEY DEFINITIONS A. Insured Ex. #1 1. Insured means you and the following residents of your household: a. a relative of yours b. any person under the age of 21 who is in your care or the care of an insured in a. above a. You (which includes resident spouse) b. Resident relatives c. Anyone under 21 in the care of anyone above Ex. #2 1. You and your relatives are covered 2... K. Relative means a person related to you by blood, marriage or adoption who lives in your household and anyone else in your or a Relative s care living in your household. a. You (which includes resident spouse) b. Resident relatives c. Anyone in the care of anyone above, regardless of age

19 Ex. #3 J. "Insured" means: 1. "You"; but, with respect to use of an "auto" "you" do not own which is furnished or available for "your" regular use, only if "you" are insured for "your" use of that "auto" under one or more "underlying policies" for not less than the auto liability deductible amount shown in Schedule A of this endorsement. 2. A "family member", but with respect to use of an "auto" furnished or available for the regular use of a "family member", only if the "family member" is insured for his or her use of that "auto" under one or more "underlying policies" for not less than the auto liability deductible amount shown in Schedule A of this endorsement. Exclusions and limitations concerning certain exposures, such as auto, can be found in various definitions Ex. #4 "Insured" means: (a) the named insured (b) the following residents of the named insured's household: (1) the named insured's relatives; and (2) anyone under the age of 21 under the care of the person named above; and (c) a person or organization while using or holding an automobile, recreational motor vehicle, or watercraft owned by, rented by, or loaned to the named insured, provided that the named insured has permission for the type of use. A person or organization is not an insured if the use or custody is in the course of an automobile sales or service business or without the named insured's permission. Insured includes anyone using, with permission, a vehicle or watercraft owned, rented or borrowed by the named insured Ex. #5 "Covered person" means: (a) You; (b) A family member; (c) A person using an auto, recreational vehicle or watercraft you own with your permission "Family member" means a person related to you by blood, marriage or adoption who resides in your home. Insured includes anyone using, with permission, a vehicle or watercraft owned by the named insured

20 B. Personal Injury 1. Most Umbrella forms have separate definitions for personal injury and bodily injury 2. Some Umbrella forms broaden the definition of personal injury to include bodily injury 3. Carefully read the policy exclusions which can affect the interpretation of the definition of personal injury (check for intentional injury exclusions) Ex. #1: K. "Personal injury" means injury arising out of one or more of the following offenses: 1. False arrest, detention or imprisonment; 2. Malicious prosecution; 3. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor. 4. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services; or 5. Oral or written publication of material that violates a person's right of privacy. Ex. #2: Personal injury means: a. bodily injury, shock, mental anguish, or sickness or death; including death resulting from any of the above. b. false arrest, detention or imprisonment; c. malicious prosecution; d. wrongful entry or eviction; e. humiliation; f. libel, slander, defamation of character; g. invasion of privacy.

21 C. Policy Territory 1. Worldwide in most Umbrellas 2. Limitations may apply to certain exposures such as auto, recreational vehicles and watercraft Ex. #1 Coverage applies to an occurrence which takes place anywhere in the world. a. Worldwide coverage b. No requirement to carry underlying auto, recreational vehicle or watercraft coverage outside the U.S. EX. #2 This coverage protects you wherever in the world you happen to be For automobiles, recreational motor vehicles and boats, we will cover you and your family only if you have coverage for them on a policy listed on the Declarations Page. If there is a claim involving an automobile, recreational motor vehicle or boat that is not covered by your other liability insurance, we will not cover it either. It is important that you realize that most automobile policies only cover you while in the United States and Canada. If you drive in another country you must carry insurance that will cover you in that country. This includes Mexico. If you do not, we will not cover you under this policy. a. Worldwide coverage, but b. Underlying is still required for auto, recreational vehicles and watercraft

22 VII. POLICY PROVISIONS A. Pay on Behalf Of vs Indemnify 1. Pay on behalf of = Stand in your shoes Company will pay for ongoing expenses, supplemental payments and actual damages owed as they occur or become payable Example Subject to our limit of liability, we will pay on behalf of the insured damages in excess of the retained limit, for which an insured becomes legally liable. 2. Indemnify = Make you whole again i.e. Pay you back a. Insurance company is not obligated to provide any payment for damages until the insured is legally obligated to pay for such b. Insured may have to use own money for defense and supplemental payments c. Many indemnify agreements do not actually require the insured to pay for damages, but only be obligated Example We will indemnify the insured for ultimate net loss in excess of the retained limit which the insured shall become legally obligated to pay as damages due to personal injury or property damage.

23 B. Defense 1. Underlying carrier conducts defense if loss is covered by underlying policy 2. Umbrella carrier conducts defense in cases: a. Of a loss not covered by underlying policy b. Where the limits of the underlying policy are exhausted 3. Defense may be in addition to the limits as Supplementary Expenses or may be within the limits Sample wording In Addition to Limits We have the right and duty to assume control of the investigation, settlement or defense of any claim or suit against the insured for damages covered by this policy In those circumstances where the above paragraph applies, we will pay our expenses in addition to the applicable limits of insurance Sample wording Within Limits We will defend any suit against the insured alleging liability insured under the provisions of this policy Any payment of amounts incurred above will serve to reduce the limits of liability of this policy a. Most policies cover defense in addition to the Limit of Liability b. Many will pay defense and legal costs if there is no primary coverage c. If there is primary coverage, the umbrella carrier may elect to participate in defense while being covered in the underlying policy

24 C. Exclusions Umbrella exclusions are not standardized and will vary by carrier, however, many are very similar to those found in the underlying policies The following are common exclusions found in most Umbrella policies: 1. Workers Compensation benefits required or voluntarily provided 2. Property Owned by the Insured 3. Property in the care, custody or control of the insured Some forms may provide a give-back of contractual property damage Example This exclusion does not apply to any property damage to property: a. used by; b. rented to; or c. in the care, custody or control of; any insured to the extent that the insured is under contract to provide insurance for such damage.

25 4. Intentional Injury or Property Damage May or may not give back coverage for the use of reasonable force to protect persons or property. 5. Aircraft Liability Policies vary, but aircraft is almost always excluded Ex. #1: any personal injury or property damage arising out of: a. ownership; b. maintenance; or c. use (including loading or unloading); of an aircraft of an insured. Ex. #2: due to the ownership, maintenance or use including loading or unloading, of any, aircraft...except to the extent that coverage therefore is provided by underlying insurance specified in Schedule A. 6. Professional Services 7. Business a. May follow underlying b. May provide broader coverage than underlying c. May be narrower than underlying

26 Ex. #1: DEFINITION: "Business" includes trade, profession or occupation. EXCLUSION: 4. "Bodily injury", "personal injury" or "property damage" arising out of or in connection with a "business" engaged in by an "insured". This Exclusion (A.4.) applies but is not limited to an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed, or implied to be provided because of the nature of the "business". However, this Exclusion (A.4.) does not apply to: a. Civic or public activities performed by an "insured" without compensation other than reimbursement of expenses; b. An insured minor involved in self-employed "business" pursuits, which are occasional or part-time and customarily undertaken on that basis by minors. A minor means a person who has not attained his or her: (1) 18th birthday; or (2) 21st birthday if a full-time student; c. The providing of home day care service, but only when: (1) An "insured" renders such service to a relative of an "insured"; or (2) A mutual exchange of home day care services agreement exists which involves no monetary or other compensation; d. The use of an "auto" you own, or a temporary substitute for such "auto", by you, a "family member" or a partner, agent or employee of you or a "family member" while employed or otherwise engaged in the "business" of: (1) Selling; (2) Repairing; (3) Servicing; (4) Storing; or (5) Parking; vehicles designed for use mainly on public highways; e. The use of an "auto" for "business" purposes, other than an auto business, by an "insured". However, we do not provide coverage for liability arising out of the ownership or operation of an "auto" while it is being used as a public or livery conveyance. This Exclusion (A.4.e) does not apply to a share-theexpense car pool;

27 Ex. #2 DEFINITION 2. "Business" includes trade profession or occupation. However, it does not include farming. Ex. #3: DEFINITION "Business" includes trade, profession or occupation. EXCLUSION (k) Business activity or business property. Business property Does not include farms. This exclusion does not apply to: 1. Your or a family member's use of a private passenger auto; or 2. Activities which are ordinarily incident to non-business pursuits. 8. Watercraft a. Can vary considerably from company to company b. Most exclude non-owned watercraft over 26 feet in length c. Many cover watercraft only if insured in the underlying d. Some will cover watercraft of any size and horsepower for rented or borrowed watercraft e. Often follows the Homeowners Policy

28 Ex. #1: This exclusion does not apply to: 1. Watercraft with an inboard or inboard/outboard motor(s) of 50 horsepower or less, outboard motor(s) of 25 horsepower or less or to sailboats less than 26 feet long; or 2. All other watercraft up to 46 feet long, which you rent or borrow on a temporary, short-term basis. Ex. #2 EXCLUSION to the ownership, maintenance or use, including loading and unloading of watercraft 50 feet or more in overall length owned by an insured. This exclusion does not apply: a. if, on this policy's effective date, the watercraft is covered by underlying insurance; or b. if we are informed within 30 days after the watercraft is obtained and an additional premium is paid to us; or c. while the watercraft is stored on premises owned or leased to you. 9. Activities of Insureds as Directors & Officers a. An exception to the exclusion gives an insured coverage for Personal Injury (including Bodily Injury) and Property Damage for activities as a director or officer, but does not give true Directors and Officers Coverage b. Some Umbrellas will give back D&O coverage for directors, board members, trustees, or officers of non-profit corporations or associations

29 10. War, civil war, insurrection, rebellion, etc. 11. Nuclear and radioactive exposures 12. Discrimination 13. Communicable disease 14. Sexual molestation 15. Controlled substances Example 13. "Bodily injury" or "personal injury" arising out of: a. The transmission of a communicable disease by an "insured"; b. Sexual molestation, corporal punishment or physical or mental abuse; or c. The use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance(s) as defined by the Federal Food and Drug Law at 21 U.S.C.A. Sections 811 and 812. Controlled Substances include but are not limited to cocaine, LSD, marijuana and all narcotic drugs. However, this exclusion does not apply to the legitimate use of prescription drugs by a person following the orders of a licensed physician; 16. Intra family 17. Racing Autos? Recreational Vehicles? Watercraft? 18. Pollution Example 19. "Bodily injury", "personal injury" or "property damage" caused by an "occurrence" or offense involving the escape of fuel from a "fuel system";

30 19. Uninsured/Underinsured Motorists a. Many Umbrella policies totally exclude UM/UIM b. Some carriers will add the coverage for UM/UIM via endorsement c. Some carriers have a sub limit for UM/UIM d. This is an area with considerable litigation requiring careful analysis of of the Umbrella policy exclusions and policy provisions

31 Deja VU 1. What are the two primary functions of an Umbrella Policy? 2. What is underlying insurance and how does it relate to the Umbrella Policy? 3. What is a Self-Insured Retention, and how and when does it apply in an Umbrella claim? 4. What is the difference between a policy that pays on behalf of the insured and a policy that indemnifies the insured?

32 5. How would the following losses be paid? Umbrella Limit $1,000,000 SIR $ 500 Underlying requirements: Homeowners Liability $ 300,000 Auto Liability $250/$500/$100 a. Fred purchases a new car and carries limits of $250/$500/$100. While he and Wilma are driving to the movies, Fred hits a pedestrian who sues and is awarded $750,000. Auto Policy pays Umbrella pays Fred pays $ $ $ b. Due to Fred s busy schedule, he somehow missed a few payments on his auto policy and the policy was cancelled for non-payment. He hopped into his car to drive over to the insurance agency to make a payment and in his haste, he rear-ended another vehicle at a stop light, injuring the driver and totaling the vehicle. Fred was responsible for $500,000 in Bodily Injury and $20,000 Property Damage. Auto Policy pays Umbrella pays Fred pays $ $ $

33 c. While Fred was home recovering, he received a renewal notice for his Homeowners Policy. He decided to do a little comparison shopping over the internet. He ended up buying a policy which had a Personal Liability limit of $100,000. Subsequently, Fred s dog bit the paperboy and Fred was sued for $200,000. Homeowners Policy pays Umbrella pays Fred pays $ $ $ d. After a busy year in court, Fred and Wilma decide to get away and take a vacation in France. They rent a car to drive through the countryside and while looking at the gorgeous view, Fred loses control of the car and drives through the wall of a quaint little roadside café, causing $100,000 damage. Fred turns to Wilma and says, Well, it was certainly a good thing we got our auto policy reinstated before we left! Auto Policy pays Umbrella pays Fred pays $ $ $ e. Fred mistakenly thought his next door neighbor walked off with some of his silverware during a party at Fred s house one night. Fred began telling everyone he knew about it and it destroyed the neighbor s reputation. The neighbor sued Fred for slander and was awarded $1,000,000! (at the time, Fred had an unendorsed Homeowners Policy with a Personal Liability limit of $300,000) Homeowners Policy pays Umbrella pays Fred pays $ $ $