Expert Commentary

Excess Follow Form versus Umbrella

December 2003

This month's insurance industry market practices column looks at excess insurance. Coverage terms and conditions, and negotiations, are addressed.

by Peter Polstein

Over the past few months, I have received a number of e-mails commenting on prior articles where I alluded to a preference for negotiating excess commercial liability and commercial automobile on the “tower theory” in lieu of umbrella placements. In some cases, the writer opposed my thought process, while others either agreed or, after a couple of e-mail discussions, came to agree.

While I must admit that a considerable number of placements in which I was negotiating broker ended up as umbrella programs, a fair number became simply follow form primary. So saying that, it is obviously a difficult process to negotiate umbrella, if you have no physical primary placement, other than a self-insured retention (SIR) with terms and conditions that are agreeable with the first layer of excess. Likewise, negotiating strict follow form excess required the agreement of not only the first layer excess, but in broad general terms potentially a significant number of the tower layers.

Coverage Terms and Conditions

Without creating an overly repetitive article, let's take a quick look at an area which I have previously discussed: coverage terms and conditions. On the assumption that the primary layer, irrespective of whether it is first dollar, excess of a deductible, or self-insured retention, contains the following (to name a few).

A very broad definition of the Named Insured, with coverage extensions in addition to the usual Occurrence and Aggregate wording such as:

  • Products Liability and Completed Operations, including the potential of a prior retro date, including Product Recall
  • Pollution Liability on an Occurrence basis, which might include a prior retro date
  • Fellow Employee Exclusion
  • Amend Contractual to provide coverage for P.I. on a blanket basis for “All contracts and agreements”
  • Waiver of Subrogation
  • Employers Legal Liability
  • Employment Practices Legal Liability
  • Unintentional E&O
  • Knowledge of, and Notice of Accident
  • Professional Advice and Consultation wording
  • Liquor Liability
  • World Wide Coverage
  • Incidental Medical Malpractice
  • Broad Form Property Damage
  • Non-Owned Water Craft, extended to say 75 feet
  • Automatic Coverage for all newly acquired entities, subject to report within say 90 days
  • Cancellation extended to a minimum of 90 days, except for nonpayment of premium

Negotiating Umbrella Coverage

With this in mind, why would you negotiate cover, irrespective of utilizing the usual wording that “this coverage shall be no less broad than primary,” when nearly all umbrellas have distinctly different wording, definitions, not to mention defense covers which “Pay on Behalf of” while others “Indemnify”? Another consideration is the need with umbrella placements to advise your insured, of each and every differential by layer, or you will be looking at potential E&O situations.

As we all know, umbrella liability coverage no longer provides the “broad covers” of two decades or more ago, when the form covered almost anything excess of the $10,000 SIR. Further, in a great many cases, follow form excess can be negotiated with the insurer taking their net position, without having the facultative marketplace pricing the layer as they do on many occasions with umbrella. The same position, negotiating follow form, can be utilized in the placement of commercial automobile.

I suppose I will be hearing additional commentary on this subject, but if you really think about it, follow form excess makes a great deal of sense. Obviously, this method of negotiating coverage is not for all placements. Smaller risks, where the premium is moderate, and limits are simply a primary and one or two layers of excess may well not be the answer. However, where there are substantial premiums, with a need for significant limits, follow form works.

As we approach the end of the year, let me wish all of you, a happy and healthy New Year, and enjoyment throughout the holiday season.

—Peter Polstein

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author’s employer or IRMI. This article does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.