Is an Umbrella Just a Bumbershoot?

September 2007

This summer, the Supreme Court in Massachusetts ruled for Underwriters at Lloyd's, that they were not required to pay a significant liability claim, simply because of the fact that the primary put their limits up and paid the claim. This was despite the fact that the wording found in the second layer umbrella included the traditional language of following form etc.

by Peter M. Polstein

In this case, the primary underwriter, a member of the CNA group, had extensively maintained contact with all interested underwriters such that they were apprised of each and every move made by the primary insurer, including its counsel. In this case, it appears the so-called umbrella was worth nothing more than catching rain drops.

Back in December 2003, IRMI published one of my articles (Excess Follow Form versus Umbrella) that specifically took to task the use of umbrella contracts versus straight follow form wording of a very broad primary contract. If this decision, which may be upheld despite the plaintiff's right to appeal, doesn't provide a reason to rethink excess placements, then I don't know what will.

The marketplace—especially given its proclivity for underwriting just about anything that's insurable—certainly should not be opposed to legitimate, very broad primary language which would provide a risk with all of the traditional, and perhaps nontraditional, bells and whistles needed to close its potential coverage gaps. Obviously, the trick in placing the towers of excess liability would require language which would make it an absolute: that the excess underwriters agree with both coverage and settlement by the primary.

Somewhat sidesaddle to this is the need to very carefully investigate who the excess underwriters are, especially those who have been attempting to reinsure not only their cat business, but pieces of excess, which is more traditional in the capital marketplace. The continued use of the capital marketplace, which seems to have an insatiable appetite for both traditional and exotic risk, will (under the right circumstances) return to haunt those who believe that they have relinquished risk. You may think this being over the edge, but just contemplate how fractured our industry has become.

Interestingly, the Sunday, August 26, 2007, New York Times has an extensive article on this very subject, relative to the capital markets appetite for cat business. The writer expresses, in somewhat glowing terms, the ability of the market to judge and model risk. I really can't think of anything further from the truth when you consider the last 10 years of modeling, which hasn't been right once.

It is apparent, from both the Massachusetts decision, and the one in Pennsylvania in late 2006 which redefined an accident/occurrence, as well as some of the southern courts that have basically rewritten the language and intent of what is becoming a growing variety of insurance risk, that total clarity written within the policy language may yet preclude the judiciary's invasion of our industry.

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