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
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