Time To Standardize Personal Umbrella Insurance Policies
February 2008
Personal umbrella policies have been around
for decades now—much like homeowners policies. But unlike homeowners policies,
the insurance industry has failed to agree on standardized umbrella products
so that agents and consumers alike know what they're buying.
by
Jack Hungelmann
Corporate
4 Insurance Agency, Inc.
Over the years, umbrella policies have become more and more restrictive and
more and more difficult to analyze and compare with the competition. In this
article I make a case for standardizing these policies. I appeal to the insurance
industry collaboratively or the National Association of Insurance Commissioners
(NAIC) legislatively to create universal standardized umbrella policies so that
both agents and consumers will know exactly what they are buying just by the
policy form number (much like homeowners policies).
As an insurance agent specializing in personal insurance and risk management
for individuals and small-business owners, part of my job is to help people
manage personal risk. I have been studying and comparing personal umbrella policies
for over 15 years now. I put the results into a spreadsheet so that I can more
easily compare the coverages and limitations of each of the policies available
to my clients. The most current
spreadsheet, updated February
2008, includes the new 2006 ISO form, the addition of General Casualty’s umbrella,
plus Progressive's decision to offer excess Uninsured and Underinsured Motorists
coverage.
If you look carefully, the most significant observation you will make is
that there's absolutely no consistency from one umbrella policy to another,
and that being able to compare the scope of coverage between umbrella policies
is certainly beyond the capability of any consumer and even beyond the capability
of most personal insurance agents. What this means is that consumers who buy
personal umbrella policies are largely buying a "pig in a poke." They have absolutely
no idea whether the policy they're buying is one of the better umbrella policies
or one of the worst. Personal umbrella policies, unlike auto and homeowners
policies for example, are largely unregulated in the scope of their coverage.
And, unlike auto and homeowners policies, the insurance industry has not really
created any universally adopted umbrella forms. Those that have been created
by ISO and AAIS (i.e. Western National) aren’t broad enough in scope of coverage
to be recommended.
There are three reasons the consumer buys an umbrella policy:
-
Additional liability coverage limits in excess of primary limits for
the kinds of claims covered by the personal lines policies (auto, home,
boat, etc.).
-
Excess defense coverage for those same claims because the primary policy
defense coverage only defends up to its policy limits. Suits for limits
in excess of primary limits will necessitate retaining one's own attorney
to defense the excess amount.
-
A broader scope of coverage than underlying policies offer—in essence,
covering many of the personal liability risks facing individuals that are
not covered under underlying insurance policies. I refer to this broader
coverage as "gap coverage."
Virtually all personal umbrella policies available today are extremely consistent
in one way—they pretty much satisfy objectives 1 and 2 above. They provide excess
liability coverage above the primary limits and provide excess defense coverage
for the same type of claims covered by the primary policy.
The one area where there's actually no consistency is the scope of the gap
coverage. Some umbrella policies provide virtually no broader coverage than
is covered by primary policies. These are essentially straight excess policies.
Most umbrella policies provide some gap coverage. There are only a small number
of umbrella policies that provide coverage for most of the common exposures
that consumers face not covered by their primary policies (the gaps). Vacation
exposures—like renting vehicles abroad (U.S. auto policies typically provide
coverage only within the United States and Canada) and liability for injuries
and property damage caused when renting boats, snowmobiles, all terrain vehicles,
etc.—are seldom covered by auto or homeowners policies. Or if, while renting
these vacation vehicles, they are seriously damaged, rental agreements often
hold the renters responsible for that damage. (Property in your custody is pretty
much universally excluded under primary policies.)
Contractual liability risks are another problem, such as when a father signs
a contract for his daughter's wedding reception, agreeing to indemnify the restaurant
for any injuries to guests. Or, if alcohol is served at the reception, agreeing
in the fine print of the rental agreement to defend and pay any judgment against
the restaurant arising out of an automobile accident injury caused by a driver
who had too much to drink at the reception. Consider also lawsuits for injuries
to a coworker caused while driving a company-furnished vehicle. The lawsuit
is neither covered by the company business auto policy nor the driver's personal
auto policy, but can be covered by certain umbrella policies with no underlying
insurance requirement.
Some consumers are kind enough to volunteer their services to nonprofit organizations,
serving on a board of directors. Lawsuits against board members for injuries
and property damage arising out of that service, such as injuries at the annual
organization fundraiser, are not covered by underlying policies but can be covered
by a good personal umbrella policy.
Homeowners policies often afford very little coverage for the regular business
activities of children, such as newspaper delivery, baby-sitting, lawn mowing,
etc. Umbrella policies can and often do pick up this exposure, at least up to
certain age.
Some people have in-ground heating oil storage tanks. If the tank springs
a leak, and the homeowner is sued for pollution cleanup expenses, they don't
have coverage anywhere for that liability. A few umbrella policies provide coverage
for that. Most do not.
Many states allow punitive damage awards. Although underlying policies often
do cover those awards up to the policy limits, many umbrella policies do not
provide excess coverage.
Standardizing Personal Umbrella Policies
The standardization of umbrella policies would help agents and consumers
know the level of coverage they're buying. I suggest creating three umbrella
forms in a format similar to that of homeowners insurance policies. They would
look something like the following.
-
UMB1 (Basic Form)—A straight excess policy that provides excess bodily
injury, property damage, and personal injury coverages, if covered by the
underlying insurance policies. One difference would be the addition of worldwide
coverage.
-
UMB2 (Broad Form)—A named-perils form covering liability for most of
the activities that clients tend to get exposed to on occasion that aren't
covered by a primary policy. This would include, for example, liability
coverage for bodily injury and property damage claims arising out of:
-
the rental or borrowing of nonowned automobiles, watercraft, and
recreational vehicles
-
damage caused to any of these nonowned vehicles/watercraft, subject
to only the self-insured retention/deductible
-
contractual liability when the client/renter agrees to indemnify
organizations in a contract when those organizations are sued as a result
of that client's negligence (i.e., renting facilities or restaurants
for wedding receptions, birthday parties, etc.)
-
sudden and accidental pollution liability (i.e., your underground
home heating oil storage tank springs a leak)
-
automatic incidental premises liability for home offices to the extent
covered by underlying insurance; services of directors and officers
for nonprofit organizations
-
UMB3 (Special Form)—The "all-risk" form covering any lawsuit other than
a few exclusions like intentional acts, transmissions of communicable diseases,
criminal activities, aircraft physical damage legal liability, or pollution
liability from seepage that occurs over a long period of time (i.e., is
not sudden and accidental). Nearly all other risks that appear on my comparison
spreadsheet would not be excluded, and thereby covered, such as:
-
mold liability
-
aircraft vicarious liability coverage
-
coverage for fellow employee lawsuits when operating a company furnished
car for regular use
-
business activities of minors, providing they don't earn more than
$5,000 per year, for example, and don't have any employees
-
excess employers liability coverage for injuries caused to domestic
workers, etc.
All three forms would include an option to add at least $1 million of excess
uninsured and underinsured motorist coverage.
Conclusion
Doing an analysis and comparison of umbrella forms is very difficult and
very time consuming, but until such time as the insurance industry develops
standardized umbrella forms or state insurance departments force them to do
so, insurance agents practicing risk management must perform these comparisons
on their own.
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