Reducing Umbrella Risks by Having One Agent
March 2010
From a risk management perspective, consumers
are better off having all their personal liability insurance coverage with the
same company. If that is not possible, then consumers should at least have all
their liability insurance with the same agent.
by
Jack Hungelmann
Corporate
4 Insurance Agency, Inc.
One big advantage of having all your coverage with the same insurance company
is that the risk of having the wrong underlying limits, especially after an
insurer has just raised their required underlying limits, is greatly reduced
or even eliminated. Here's why. While the umbrella contract makes it the insured's
responsibility to maintain the proper underlying limits, if the insurer has
both the umbrella and all underlying policies, it can automatically raise the
underlying limits with just an explanatory letter to the insured. This strengthens
the insured's position in the event of a lawsuit. The insurer would be hard
pressed to try to hold the insured responsible for the financial difference
between the original and new underlying limits when it had the power to rectify
the situation. If making the change automatically is not feasible or legal,
the insurer would at least have an obligation to send a cancellation notice
on the umbrella if the insured did not accept the underlying limits change.
Coverage Congruency
A second advantage of having all insurance with the same insurer is congruency
of coverage. There is a much lower chance of an umbrella policy not covering
what a primary policy covers. As an example, consider a family with working
children and the risk that liability arising from that work would be excluded
under the homeowners policy's definition of "business." That definition often
has an exception for children of the insured who babysit, deliver newspapers,
provide lawn care, etc. There are usually three requirements that must be met
as part of the exception:
- The children have to be under a certain age (i.e., 23).
- They have to earn less than a specified amount per year (i.e., $2,000).
- They cannot have any employees.
It's imperative that the three requirements that allow coverage for children's
business activities in the umbrella policy are no less broad in scope than the
same requirements for the underlying homeowners policy, or there could be no
excess coverage. With all policies with the same insurer, this type of umbrella
coverage gap is much less likely to occur. A company's umbrella coverage should
never be less broad than the same company's underlying policies (i.e., "following
form" coverage at a minimum).
Notice of Change Requirements
A third advantage of having underlying and umbrella policies with the same
insurer is that notification of any new primary exposures (e.g., a secondary
residence, a boat, or an incidental office) would also be considered notification
to that company's umbrella department. That would not be the case if the affected
underlying policy exposure and the umbrella policy were not with the same company.
Clearly, having the umbrella policy with the same insurer as the underlying
policy greatly improves the chances that a large liability claim will be covered
by both policies. This is good for both the customer and the agent. It's good
for the customer, because he has the coverage he needs. And it's good for the
agent because his errors and omissions (E&O) exposure is reduced significantly.
Using One Agent but Different Insurers
If having all underlying policies and the umbrella policy with the same insurer
is not feasible, it is imperative that they at least all be handled by the same
agent. When there are increases in the umbrella insurer's underlying insurance
requirements or new exposures to be added to the underlying policies, the agent,
armed with the awareness of these changes, can adjust the customer's underlying
policy liability limits or endorse the umbrella to cover the new exposures.
Having different insurers for the umbrella and the underlying policy transfers
the responsibility for making these types of changes from the insured to the
agent. It correspondingly increases the agent's E&O risk.
In addition, when using different insurers, there will certainly be incongruence
of coverage. Definitions won't match up, and neither will the exclusions. If
there is a lawsuit that is covered by the underlying policy but not by the umbrella,
there will be hell to pay! (And it won't be the insured who pays.) The best
way an agent can protect himself from this incongruence happening is to always
write the umbrella policy with an insurance company whose coverages are almost
universally broader than the standard Insurance Services Office, Inc. (ISO),
auto or homeowners policy. For example, when I have to use different insurers
for the umbrella and underlying policies, I use Auto-Owners for the umbrella,
whenever possible. I learned this because of research I conducted comparing
umbrella insurers. See Creating and Using
a Personal Umbrella Comparison Form. Auto-Owners will write a freestanding
umbrella policy but, without the underlying auto insurance, limits coverage
for cars to "following form" only. Without the underlying homeowners insurance,
it takes away nonowned watercraft liability coverage.
Using Different Agents for Underlying and Umbrella Policies
The situation that is toxic to agents, customers, and companies alike is
where the agent who handles the underlying policies is different from the agent
handling the umbrella policy for the same customer. When an umbrella insurer
raises its underlying limit requirements, it is up to the insured to notify
all agents to make the change to whichever policies are affected. And, when
the customer has a new exposure and requests coverage be added to her auto or
homeowners policy or other underlying policy, it is that customer's job solely
to notify the umbrella policy's agent.
Leaving these important responsibilities in the hands of an insured who is
not an insurance expert is just too risky, and really unnecessary, for both
the consumer or the agent. This is why I will not represent a customer who wants
just an umbrella policy through me. I would not be doing either of us a favor.
Summary
Whenever possible, it's important to keep underlying liability insurance
with the same insurer who handles the umbrella policy. The further you get away
from that model, the more likely the risk of something falling through the cracks,
and the greater the responsibility of coordinating underlying and umbrella coverages
as it shifts from the insurer to the agent and ultimately to the customer.
Jack Hungelmann's book Insurance for Dummies,
contains much of this information and is available at your favorite bookstore
or
online. For more information on his risk management and insurance business,
go to www.JackHungelmann.com
where you can check out sample newsletters, brochures, other articles written
on various issues. For background information, see Mr. Hungelmann's
biography.
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