The personal umbrella liability policy provides high limits of liability to
protect an insured against catastrophic third-party liability claims. This
policy covers bodily injury, property damage, and personal injury, which
includes offenses such as libel, slander, false arrest, invasion of privacy,
and others.
The personal umbrella policy grants liability coverage that stacks on top of
the primary liability coverage provided by the insured's homeowners,
personal auto, watercraft, motor home, and any other scheduled underlying
liability policies. The umbrella policy also fills some gaps in coverage over a
specified deductible (often called a retained limit) in the underlying
policy.
A huge liability claim can strike an insured at any time in a variety of
ways. And no one can really predict how much a jury may award an injured
person. This discussion will address many examples of large personal liability
claims the personal umbrella policy would likely cover. It will also identify
who should especially procure such coverage (those with higher-than-normal
personal liability loss exposures). Lastly, it will provide a comparison of
nine different personal umbrella forms.
Loss Scenarios
The following are examples of large liability claims that can impose serious
financial hardship on an insured and that may be covered under a personal
umbrella policy.
- The named insured is driving his auto home from a club with his best
friend. He is driving under the influence of alcohol and flips his car,
killing his friend.
- The named insured's teenage resident son takes the family speedboat
out and negligently collides with a high-priced yacht.
- The named insured is a director for her condominium association. The
board has a playground installed with a faulty swing, and a fellow condo
association member's child is injured.
- The named insured employs a nanny, and she is seriously injured in the
insured's home.
- The named insured owns rental property, and a tenant sues for wrongful
eviction and unlawful entry.
- A guest at the named insured's two-story home falls down the stairs
due to a faulty railing and is paralyzed as a result.
- The named insured and his wife are killed in their auto due to the
negligence of an uninsured motorist. In certain states, insurers may be
required to provide uninsured motorists (UM) coverage under the personal auto
policy and the personal umbrella policy.
- The named insured, in her volunteer role as the editor of a homeowners
association newsletter, libels a fellow homeowner and is sued for a large sum
of money.
- The named insured and her neighbor take turns watching each other's
children, and the insured loses track of the neighbor's toddler, who
drowns in the insured's backyard pool.
- The named insured is a member of a board of directors for a nonprofit
organization for which she receives no compensation. She is sued in
connection with a business decision made at one of the quarterly
meetings.
- The named insured rents a car in Germany and causes a serious automobile
accident; the underlying automobile policy does not respond due to
territorial restrictions.
Who Should Procure a Personal Umbrella Policy?
Personal umbrella policies are growing in popularity. In the past, only
wealthy individuals and families purchased this coverage. Today, middle-income
families also may purchase this policy for protection in our society's
increasingly litigious climate and the proliferation of nuclear verdicts. As
the tendency to sue for damages rises and awards granted by juries grow, the
personal umbrella policy is increasingly seen as an insurance necessity rather
than a luxury.
Some insurance agents and financial planners recommend personal umbrella
policies for people if they have certain characteristics or engage in certain
activities as follows.
- They have total assets greater than underlying liability limits.
- They are financially responsible for the actions of a young,
inexperienced driver.
- They perform extensive volunteer work for nonprofit organizations.
- They live in a high-profile neighborhood.
- They have a high-profile career or high income—both targeted
factors.
- They frequently host guests on the property.
- They charge hunters to hunt on their extensive tracts of rural land.
- Their residence includes a swimming pool and/or a trampoline.
- They own waterfront property, a farm, or a ranch.
- They own watercraft, all-terrain vehicles, or aircraft.
- They own one or more rental properties.
- They engage in extensive international travel for pleasure.
- They employ several full-time domestic staff members.
- They own one or more dogs or exotic animals.
- They own firearms.
In addition, an argument can be made that even lower-income individuals
should secure a personal umbrella policy, especially since it is relatively
inexpensive. For example, a person who lives in an apartment negligently causes
a fire to start, burning down the complex. In that event, a $1 million personal
umbrella policy might be invaluable.
Personal Umbrella Comparisons
Note that personal umbrella policies have not been standardized to the
extent of homeowners and personal auto policies. Many insurers have drafted
their own forms. Nine personal umbrella/excess forms are reviewed in this
comparison sampling in this article. For a complete comparison, see the
exhaustive analysis in IRMI's Personal
Risk Management and Insurance (PRMI), completed in April
2021. This service is available by subscription.
The nine examined forms include the following two insurance bureau forms and
seven insurer forms.
- Allstate Indemnity Company's Personal Umbrella Policy, AS 463,
01-2021
- American Association of Insurance Services' (AAIS) Personal Umbrella
Liability Coverage, PU 00 01, 2011
- Chubb Group's Masterpiece Excess Liability Coverage, 54000035,
07-2020
- Farmers Insurance Exchange's Special Personal Umbrella
Policy, 56–5490, 3rd Edition, 9–2017
- Insurance Services Office, Inc.'s (ISO), Personal Umbrella Liability
Policy, DL 98 01, 02–2015
- Markel Insurance Company Personal Umbrella Liability Policy, MUP 0001-KS,
05-2019
- Nationwide Mutual Insurance Company's Personal Excess Liability
Policy, U1400, 08-2020
- Safeco Insurance Company's Your Personal Umbrella Policy, P–967/RIEP,
06–2020
- State Farm's Personal Liability Umbrella Policy, FP-7950.2, 09-2015
2008
The insurer forms chosen for this analysis are from some of the highest
volume writers of personal lines policies in the United States. These leading
companies include direct writers and independent insurers. Unlike other
personal lines forms, the insurer forms are not necessarily patterned after the
ISO form since it was not implemented until 1998. Note that most umbrella
insurers require that they have one or more underlying policies to offer their
personal umbrella policy to a customer.
Insuring Agreement
Personal umbrella policies typically include an indemnification component
and a defense component. The defense component often differs among forms more
than the indemnification component. For example, unlike other forms, the State
Farm form specifies that its defense obligation terminates not only upon
payment of an actual judgment or settlement but also when the insurer tenders
the limits or deposits the limits into the court. This action can have a
significant financial impact on the insured.
Assume the insured is negligent, and this negligence results in the death of
a guest. Under the State Farm policy, the insurer can tender the limits to the
insured or deposit the limits into the court and then withdraw from the
defense, leaving the insured to pay for their own defense in the lawsuit
(although a court might balk at this practice). The other personal umbrella
forms do not have this restrictive provision.
Some forms provide more expansive defense coverage. For example, the ISO and
Markel forms agree to pay any expenses for the insured's defense in any
country where the umbrella insurer is precluded by law from defending an
insured—if the primary insurer has given its written consent. The Nationwide
Insurance form allows for reimbursement of up to $10,000 for expenses incurred
by an insured for a law firm of their choosing to review and consult on the
defense, so long as Nationwide is already providing a defense.
Definitions
Most personal umbrella policies have a separate definitions section.
However, the number of defined terms can vary. The Allstate form has 11
definitions, while the Nationwide form includes 32 definitions. A few forms do
not have a definitions section per se. Instead, definitions are provided in the
section in which the term is used.
For example, the Chubb Masterpiece form defines "underlying
insurance" within the payment-for-a-loss section. It defines "follow
form" in the excess liability coverage section. This approach has
advantages and disadvantages. One chief advantage is that it is easier to find
the term if it is in the same section as the coverage provision. However, if
this term is used in other sections, it may be difficult to locate. For
example, in the Chubb form, there are references to "damages" in the
exclusions section; however, this definition is found in the excess liability
coverage section.
The following illustrates how certain definitions can vary by form.
"Business" Definition. Nearly all personal
umbrella policies exclude business-related activities of the insured. Some
forms define the term succinctly, and others define it in an expansive manner
by adding specificity to address as many situations as possible. The Farmers
form stipulates that it includes any "part-time or full-time trade,
profession or occupation." Under this definition, any side jobs would
likely qualify as a business (thus restricting coverage). The AAIS form is even
more specific. It stipulates what constitutes business use and what does
not constitute business use. The Allstate form does not
consider any occasional or part-time work of an insured person under age 21 to
be a business exposure (more expansive coverage).
"Insured" Definition. An "insured" is a
commonly defined term in personal lines policies. Some forms, such as the AAIS
form, simplify this process by stipulating an insured means all persons or
entities covered by "underlying insurance," with an exception
pertaining to insureds under certain motorized vehicles or watercraft-related
circumstances.
Other forms provide more specificity. For example, the Safeco form
stipulates the parties who are not insureds, such as any person while employed
or engaged in the business of selling, maintaining, storing, parking, or
mooring vehicles or watercraft. Other forms use different terminology. For
example, the Chubb form does not define "insured." Instead, it uses
the term "covered person," which is like the ISO "insured"
definition, except with no reference to other person's or
organization's care or custody of the insured's animals. Allstate uses
the term "insured person."
The Farmers form includes within its "insured" definition
"any trustee of your estate or living trust while acting within the scope
of their duties as such" as long as underlying insurance is in force for
this exposure (broader coverage). The Markel form defines a "covered
person" to include a trust if the policy is issued in the name of a trust
and includes coverage for trustees.
Exclusions
There is great variety among the exclusions section for personal umbrella
policies. The "Personal Umbrella/Excess Exclusions Comparison Chart"
illustrates some of the common exclusions contained in three personal umbrella
forms reviewed. Note that exclusionary language is found not only in the
exclusions section but also in the definitions and coverages sections.
Sometimes, related exclusions are merged into one; other forms, however, keep
them separate. In addition, many of these exclusions can vary by state.
PERSONAL UMBRELLA/EXCESS EXCLUSIONS
COMPARISON CHART
|
Policy Exclusion
|
AAIS
|
Markel
|
Allstate
|
Aircraft
|
Exception pertains to bodily injury to a person while performing
duties as a domestic employee.
|
|
Exception pertains to the incidental use of an aircraft by the named
insured or an insured person as a passenger.
|
Business
|
Exceptions pertain to loss from (a) occasional rental of insured
premises, (b) use of a motorized vehicle if covered by underlying
insurance, (c) certain business activities of insureds under age 21,
and (d) certain civic or public activities performed by an insured.
|
|
Exception for volunteer civic service without pay for a nonprofit
that is not part of the insured's occupation or profession
|
Care, custody, or control
|
|
|
Applies to loss to property owned by others an insured agrees to
insure or be responsible
|
Communicable disease
|
|
|
Applies only via sexual contact
|
Contractual liability
|
Exception pertains to losses if covered by an underlying policy.
|
Applies to loss arising out of any contracting or property
development operations by or on behalf of an insured
|
|
Directors and officers
|
Exception pertains to loss from nonprofit organizations for which
the insured is not compensated (reimbursement for expenses is not
considered compensation).
|
Exception for loss from nonprofit for which the insured is not
compensated.
|
|
Discrimination
|
No specific discrimination exclusion per se; however, it includes a
broader exclusion pertaining to any act committed by an insured that
would violate the rights of another.
|
|
Applies to illegal discrimination
|
Conditions
There is a wide array of personal umbrella conditions commonly found in the
forms. These provisions spell out the mechanics of coverage and the duties the
insurer and the named insured owe each other. The following is a brief
discussion of two of the common conditions found in the various forms.
Concealment or Fraud. Most personal umbrella forms carry
this condition, which states that coverage is void to all insureds if any
insured has intentionally concealed or misrepresented a material fact. A
"fact material to risk" is "a fact that may increase the risk
and that, if disclosed, might induce the insurer either to decline to insure or
to require a higher premium" (Black's Law Dictionary, 11th
ed.). Some forms (e.g., Nationwide) specify that the insurer may deny coverage
if the named insured or any other insured has engaged in misrepresentation,
concealment, or omission of any material fact or engaged in fraudulent conduct
(narrow coverage). Conversely, other forms (e.g., Farmers) are not so strict
and only deny coverage for "any insured who purposely conceals or
misrepresents any fact or circumstances material to issuance, continuance or
renewal of this insurance" (broader coverage). Thus, coverage could apply
to innocent insureds. Be aware that state statutes sometimes necessitate the
amendment of this provision.
Note that insurers are reluctant to deny losses under the concealment or
fraud clause unless the evidence against the insured is very convincing. It is
interesting that, given the large exposure at risk for even a minimum limits
personal umbrella form, not all forms include this specific condition. This may
be partly the case since several state statutes specifically address insurance
fraud that allow an insurer to void coverage even without supporting policy
language.
Policy Period/Policy Territory. Most forms include a policy
period provision. The State Farm policy stipulates that this policy applies
only to a "loss which first occurs during the policy period shown on the
declarations page.…" Some policies also include provisions concerning the
policy territory. The ISO form specifies that coverage applies to "an
'occurrence' or offense which takes place anywhere in the world."
In contrast, the Markel form provides worldwide coverage, but the territory is
restricted for uninsured and underinsured motorist (UM/UIM) coverage to the
policy territory defined in the UM/UIM coverage of the primary auto insurer
listed in the umbrella schedule.
Conclusion
The personal umbrella policy is coverage that many personal lines clients
overlook, particularly since it is not required by law. Yet this policy can
forestall the possibility of financial ruin due to an unintentional accident or
event. At the same time, agents and brokers should communicate to clients and
prospects that a personal umbrella policy is not a commodity; there are many
differences in the forms. So, when providing your clients (particularly ones
with a high suability factor) with broad overall liability coverage from all
sources, a comparison of the personal umbrella forms is in order.