Comparing and Analyzing Stand-Alone Personal Umbrella Policies

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.

• PRMI's personal umbrella analysis in Reference Connect
• PRMI's personal umbrella analysis in IRMI Online

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.