Since uninsured lawsuits can be financially devastating to clients, one of the ways I practice personal risk management with clients is to become familiar with available personal umbrella policies and how well those policies cover liability risks not otherwise insured by underlying liability policies. My goal was to have at my fingertips a tool to quickly and accurately pick an umbrella policy that covers all, or at least the vast majority, of the uninsured liability exposures in my client's underlying insurance policies. After analyzing various umbrella forms and mandatory endorsements, I created an umbrella comparison form that shows what each policy covers and does not cover. This form shows umbrella policies used in Minnesota and was last updated in November 2006 to reflect analysis of Progressive's new personal umbrella policy as well as the significantly revised Harleysville personal umbrella policy.
This form was developed over several years as I identified the different types of risks that were not then covered by primary coverage but in most cases could be covered by umbrella policies. Here are some examples of clients' liability risks I've encountered:
Chartering 30-foot sailboats to sail with friends on Lake Superior
Serving on the board of the Eden Prairie Minnesota Hockey Association
Serving on a church board that oversees the Fall Festival with gambling and liquor exposures
Renting a restaurant to host his daughter's wedding party, which will involve signing a contract to indemnify the restaurant for any lawsuits arising out of the event
Driving a company-furnished car with no coverage for injuries to coworkers
Transferring the ownership of a home to a trust
I would then take these uninsured exposures and add them to my list of risks potentially covered by an umbrella policy. It's a never-ending process.
Examining My Umbrella Comparison Form
The first part of the Comparison Form compares underwriting issues. It lists a form number and edition date so I know that, when I'm working with a new client, the umbrella policy form I'm referring to is the one still in use by the specific insurer. I list the A.M. Best rating because I believe as a rule of thumb that the minimum Best rating for an umbrella policy of $1 million or $2 million is A; the minimum Best rating for umbrella policies of $3 million or more should be A+ or A++. Also, on the Underwriting Comparison part of the form, the underlying insurance liability limits required for each umbrella are listed as a quick reference. I also include which underlying policies are required to be placed with each insurance company in order to obtain the umbrella policy for that particular company. The maximum limit available with each company is noted as well as its binding authority. Finally, the amount of the self-insured retention/deductible for those claims covered by the umbrella but not covered by underlying insurance is shown.
Since personal umbrella policies cover virtually all personal lawsuits not otherwise excluded for bodily injury or property damage, as well as many types of personal injury claims, they are, in effect, a type of "all risks" contract where coverage is found not in a list of covered losses, but rather in the definitions and/or exclusions. Like a special perils property form, generally "if it ain't excluded, it's covered."
Using the Comparison Form to Evaluate an Umbrella Policy
Once you have built your comparison form criteria, you can use those criteria to evaluate the quality of each of your umbrella policies. For example, one insurer recently introduced a freestanding personal umbrella policy. Since not many personal insurance markets offer an unsupported personal umbrella policy, it would be a real asset if the policy coverages were strong. Using my form, here are some things I discovered about the policy's coverage:
Its minimum umbrella limit is $500,000 rather than $1 million.
Its maximum is $2 million.
It has worldwide liability coverage, but only for suits that are brought in the United States or Canada (not likely to happen in a car accident on vacation traveling in Europe). It's the only company I represent that has that limitation.
No aircraft coverage of any kind, even if there is underlying insurance.
No coverage for damage caused to rented vehicles, boats, rental dwellings (such as vacation condominiums), rented snowmobiles, and recreational vehicles, i.e., no relief from the underlying policies' exclusion for damage to property in the insured's "care, custody or control." ·
No coverage for driving nonowned vehicles if there is no underlying personal automobile policy, i.e., when the only vehicle is a company car or when the insured has no owned vehicles but occasionally uses nonowned vehicles.
No coverage for vicarious liability for other drivers' negligence. An example of this is when your elderly client with suable assets but no personally owned vehicle receives rides from well-intentioned friends and neighbors to the doctor's office. The driver causes an accident, and your client gets sued vicariously because the car was on the road for the sole benefit of your client.
There is no coverage for motorcycle guest passenger liability (compared to two other policies that also do not include that coverage).
There is no coverage for premises injuries related to home business activities unless covered by underlying insurance (requires modification of the homeowners basic coverage). There is coverage for children's business activities if a minor and limited to part-time babysitting, caddying, lawn care, etc.
No automobile liability coverage for business deliveries, like delivering pizza or newspapers (major exclusion, as the standard personal auto policy generally excludes only things like taxi cab services, a.k.a. public or livery conveyances). This is a very worrisome exclusion.
There is apparently liability coverage for injuries to domestic employees if workers compensation policies are neither required nor provided.
No coverage exists for child care activities except occasional part-time home care (i.e., babysitting) if covered by underlying insurance.
There is coverage for bodily injury and property damage liability for service on a nonprofit board.
There is no coverage for sailboat racing, even though such racing is covered by most underlying homeowners insurance policies. There is no coverage for any vehicle racing—not even coverage for that done in an amusement park, for example.
There is no coverage for newly acquired motor vehicles, recreational vehicles, or watercraft after 30 days (this is a serious gap and a major agent errors and omissions exposure because in order to have coverage, the agent will need to notify this umbrella insurer within 30 days as to the specifics of any of these newly acquired instruments. Very unlikely with a freestanding umbrella policy.).
There is no assumed contractual liability coverage—not even for incidental residential contractual assumptions, such as a contractual obligation to defend and indemnify a landlord for your negligence—not even if the contractual liability assumption is covered by underlying policies.
There is no pollution coverage of any kind—not even sudden and accidental spills or heating oil storage tank leaks.
There is no coverage for punitive damage awards—not even in states that allow those awards and not even if such awards are covered by underlying policies.
There is no coverage for mold liability.
No available excess uninsured/underinsured motorist coverage exists.
In summary, as a result of going through this exercise of analyzing this personal umbrella policy, I would not recommend this umbrella policy in its present form to any of my customers. I would, however, consider using the policy if the coverage pitfalls of the current form were removed, especially considering the insurer's strong A.M. Best financial rating. I cannot stress the importance of keeping up with insurer policy changes which necessitate another pass through your umbrella comparison form.
What this Comparative Analysis Has Taught Me
I discovered that there are huge differences in scope of coverage of umbrella policies, as you can see from the chart. In at least one instance, the umbrella is more restrictive than a straight excess policy. Most insurers that offer subpar policies often are unaware how restrictive their policies are. I know of no umbrella policies that would receive a perfect score of 10.
I have learned that I need to first identify with my clients what their noninsured liability exposures are under their underlying policies, then check my comparison table to see which companies offer those missing coverages under their umbrella. To get my clients the best umbrella for their needs, I sometimes need to choose the umbrella first and then place their underlying policies there too if required to get that umbrella.
Just how serious is an agent's obligation to know the strengths or weaknesses of the umbrella markets? I was just hired as a consultant on a case where an insurance agent is being sued for major injuries that were not covered by an umbrella policy that he had placed on his client that could have been covered in at least one other market. It is very serious indeed.
Disclaimer: Please note that I share this form merely as an illustration of how to create a tool for your own use. These are my personal interpretations and are not necessarily confirmed by the respective insurers. Also, the forms and mandatory state endorsements vary by state, so what's covered in Minnesota might not be covered in other states. Be sure to verify with the insurers the accuracy of your own interpretations by running the underwriting criteria by the Underwriting Departments and the coverage interpretations by the Claims Departments—ideally the claims manager.
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, and other articles written on various issues.
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