Umbrella liability insurance has been an important component of catastrophe
protection for most organizations during the entire career of nearly every working
person today. Specialized insurance markets for umbrella coverage now can provide
$100 million or more of catastrophe limits in a single policy. Yet, umbrellas
are a relatively new form of insurance. Only a few years ago, they typically
had limits from $1 million to $5 million.
Your career must have started prior to 1949 if you have worked during a time
when there were no umbrella policies. Umbrellas did not become widely known
and sold until the 1960s, and many businesses did not purchase their first umbrella
policy until the 1970s.
Have you ever wondered how and when umbrella policies started? Or wondered
how umbrella liability coverage evolved into its current form? Who created the
first umbrella policy? And what was the London insurance market's role? No one
has ever published the full story-or at least a version that is verifiable.
Even in the late 1950s, when the originators of umbrella coverage were still
working, no firm or individuals took credit for their originality. As a result,
some articles and other publications have reported the facts incorrectly in
the past.
This article (which will be in two parts) will provide a general overview
of the origins of liability coverage that ultimately evolved into the umbrella
liability policies of today. It will set the stage for future articles describing
important details about umbrella coverage that continue to have an impact on
insurance buyers and insurers, and on policy terms that continue to be interpreted
in U.S. litigation.
My purpose in describing the origins of umbrellas is to provide reference
points that will allow you to understand how (if not why) changes in coverage
occurred over time. It also is interesting to know who the pioneers were in
our industry, and where they worked.
As this story unfolds, remember that important facts are still hidden from
view. New information may still be discovered through further research. Documents
held by insurers, special library collections, and the estates of underwriters
and brokers, both in the United States and in London, may continue to reveal
nuggets of information that have been long forgotten because the principal actors
can no longer tell us what happened. Until funds become available to perform
research into the available documents, many details will remain unknown.
Many documents with great historical value are not available to researchers
or the public because their owners fear litigation that may still arise from
unknown future claims. The litigation environment in the United States thus
has deprived insurance historians of important facts related to the development
of liability insurance, both in the United States and elsewhere in the world.
In the general statements that follow, sources of information have been omitted
for readability. In a scholarly treatment of this subject, this article would
be heavily footnoted.
Origins of Liability Insurance
Liability insurance is an insurance industry response to the need for protection
that arose only after changes in English and American common law that began
during the nineteenth century. After passage of an employers liability law in
Germany in 1871, in 1880 the English Parliament passed the Employers' Liability
Law. These were the first acts permitting injured workers to be compensated
without having to sue to prove that the employer's negligence caused their injury.
This was followed by the passage of similar laws in the United States, starting
in the 1880s, leading up to the first workers compensation laws in the early
twentieth century. Employers liability (EL) insurance thus was the first distinct
liability hazard coverage.
In 1886 the Endicott & Macomber Agency in Boston, became the U.S. manager
and general agents for Employers Liability Assurance Corporation, Ltd., an English
company that had entered the accident and employers liability insurance business
after passage of the 1880 English law. One of the firm's principals, George
Monroe Endicott, had established a relationship and secured the appointment
with the company's general manager in London, Samuel Appleton, earlier in 1886.
The firm subsequently issued the first liability policy in the United States,
effective November 1, 1886, to The Gender and Paeschke Manufacturing Company
of Milwaukee, Wisconsin. The first EL policy issued in New York was effected
through the Dwight & Hilles agency, by Edmund Dwight, who was the company's
general agent for New York State. It was effective December 31, 1886, for Otis
Brothers & Co. (later the Otis Elevator Company).
In 1887 different sources report that between $150,000 and $200,000 in "employers
liability" premiums were written in the United States. The year 1887 was the
year in which Lloyd's underwriter Cuthbert Heath introduced nonmarine insurance
business to Lloyd's of London, an event that would come to offer great opportunities
for U.S. organizations seeking coverage arranged specifically to suit their
needs, instead of the fragmented approach offered by U.S. insurers in the early
twentieth century.
For the next 30 years, all liability policies often were called "employers
liability." Liability coverages also were sometimes referred to as "accident
insurance," according to the labels used at that time to classify different
types of insurance coverage insurers wrote. In addition to policies insuring
against claims by employees, by 1915 other forms of liability insurance included
the following.
- Manufacturers employers liability
- Manufacturers public liability
- Contractors public liability
- General liability (later renamed owners, landlords, and tenants liability)
- Theater liability
- Elevator liability
- Owners contingent and contractors contingent
- Vessels employers and public liability
- Automobile liability
- Teams liability
- Druggists liability
- Physicians and surgeons liability
- Hospital liability
The pattern that evolved was to create a new liability insuring form for
each specific hazard or risk type that emerged with a need for coverage. In
part, this was caused by an emerging American system of insurance regulation
that licensed insurers to write only specific classes of insurance which were
narrowly defined.
In addition to the forms listed above, by the 1920s there were specific "standard"
policy forms for aviation liability, products and completed operations liability,
miscellaneous professional (errors and omissions) liability, and excess liability.
Directors and officers liability forms appeared in the 1930s, although this
coverage had been preceded by the use of "director's liability bonds" from Lloyd's
before 1920. Comprehensive general liability, which was discussed thoroughly
and developed during the late 1930s, was introduced nationwide in 1941. The
earliest "standard" umbrella forms appeared during the 1950s. Environmental
impairment liability forms were introduced in the 1970s.
Throughout the history of liability insurance, progressive insurance professionals
have developed such special coverage forms whenever they identified a need that
existing forms did not meet.
Early Policy Limits
In the 1880s, the early EL policies had limits of $1,500 per injured worker
and $5,000 for injuries to all persons injured in a single accident (although
the first policy was written for $1,500/$3,750). By about 1910, standard ("basic")
limits on liability policies were set at $5,000 per person and $10,000 for all
persons injured in a single accident. Liability policies only covered bodily
injury. There is no mention in early references to coverage for property damage
liability, until late in the decade before the 1920s, but the basic property
damage (PD) limit was eventually established as $5,000.
The need for higher limits of liability helped to create additional liability
insurance markets. In the 1920s, most insurers were very conservative about
providing liability limits. U.S. excess liability markets emerged to meet the
need, along with excess of loss reinsurance for primary insurance policies,
if the primary insurer was willing to provide higher limits. However, the U.S.
approach still relied on having separate, "schedule" policies for each hazard
insured, and often a separate set of schedule policies for each location. "Blanket"
excess insurance forms that could follow multiple underlying policies were generally
unknown.
Agents' publications in the 1920s frequently contained references to higher
limits as a way to increase insurer premium volume or agents' commission income.
Some insurers also promoted high limits for risk management reasons, asserting
that companies needed more coverage than the minimum policy limits (5/10) to
be adequately protected against the types of claims that could arise. For example,
any elevator owner needed higher limits of elevator liability because of the
frequency and severity of elevator accidents.
There are numerous reports of verdicts in insurance publications during the
1920s and 1930s demonstrating that even then it was common for juries to award
damages of up to $100,000 (and occasionally more) to injured claimants. Verdicts
continued to escalate during the Great Depression of the 1930s. Many businesses
during this period began to purchase increased limits, usually selecting 25/50,
50/100, or 100/300. Higher limits (at least up to $1 million) were available,
but rarely requested.
The First Excess Liability Market
As limits increased, so did the market for excess insurance. Concurrently,
the increase in exposures and losses required a reinsurance market to spread
and adequately capitalize insured risks. With great foresight in these matters,
Cuthbert Heath was one of the founders of the British company, Excess Liability
Insurance Company, Limited, in 1894. He wrote later,
Feeling that nonmarine business was growing and would grow at Lloyd's
... I therefore formed the Excess Insurance Company which with a capital
of £5,000 fully paid up was used as a backing for two of my names, every
risk being reinsured with it.
The purpose set out for the company was "to write marine, fire and accident
[liability] business and reinsurance," along with fidelity. The company later
participated in a group of aviation insurers formed in the United Kingdom in
1913, 2 years after Lloyd's issued the first aviation policy. The Excess reinsured
the coverages underwritten by the Heath syndicates at Lloyd's for many years,
and was still participating on excess and umbrella coverages placed in London
in the 1960s.
Excess of Loss Reinsurance
Shortly after the San Francisco earthquake of 1906, Heath created the first
excess of loss cover for the Hartford. The company had recognized a need for
a different form of reinsurance because of its San Francisco claims experience.
The cover contained the basic elements of "layering," as we know it today, which
made possible the methods still used to tap market capacity for high liability
limit placements.
Anthony Brown, in his 1980 biography, Cuthbert
Heath: Maker of the Modern Lloyd's of London, describes it as follows.
Under it, the direct insurer would retain the responsibility for all
the smaller losses himself. Larger losses above an agreed maximum figure
would be paid by the reinsurer up to a second agreed limit, after which
the liability reverted to the original insurer, who could then buy further
reinsurances for the upper limits. As a further sophistication of the system,
the reinsurer could himself buy reinsurance-known as a retrocession-in respect
of the responsibilities he now assumed.
As excess reinsurance concepts developed, Guy Carpenter helped to create
the market for excess of loss reinsurance in the United States during the late
1920s, when he was insurance manager of the Cotton Insurance Association of
America. Carpenter developed the concept of "burning cost" for reinsurance pricing,
and he placed the cover with Cuthbert Heath at Lloyd's acting as the lead underwriter.
These reinsurance plans are the seeds from which the high liability limits of
late twentieth century casualty insurance programs grew.
Excess Insurance Company of America began writing excess coverage in 1927.
The most frequent method of providing higher limits was through excess of loss
reinsurance for direct insurers of primary policies. This was often executed
as a subscription endorsement added to the primary policy. Excess Insurance
Company was one of several domestic insurers that provided following form excess
coverage under separate excess policies.
Advertisements for Excess Insurance Company appeared frequently in trade
journals directed toward agents and brokers in the 1920s and 1930s. The Excess
therefore appears to have been influential in promoting both higher limits and
coverage concepts that ultimately became standards. One of the other pioneering
excess markets was Indemnity Insurance Company of North America (INA).
The other markets reported to have provided specific excess coverage in the
1920s were all formed as professional reinsurance companies, including Employers
Reinsurance Corporation, American Reinsurance Company, and General Reinsurance
Corporation. There were no U.S. markets known to write any excess liability
coverage before about 1918, even for modest limits. One source states that in
1916, Lloyd's was the only market for excess casualty insurance.
Direct U.S. Placements at Lloyd's
In the years before 1910, Heath also pioneered the practice of writing nonmarine
risks for U.S. companies as "direct" business, not just through reinsurance.
The first Lloyd's "Motor Policy" on a U.S. risk, one of the first direct placements
of nonmarine business for a U.S. insured, was written by Heath in 1907 for Rollins
Burdick Hunter (RBH), on behalf of the White Sewing Machine Company. It was
a physical damage policy valued at $2,500.
Based in Chicago, RBH also placed insurance for many of the meat packing
houses in that city. One of the largest meatpackers, Swifts', formed its own
insurance company in 1907, Interstate Insurance Exchange. This was an early
forerunner of "captive" insurance companies, as we know them today.
Eventually RBH placed the reinsurance for Interstate at Lloyd's, using Cuthbert
Heath as the lead underwriter. These placements opened the door for many associations
between U.S. companies and the London market that became particularly important
in the development of excess and umbrella liability insurance during the 1930s
and 1940s.
Excess Coverage Developments
The developments described above provided a foundation, but further improvements
in the way coverage was provided were needed before umbrella coverage could
emerge. Blanket excess liability coverage was one such need.
Insurance buyers faced a difficult, complex task in arranging coverage under
the American system of insuring specific hazards in separate policies. If they
picked the wrong form, their company would not be insured for the particular
hazard. It was difficult to know whether a company's insurance program was sufficiently
complete. Because of the variety of types of policies, it was easy to end up
with many gaps in coverage, and an inconsistent set of coverage limits. Liability
coverage was badly in need of a "blanket" coverage form, comparable to blanket,
all-risk property insurance.
There are no documents that "verify" the existence of blanket catastrophe
liability insurance before the early 1930s. However, some knowledgeable insurance
professionals believe that large utilities, oil companies, and railroads may
have placed blanket liability coverages at Lloyd's with limits of at least $1
million as early as the 1920s. The earliest time for which there are any sources
concerning catastrophe liability insurance (blanket insurance with limits of
$1 million or more) is about 1934. INA was one of the few American markets for
blanket excess liability coverage before 1950, along with the professional reinsurers
already mentioned.
In the early years of excess coverage, it was common to buy only the difference
between the primary limits and some higher amount, such as $500,000, $750,000,
or $1 million. Such arrangements persist today in "gap layer" covers, which
occasionally may be required to bring the total amount of primary insurance
up to the attachment point of the first umbrella layer. It is sometimes the
only way to satisfy the underlying insurance requirement imposed by umbrella
underwriters.
So-called gap or difference between covers were seldom used after umbrella
policies with limits in multiples of $1 million became common in the 1960s,
because underlying limit requirements usually were no higher than 100/300. Underlying
limit requirements began to increase significantly in the late 1970s, which
reinvigorated the market for straight excess gap insurance.
It took a long time for the insurance industry, and most insurance buyers,
to recognize that there was a real need for limits greater than $1 million.
A 1928 report in The Casualty Insuror about a gas tank explosion that caused $5 million in damages stated that:
no conceivable insurance policy could cover that amount of damage...
[O]ne cannot imagine an assured admitting the necessity of a $5 million
limit on one accident and paying the premium on such a policy.
One of the more interesting aspects of this remark is the suggestion that
a company should be reluctant (if not ashamed) to admit a need for high limits
of liability insurance! A possible explanation for the tone of this remark is
the writer's failure to separate theoretical exposure to loss from the probability
that the loss will occur. The writer also overlooked the fact that a loss of
such magnitude had already occurred, which meant that it should be relatively
easy to imagine a similar loss happening in the future. It would be logical
for businesses to want sufficient coverage limits for such potential losses.
The demand for higher limits in the 1930s appears to have been concentrated
in specific industry groups, such as utilities, railroads, oil and gas production
companies, and some heavy industrial companies. A market emerged for catastrophe
policies, using two types of coverage forms: straight excess following form
contracts and stand-alone blanket catastrophe liability policies.
Some sources suggest that the most common upper limit of coverage at this
time was $1 million. Lloyd's and other British companies provided a market for
both types, but most U.S. insurers provided a market only for the straight excess
coverage. This conservatism of the U.S. insurance market drove many large companies
to seek relationships in London so they could obtain the broader coverage available
there.
The Emergence of Self-Insurance
Only the largest businesses used large self-insured retentions (SIRs) or
purchased catastrophe policies in the 1930s or before. Most businesses could
easily secure the limits they wanted in the domestic insurance market, although
not necessarily in the most desirable coverage arrangement. Limits of 100/300
were available for about 50 percent more than the 5/10 basic limits provided
in liability rating plans of the late 1920s. There was additional straight excess
following form coverage available up to $1 million, but apparently it was seldom
requested.
Stand-alone excess policies were introduced to provide coverage over a self-insured
retention during the 1920s. Since there was no underlying insuring agreement
or other policy terms for the contract to follow, the stand-alone policy had
to have its own insuring agreement, exclusions, and conditions. The U.S. insurance
industry (insurers, agents, and regulators) did not support the stand-alone
excess policies because they viewed an SIR as a deductible, a form of self-insurance.
Lloyd's, domestic (U.S.) professional reinsurance companies, and specialty market
insurers like Excess Insurance Company of America and Indemnity Insurance Company
of North America provided the market for this coverage.
Stand-alone excess policies were written for lower premiums than first-dollar
insurance, reducing the premiums and commissions that could be earned by insurers
and agents. Fully insuring risks of loss was a known, respectable, traditional
method of risk finance in business circles. Self-insurance was generally disfavored,
but grudgingly acknowledged, by various agents' groups and publications.
Agents had greater power and influence over insurance companies and insurance
regulators at that time than they do today. Therefore, self-insurance (in the
form of an SIR) was not an option for any but the largest businesses, because
of their greater bargaining power.
But large businesses with specialized insurance needs were precisely the
type of client that the Lloyd's market wanted to attract. Lloyd's was not constrained
by the fragmented and conservative approach of U.S. insurers toward providing
liability insurance. The blanket liability policy was a perfectly logical alternative
to the administrative headache of mixing multiple primary liability policies
and SIRs.
The size of the typical SIR in the 1930s was $25,000, and was as high as
$300,000 for some companies (at least for certain hazards). Even $25,000 was
considered to be a significant amount of self-insurance, since it exceeded the
basic limits of the standard liability policies (5/10) that most businesses
purchased. In contrast, an SIR of $1 million was relatively common in the 1990s,
and a few very large organizations had SIRs exceeding $5 million.
This discussion will be continued in Part 2 of this article.