Part 1 of this article discussed the early
history of liability insurance, excess coverage, and reinsurance concepts that
laid the foundation for the way umbrella liability coverage is written today.
In this continuation, we will discuss developments in blanket liability, other
concepts that led to the creation of the first umbrella coverage forms, and
the development of the American market for umbrellas after 1957.
Broad Form Excess Liability
Lloyd's of London is known to have insured U.S. organizations on a broad,
blanket form of excess liability insurance from at least 1934. The "official"
standard following form of excess public liability wording was known as the
"TP" form, which was approved by Lloyd's Nonmarine and Fire Underwriters Association
(NMA) by 1938. The alternative type of coverage that was written excess of a
self-insured retention (SIR) or underlying insurance (or a combination of the
two) came to be known as "blanket catastrophe excess liability."
While some underwriters at Lloyd's preferred coverage that applied only to
accidental losses, there were other underwriters willing to extend blanket coverage
to legal liabilities of the assured without relying on the word "accident" to
trigger the coverage. Both types of coverage were offered and appear to have
been purchased by a variety of large U.S. companies. The "TP" excess contracts
generally applied to accidental losses only, while the Broad Form contracts
generally were applicable to occurrences.
The contrast with U.S. liability forms was dramatic. Because of the conservatism
of regulators such as the National Association of Insurance Commissioners (NAIC)
and insurers' National Bureau of Casualty Underwriters (NBCU), separate policies
had to be purchased for each hazard (or type of liability risk) a business wished
to insure. Sometimes there also were separate liability policies for each location
at which the insured conducted operations.
Each policy was a "schedule" contract, meaning that it insured only the risks
(operation or location) described in the exposure schedule in the policy declarations.
The scope of coverage in these policies was changed little from the coverages
that had been available in 1915, and they continued to apply only to bodily
injury. Insurance companies licensed to write "accident" insurance issued the
policies. When property damage liability coverage was introduced, it was often
written for identical hazards but on separate policies from the bodily injury
coverage.
The problem of determining how many policies a business needed to purchase
was further complicated by the need for higher limits. If a primary insurer
could not provide the amount of excess coverage a business required in a single
contract, the insured might be required to purchase separate excess policies
over each of the primary policies. This was especially common in automobile
insurance, because of the number of insurers that reportedly would not offer
more than the minimum financial responsibility limits of coverage. It is easy
to imagine how coverage for a particular hazard required at a single location
could be overlooked. Even worse was the problem of purchasing coverage for the
wrong hazard at a location, when coverage would have been available if the insured
or the agent had correctly identified the exposures.
The blanket catastrophe excess liability policy marketed at Lloyd's
solved the problem of overlooking a location or inadvertently not buying an
essential type of insurance. Basically, it covered all of the "assured's" legal liability
exposures on a broad "occurrence" basis, with only a few exclusions. It was
an indemnity policy, subject to an SIR of at least $25,000 per accident, or
the limits of any other underlying insurance available to the assured.
There was no primary duty to defend, because of the SIR, excess, and indemnity
nature of the contract. This was a minor point, since legal expenses were only
a small part of total claims costs until the 1970s.
Emergence of CGL Coverage
In the 1930s some forward-thinkers in the U.S. insurance industry began to
realize how needlessly complex primary liability insurance had become. A blanket,
or comprehensive, form of liability insurance was needed that would cover all
primary liability exposures for an insured organization's locations and business
activities under a single policy.
The leading proponent and spokesman for the blanket liability form of coverage
was insurance lawyer E.W. Sawyer, who was hired as the attorney for the National
Bureau of Casualty Underwriters (NBCU) in 1939. He was a prolific writer and
speaker, and it was rare for a month to pass without seeing an article about
or by him in one of the insurance trade journals. He began advocating the creation
of a standard blanket or comprehensive liability coverage form in the mid-1930s.
The basic concept of the blanket liability coverage form was simple: Provide
coverage for the insured's legal liability for injury or damage except as specifically
excluded. After several years of discussion and development, the draft coverage
form was introduced for trial on the Pacific Coast in late 1939. The NBCU released
the form for use nationwide in January 1941 under the label of "comprehensive
general liability (CGL)" insurance.
The first CGL insurance policy form only provided automatic coverage for
bodily injury liability. Property damage liability coverage was optional. It
would be some time before CGL forms automatically included property damage liability.
Covered injuries or damage had to be caused by an accident during the policy
period.
Although the standard CGL forms only covered injuries or damage "caused by
accident," large companies and sophisticated insurance brokers often requested
endorsement of the CGL policy to substitute "occurrence" for "accident" as the
coverage trigger. This became particularly common in the 1950s. Although there
was usually little underwriting resistance to the request for occurrence bodily
injury coverage, there was less willingness to grant the request for property
damage liability.
NBCU, which later became Insurance Rating Bureau (IRB) and then Insurance
Services Office, Inc. (ISO), issued subsequent major revisions to the CGL policy
forms in 1943, 1955, 1966, 1973, and 1986. The 1966 version of the CGL insurance
form was the first standard primary coverage form that applied to occurrences
instead of accidents.
The coverage changes in each of the revisions, especially in the wording
of exclusions, are extremely important because of their relationship to the
scope of coverage provided in stand-alone excess and umbrella forms. Although
we will not discuss the differences in these forms here, we will need to refer
to differences between the wording of some standard CGL terms and umbrella policies
in later articles in this series.
By the 1950s, businesses most often purchased CGL policies instead of the
older forms of schedule hazard policies. Since the late 1960s or early 1970s,
schedule liability policies have most often been used to carve out more hazardous
risks from CGL policies, to price and insure them separately in specialty markets.
There is no logical or economic reason why a business should seek or prefer
schedule liability policies if CGL coverage is available.
Post-War Catastrophe Concept Changes
Before World War II, the concept of a "catastrophe" was limited by imagination,
limited amounts of historical damage awards, and other social factors. While
events (usually lumped under the label of "accidents") involving multiple deaths
were not uncommon, most organizations did not perceive a need for insurance
that would provide coverage.
The most frequent multiple-death events involving potential public liability
in the years before World War II were fires, elevator drops, and railroad accidents.
Floods, storms, earthquakes, and similar acts of God were not subjects of public
liability insurance.
After World War II, many brokers and insurance buyers began to recognize
that hazards in chemical manufacturing and other industries could easily exhaust
primary aggregate limits. The massive Texas City, Texas, explosion of August
1947, which caused 570 deaths, resulted in much published commentary on this
problem.
During the war years, hundreds died in fires at the Coconut Grove nightclub
in Boston (1942) and the circus tent fire in Hartford (1944), further illustrating
the range of potentially catastrophic exposures that existed. After the first
individual liability award of more than $1 million, around 1961, it became obvious
that virtually all businesses (and many individuals) needed higher limits than
they had purchased in the past.
Blanket excess policies above underlying insurance and an SIR were more widely
known by the late 1940s. Although available sources do not indicate that there
were many more markets for the coverage, insurers that provided the coverage
were increasing the volume of this business as well as the available limits.
Excess policies often required that underlying insurance limits be reinstated
if exhausted by claims. However, as occurrence coverage became more widely used
by large companies, insureds, brokers, and underwriters all recognized that
it was possible for covered occurrences to take years to be recognized and exhausted.
If this happened, it would not be possible to go back to a primary insurer after
expiration of the policy and reinstate primary aggregate limits. The solution
developed for this problem was that excess liability policies should be able
to "drop down" to afford coverage after exhaustion of primary aggregate limits.
No policy then existed that could solve all of the following problems.
- Extend primary coverage limits up to provide high limits of catastrophe
liability insurance, over most common forms of underlying insurance.
- Extend coverage out to encompass primary self-insured or uninsured risks.
- Drop down to replace primary coverage, if primary limits were exhausted.
The first two problems had been addressed for many years by the broad form
excess liability forms available from Lloyd's and other insurers. No form yet
addressed the third problem in the late 1940s.
Introduction of the First Umbrellas by Lloyd's
Lloyd's of London faced many restrictions to selling insurance in the United
States after World War II, especially in New York, which was one of the most
important insurance centers for American companies. The London market could
only provide insurance to American companies that American insurers either would
not or could not provide. Broad excess liability coverage, in effect an orphan
in the American market, was ideally suited to the need at Lloyd's of providing
an unconventional coverage for the American market.
In the late 1940s, Walter Smith was a senior vice president in charge of
the casualty department at Marsh & McLennan's New York office. He is believed
to have been instrumental in perceiving the need for adding "drop down" coverage
to the broad form excess liability policies that Marsh was involved in placing
at Lloyd's for its largest clients. George Bardes, a coverage technician who
worked for Smith, also reportedly worked on solving the problem of how the existing
excess forms should be modified to provide "drop down" coverage.
Although there were a number of capable Lloyd's brokers who placed broad
form excess coverage in the 1940s, Marsh worked to develop special relationships
for its clients to differentiate itself from other U.S. brokers. One of the
specialists they worked with during the 1940s was the George H. Forster Company
in Montreal (a retail broker), which had relationships with Lloyd's broker Price
Forbes through its Canadian correspondent office, Lukis Stewart Company (acting
as a wholesale broker). Lukis Stewart eventually purchased the Forster Company
around 1946, and thereafter operated Forster as a division of Lukis Stewart.
Guy de Repentigney, Ernest Shannon, and James E. Fraas were the key individuals
at Lukis Stewart/Forster who provided the link between Marsh in New York and
Price Forbes in London.
Although there are a number of senior brokers at Price Forbes who may have
worked on the emerging umbrella policy form, the key men responsible for finalizing
details of the coverage and negotiating its terms with underwriters at Lloyd's
were most likely Victor Hannaford and Philip G. Spooner. Although we do not
know all of the Lloyd's underwriters who participated on early umbrella placements,
two of the most prominent leaders who have been mentioned as having substantial
lines are Eric Squire of C.E. Heath and Julian Huxtable of the Sturge Syndicate.
The first of the new "broad form third-party excess liability" coverage forms
was quoted in 1948 for Gulf Oil Company, which already purchased broad form
excess coverage from Lloyd's under the then-common coverage form. Although Gulf
did not accept the new form in 1948, it was accepted in 1949. Gulf Oil thus
became the holder of the first known Lloyd's umbrella policy, effective June
1, 1949.
Rapid communication with London was conducted by transatlantic cable at that
time, and the charges applied per word. Although the coverage was initially
called "broad form third-party excess liability," eventually it was shortened
to "umbrella," because it was an easier, less costly shorthand term to use in
cables.
Details about the placement were known to only a few people at the time.
Marsh personnel must have realized that the new form, broader than any other
form of liability coverage then available in the world, was a huge competitive
advantage in placing insurance for its largest clients. By offering the coverage
selectively and keeping quiet about the details, Marsh effectively had an "exclusive"
on the umbrella coverage form. This advantage for Marsh lasted until about 1955
or 1956.
One of the ways Marsh and Price Forbes are believed to have held their exclusive
advantage over umbrellas in the early 1950s is through the use of one or more
"line slips" with their leading underwriters, giving Price Forbes umbrella placement
authority for specified types of risks. Since the "following" underwriters at
Lloyd's relied on the lead underwriter to set the rate, only a few lead excess
liability underwriters specializing in North American risks controlled the market
for the coverage.
Even though there is no known written agreement, Price Forbes had exclusive
control of the umbrella market (as distinguished from other excess liability
forms then in use), as the underwriters apparently did not entertain umbrella
submissions from other Lloyd's brokers. Access to Price Forbes in London for
these placements was exclusively through their business affiliates in Montreal,
the Forster division of Lukis, Stewart (the Price Forbes branch correspondent),
and they in turn only accepted umbrella submissions from Marsh & McLennan in
New York.
Although having an exclusive market for the broadest liability coverage in
the world would excite any broker who still draws breath, it did not result
in a flood of umbrella submissions by Marsh clients. Growth of the business
was slow at first. Only 1 umbrella policy was issued in both 1949 and 1950,
followed by 11 in 1951, and 29 in 1952. By 1956, 141 policies were issued, the
first year in which more than 100 clients received umbrella coverage.
The exclusive arrangement appears to have ended at some point between 1955
and early 1957. Other large U.S. insurance brokers with connections to Lloyd's
learned about the form and persuaded the underwriters that they should be able
to offer it to their clients, through their own customary Lloyd's brokerage
relationships. In addition, a copy of the "Price Forbes form" made its way to
some American markets, who decided to introduce their own umbrella policies
in 1957.
U.S. Competition to Lloyd's Umbrellas
From 1948 until approximately 1956, the Marsh/Forster/Lukis Stewart/Price
Forbes/Lloyd's market was virtually the only source for umbrella coverage. No
U.S. insurers offered the coverage, as far as anyone knows today (although some
U.S. insurers did offer "traditional" forms of excess liability coverage). However,
from 1957 on, U.S. insurers began offering umbrella coverage, one-by-one, in
response to competitive pressure from insurance buyers and the need to compete
with other admitted insurers. This pressure increased as knowledge of the scope
of umbrella coverage became more widely known.
The entrance of U.S. insurers into competition with Lloyd's for umbrella
business, as well as the concurrent liberalization of state surplus lines laws
during the 1950s, helped to open up the London market for umbrellas. U.S. competitors
nevertheless recognized that Price Forbes had played a key role in creating
the coverage. When U.S. insurers obtained a Lloyd's umbrella policy as a model
on which to design their own umbrella forms, they referred to it as the
"Price Forbes form."
The first U.S. companies to begin offering umbrellas included the Indemnity
Insurance Company of North America (INA), in June 1957; Continental Casualty
Company (CNA), in 1958; Employers Surplus Lines Insurance Company, in January
1959; and The Travelers Insurance Company, in September 1959. In 1960 American
Reinsurance Company, Employer's Reinsurance Company, Employers Mutual of Wausau,
and General Reinsurance Corporation also were reported to be markets for umbrella
coverage.
In 1963 the only additional markets listed in published sources now available
were Federal Insurance Company (Chubb) and Aetna Casualty. A sales brochure
published by The Home in 1968 stated that Home introduced its Manuscript Excess
Liability Policy (the name Home applied to its umbrella form) in 1961.
During the remainder of the 1960s, U.S. admitted insurers rapidly developed
umbrella capacity with the assistance of professional reinsurers. The reinsurers
often provided policy forms and standard endorsements for an insurer and accepted
90 percent or more of umbrella risks from ceding companies through facultative
placements, in effect acting as the umbrella underwriting department for some
ceding company clients.
These methods helped to increase competition and the volume of umbrella premiums,
and also helped U.S. businesses obtain a valuable new form of coverage. By 1970
nearly all of the largest U.S. insurers were offering umbrella coverage, and
there were many more markets available through surplus lines brokers. By the
end of the 1960s, it was not uncommon for umbrellas with limits of $5 million
to $10 million to be issued.
Many casualty programs were arranged with a lead umbrella and one or more
excess umbrella layers, to obtain the capacity required for higher limits of
liability coverage. In some placements during the 1970s, single policies were
issued with limits of $20 million or more, and even higher limits were available
in the early 1980s.
Contraction of Umbrella Coverage: The LRD Forms
Concurrent with the development of U.S. competition in the umbrella market,
it is ironic that Lloyd's underwriters began questioning whether the form of
coverage they offered was too broad. Early Lloyd's umbrellas contained no exclusion
for damage to property owned by others in the insured's care, custody, or control,
so many first-party property claims were being covered. Coverage applied to
a wide variety of personal injury claims, including patent infringement, since
the Price Forbes form did not limit the coverage to a specific list of injuries.
Many early umbrellas also provided fidelity coverage.
Underwriters were distressed by their losses, and key underwriters advised
Price Forbes that they would no longer lead slips for placement of umbrellas
after December 31, 1959. A committee that included both Lloyd's brokers and
underwriters was formed to study the development of a new London umbrella form.
Leslie Dew, a former following underwriter who had become head underwriter for
the W. Minnis syndicate during the 1950s, consented to lead the slip for the
new form for the Minnis and R.J. Merrett syndicates, if he could have a hand
in drafting a replacement for the earlier Price Forbes form.
The committee formed in late 1959 to develop the 1960 Lloyd's umbrella form
included Leslie Dew, Eric Squire of C.E. Heath, Henry Jeary of Ward & Faber,
and Victor Hannaford of Price Forbes. The first draft of a new umbrella form
was released in January 1960 for circulation in the London market. Brokers also
circulated it selectively to U.S. insurers, since Lloyd's did not want to be
completely shut out of the umbrella market by having a form that was far more
restrictive than the current offerings from U.S. insurers.
What came to be known as the "LRD 1-60" form was quite restrictive, compared
with the earlier Price Forbes form on which the first U.S. entrants to the umbrella
business modeled their coverage. After considering comments from a variety of
sources, Dew changed some of the terms in the form and agreed to a revised umbrella
form, which was issued to be effective retroactively to January 1, 1960, for
all Lloyd's umbrella placements. This became known as the "LRD 6-60" form, and
remained in use by Lloyd's until 1970, when a new Lloyd's umbrella was introduced.
Many U.S. insurers entering the umbrella market during the 1960s used the
LRD 6-60 form as their model. As a result, many terms and conditions that appeared
in the LRD form are worded almost identically in American umbrellas from this
period. Some U.S. insurers simply copied the form and did not even change the
British usage of the terms "assured" (instead of "insured") and "underwriters"
(instead of "the company").
The Market after 1970
By 1970 the U.S. umbrella market was maturing and provided a competitive
alternative to Lloyd's for umbrella coverage. Many American companies issued
new versions of their umbrella forms after the introduction of the 1966 and
1973 CGL policy forms, with exclusions and other terms that more closely matched
the wording of primary policies serving as underlying coverage. This provided
a more concurrent coverage program, less likely to create inconsistencies or
gaps in coverage for the insured.
Lloyd's continued to provide a market for umbrella coverage after 1970, and
served as the anchoring first-layer umbrella for many large U.S. companies.
However, as higher limits became necessary, Lloyd's underwriters began moving
their participation to higher excess layers to avoid exposure to U.S. litigation
in the lowest umbrella layers. The underlying limit threshold for participation
by Lloyd's in umbrella programs increased over time, from $3 million, then $5
million, and later to $10 million of underlying coverage or self-insurance.
Many American insurers increased their capacity during the 1970s, through
higher retentions and the use of reinsurance. Large insurers often issued umbrellas
with limits of $5 million to as high as $25 million on one policy, heavily reinsured.
There were hundreds of sources for coverage by the end of the 1970s. Virtually
all of the large, multiline insurance groups wrote umbrellas, and many smaller,
regional insurers did so as well. Non-admitted casualty insurers also provided
a market for umbrella coverage through surplus lines brokers and underwriting
managers.
Coverage terms in these older policy forms continue to be litigated today.
Asbestos and environmental pollution litigation in the 1970s and 1980s caused
all of the parties to early excess and umbrella policies—insurers, insureds,
and brokers—to scour their archives for records of the coverage they purchased,
often going back to the 1930s and even earlier. The ongoing litigation over
liability coverage terms provides a rich source of instruction about the significance
of policy wording.
Coming Up
In future articles, we will report on the varieties of umbrella and excess
forms in use today as well as in the past, on the importance of specific policy
terms, market conditions, and other information we hope you will find useful
in improving the practice of risk management.