A properly chosen personal umbrella policy is the single best tool for plugging many of the liability coverage gaps in underlying auto, homeowners, and other personal policies. Determining insurance gaps and recommending an umbrella policy that provides step-down primary coverage for the uninsured exposures, subject only to the self-insured retention, is one of the most important functions of personal risk management.
What makes this task particularly challenging is the lack of uniformity among umbrella policies.1 Unlike most personal auto and homeowners policies, which are fairly comparable, umbrella policies vary dramatically. While they routinely offer coverage worldwide, in contrast to underlying policies, their scope of coverage is defined primarily through exclusions or attached endorsements, which vary from policy to policy.
Here are some examples from my client files of coverages normally excluded by primary personal lines policies that are available with the right umbrella policy. As we examine them, remember that each coverage will be provided by a personal umbrella policy, unless it's specifically excluded.
Automobile-Related Coverages
Drive other car coverage: Coverage is provided for clients who have no personal auto policy (PAP) and thus no automatic coverage when driving nonowned cars. This coverage is valuable to someone who either has no automobile at all or only a vehicle furnished by his or her employer. Since underlying drive other car or named nonowner coverage is either expensive for someone in this situation or even unavailable, it's best (and most economical) to choose an umbrella policy that will provide step-down coverage. About half the umbrellas I've looked at provide step-down coverage. If you can avoid the need for underlying coverage, the money you save your client will usually more than cover the cost of the umbrella policy for an entire year!
Here is my recommendation for those without a PAP of their own who rent or borrow nonowned cars. If you do it frequently, buy a named nonowner auto policy with the umbrella as backup. If you seldom do it, buy an umbrella policy that covers it with no underlying insurance required.
Vicarious automobile liability coverage: This coverage is especially good for clients who neither own nor drive cars (often elderly or disabled people) but who receive rides from friends or family to shop, see doctors, etc. Under principal-agency case law, such a passenger can be held liable for accidents caused by the driver because the car was on the road for the passenger's sole benefit. Again, it's important to choose an umbrella policy that does not require underlying insurance for this exposure.
Fellow employee liability coverage: This coverage is desirable for those who drive a company vehicle and occasionally have coworkers as passengers. If the driver's negligence injures a coworker who then sues the employee, the employer's business auto policy usually will exclude coverage for the "fellow employee" lawsuit. The employee injured on the job will get financial compensation from the employer's workers compensation policy, but there is nothing to prevent him from also suing the negligent fellow employee driver.
The driver's PAP, meanwhile, excludes coverage for vehicles "furnished or available for regular use." If the umbrella requires underlying coverage, the extended nonowned endorsement must be added to the insured's PAP, naming all drivers. If the company-furnished vehicle is the only vehicle in the house, they will need to buy a named nonowner policy.
Auto liability coverage abroad: The umbrella provides primary coverage for bodily injury and property damage liability (subject to the self-insured retention) when the insured rents cars outside the PAP's territory, which is the United States, Puerto Rico, and Canada. The territory of most personal umbrellas is worldwide. This step-down coverage is provided without underlying insurance requirements.
Caution: beware of limited worldwide coverage, which only covers claims abroad if the lawsuit is brought in the United States or Canada. There are two major umbrella writers that have that limitation!
Collision damage liability: This covers damage you cause to a car you rent or borrow that is excluded by the PAP's "care, custody, or control" exclusion. Granted, under most PAPs, collision coverage will transfer on an excess basis to a rental car, but only if you have collision coverage on at least one car. And again, under the PAP, there is no coverage outside the United States, Puerto Rico, and Canada. The right umbrella policy will cover collision damage you cause to a rented or borrowed car on a primary basis worldwide, subject only to the self-insured retention (SIR).
The beautiful thing about an umbrella policy that covers your liability for damage to a rental car is that it will also pick up claims for diminished value—claims that are not covered by collision coverage.
If someone does rent a car abroad, I still advise them to buy the collision damage waiver coverage from the car rental agency, keeping the umbrella as backup coverage. It greatly simplifies the vehicle return process and helps to avoid unnecessary delays in your vacation.
Auto contractual liability coverage: This covers the obligation you assume when you sign a contract to defend and pay any judgment against a rental car company—even if you aren't personally driving the vehicle. (An example would be renting a vehicle on a business trip with a coworker, where you sign the rental contract, but the coworker causes the accident.) In this case, your obligation is to defend the rental company and pay judgments against it, even if you have nothing directly to do with the accident.
Auto contractual damage coverage: This provides coverage for rental car damage that you did not personally cause but for which you have agreed contractually to be liable (e.g., hail damage, theft, etc.).
Watercraft, Aircraft, and Recreational Vehicle Coverage
Nonowned watercraft liability coverage: Bodily injury and property damage liability coverage is provided when you operate hired or borrowed boats that are not covered by primary homeowners liability coverage (e.g., 30-foot sailboats, houseboats, sometimes jet skis).
Nonowned watercraft legal liability coverage: Covers damage to nonowned watercraft either caused by you or for which you have agreed to be responsible under a rental contract.
Nonowned aircraft liability coverage: This covers your liability for bodily injury and property damage to others when you charter an aircraft with or without a crew. (It does not cover your legal liability for damage to the aircraft hull. That coverage is available only through the rental agency.)
Nonowned snowmobile, all-terrain vehicle (ATV), or recreational vehicle (RV) bodily injury and property damage liability coverage: Covers the liability for renting or borrowing these vehicles, none of which is normally covered by primary policies. The properly chosen umbrella will step down to the SIR and not require underlying coverage.
Nonowned snowmobile, ATV, or RV legal liability damage coverage: Covers damage you cause to rental units as well as all other damage you don't cause but for which you agree to be responsible under the rental contract (e.g., weather-related claims). The umbrella policy is excellent for plugging the gap created by the nasty care, custody, or control exclusion for damage for which the insured is responsible. Choose an umbrella that provides step-down coverage, with no underlying insurance required.
Premises Exposures
Heating oil tank pollution liability coverage: Coverage is provided for liability for property damage and cleanup costs arising from in-ground or below-ground heating oil storage tanks. Homeowners policies, of course, exclude pollution liability claims.
Work-related home premises liability coverage: This covers your liability for injuries to people entering your home for business purposes, such as to a courier who falls while bringing you a package from your employer and sues for injuries. Homeowners policies completely exclude business-related lawsuits. This risk concerns people who either have home businesses or who work on business at home. The exposure exists for probably half of all households, and I find it's one of the most commonly overlooked risks when I review homeowners policies for new clients. (Be careful with this coverage under the umbrella policy. Sometimes, it's provided only if there's underlying coverage on the homeowners. Yet, sometimes, even if underlying coverage is added, the umbrella will not extend unless you ask for and pay for a separate incidental office endorsement.)
Miscellaneous Exposures
Employers liability coverage: The exposure created by employing domestic workers (e.g., nannies, handymen, or personal care attendants) is completely excluded by underlying homeowners policies. Coverage is available through some umbrella policies. Some require underlying primary coverage, while others provide freestanding coverage, subject only to the SIR.
Nonprofit directors and officers liability coverage: This covers bodily injury, property damage, and personal injury claims arising from your volunteer services on a nonprofit board of directors (church councils, charities, condominium associations, etc.).
Assumed contractual liability coverage: This covers others' liability that you assume by signing a personal contract. This is a huge exposure because hardly anyone reads these "routine" contracts and thus people pick up a lot of liability risk unknowingly. The following are some examples from my client files in which I was able to find contractual coverage in an umbrella policy.
A wheelchair-bound client had an elevator installed in her three-story home. The contract with the elevator maintenance company required her to defend the company and pay judgments against it even if an injury was at least partly caused by the company's own negligence.
A restaurant's wedding reception contract required that the bride and groom defend the restaurant and pay judgments against it, even for injury caused by the restaurant's negligence (e.g., 50 guests getting seriously ill from food poisoning).
Four friends, all turning 50, rented a huge agricultural building on the state fairgrounds for a big birthday bash. In the contract, my client agreed to defend and pay any judgment against the state of Minnesota or the fairgrounds for injuries or property damage, regardless of who was at fault!
Each of these examples illustrates a major liability exposure that is largely uninsured by primary liability coverage. Many such exposures are excluded by some umbrella policies but are covered by others. To properly manage risk, first determine which liability risks your client faces that are not insured by his or her primary policies. Then find the umbrella policy or policies that best cover as many of these uninsured risks as possible.
Comparing Umbrella Policies
To compare umbrella policies properly, create a framework by taking the following steps.
1) Keep handy the most recent edition of the umbrella policy for each insurance company you represent or have access to (e.g., via surplus-lines brokers), including all mandatory endorsements for each state in which you operate.
2) Research the differences among the policies and their endorsements. I find using a spreadsheet works best. On the left side, I list all the possible coverages an umbrella can offer that are potentially not covered by primary insurance. Then I list the company names across the top. I read each company's policy and endorsements and fill in a "yes" or "no" under that company's name across from the potential coverage. I add footnotes for any exceptions needing clarification.
I suggest that you send the spreadsheets to the various companies' claims managers for confirmation that your interpretation of the coverage is correct. Go to the claims manager who interprets policy provisions at claim time rather than the underwriting manager.
3) Learn how to read and identify liability exposures in personal contracts. I always read contracts for my clients to help them identify risks to which they're unknowingly agreeing and to make sure their coverage will respond. When possible, I recommend that they fax me the contract before they sign it so that potentially adverse provisions can be negotiated or softened—and sometimes even eliminated. For future reference, as well as for errors and omissions protection, I scan copies of these contracts into the client's automated file.
4) Create a questionnaire from your spreadsheet that will help you determine which of the gap coverages available under umbrella policies your client needs.
Choosing the right umbrella: Use your questionnaire to determine where liability coverage gaps exist in a client's underlying insurance policies. Use your spreadsheet to select the umbrella policy or policies that best plug the gaps you've identified, then implement that umbrella for your client.
Sometimes underwriters require the underlying coverage to be placed with them as a condition of writing the umbrella. Covering the uninsured liability exposures is critical, but getting the right umbrella policy often means rewriting all the underlying insurance—usually a huge hassle for you and your client. That's why for new clients—especially affluent ones—it's important to first determine which umbrella policy affords the best gap protection before shopping for the underlying insurance, so you can then place the underlying insurance, if necessary, with the umbrella company. Catastrophic gap coverage of $1 million or more is usually much more important for those who serve on boards, rent boats, have an in-ground heating oil storage tank, etc., than any difference in premiums on alternative underlying insurance policies.
Don't judge an umbrella by its cover: Over the years, I've evaluated scores of umbrella policies. I've discovered that the size of the insurance company or its advertising budget has little to do with the scope and quality of its umbrellas. The most comprehensive umbrella policies I've seen include those of several large companies, but they also can come from smaller regional insurers that file their own forms. At one time, I even found a surplus lines umbrella policy that was broader than almost any primary market policy I'd ever seen, although the insurer eventually withdrew it from the market.
Three of the worst umbrella policies I've seen have come from well-known national insurers, often targeting more affluent personal lines clients with comprehensive package policies. Two of these umbrellas were straight excess policies offering no gap coverage at all. The other "umbrella" policy was even more restrictive than the company's primary policies. It wasn't even a straight excess!
Watch out for unannounced reductions in coverage on policy renewals: Don't assume that because an insurance company has always had a strong umbrella policy that it always will. For example, I know of a regional insurance company that for years had one of the best umbrellas I'd ever seen. But, without giving notice to agents or insureds, it began using the more restrictive AAIS umbrella form on policy renewals and added about a dozen more exclusions. Most states require that insurance companies notify customers if they renew a policy with more restrictive coverage than the original. That requirement doesn't seem to apply to personal umbrella policies, unfortunately.
You can reduce the chance of this kind of surprise by noting on your comparison form the edition date of all policies you're comparing. Then, for a given policy, compare its edition date on your form to the edition date of its renewal to determine if a new assessment is necessary.
Conclusion
Personal risk management requires a great deal of expertise in coverages and contracts, a commitment to building a risk management framework, and a great deal of additional time for each client. Nowhere is this truer than with selecting the right umbrella policy. Yet, the risk management approach makes such a huge difference in a personal lines client's welfare. It's extremely professionally rewarding, and I wouldn't practice insurance any other way.
This article originally appeared in the September 2007 issue of Property Casualty 360°. It has been revised by the author.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
A properly chosen personal umbrella policy is the single best tool for plugging many of the liability coverage gaps in underlying auto, homeowners, and other personal policies. Determining insurance gaps and recommending an umbrella policy that provides step-down primary coverage for the uninsured exposures, subject only to the self-insured retention, is one of the most important functions of personal risk management.
What makes this task particularly challenging is the lack of uniformity among umbrella policies. 1 Unlike most personal auto and homeowners policies, which are fairly comparable, umbrella policies vary dramatically. While they routinely offer coverage worldwide, in contrast to underlying policies, their scope of coverage is defined primarily through exclusions or attached endorsements, which vary from policy to policy.
Here are some examples from my client files of coverages normally excluded by primary personal lines policies that are available with the right umbrella policy. As we examine them, remember that each coverage will be provided by a personal umbrella policy, unless it's specifically excluded.
Automobile-Related Coverages
Drive other car coverage: Coverage is provided for clients who have no personal auto policy (PAP) and thus no automatic coverage when driving nonowned cars. This coverage is valuable to someone who either has no automobile at all or only a vehicle furnished by his or her employer. Since underlying drive other car or named nonowner coverage is either expensive for someone in this situation or even unavailable, it's best (and most economical) to choose an umbrella policy that will provide step-down coverage. About half the umbrellas I've looked at provide step-down coverage. If you can avoid the need for underlying coverage, the money you save your client will usually more than cover the cost of the umbrella policy for an entire year!
Here is my recommendation for those without a PAP of their own who rent or borrow nonowned cars. If you do it frequently, buy a named nonowner auto policy with the umbrella as backup. If you seldom do it, buy an umbrella policy that covers it with no underlying insurance required.
Vicarious automobile liability coverage: This coverage is especially good for clients who neither own nor drive cars (often elderly or disabled people) but who receive rides from friends or family to shop, see doctors, etc. Under principal-agency case law, such a passenger can be held liable for accidents caused by the driver because the car was on the road for the passenger's sole benefit. Again, it's important to choose an umbrella policy that does not require underlying insurance for this exposure.
Fellow employee liability coverage: This coverage is desirable for those who drive a company vehicle and occasionally have coworkers as passengers. If the driver's negligence injures a coworker who then sues the employee, the employer's business auto policy usually will exclude coverage for the "fellow employee" lawsuit. The employee injured on the job will get financial compensation from the employer's workers compensation policy, but there is nothing to prevent him from also suing the negligent fellow employee driver.
The driver's PAP, meanwhile, excludes coverage for vehicles "furnished or available for regular use." If the umbrella requires underlying coverage, the extended nonowned endorsement must be added to the insured's PAP, naming all drivers. If the company-furnished vehicle is the only vehicle in the house, they will need to buy a named nonowner policy.
Auto liability coverage abroad: The umbrella provides primary coverage for bodily injury and property damage liability (subject to the self-insured retention) when the insured rents cars outside the PAP's territory, which is the United States, Puerto Rico, and Canada. The territory of most personal umbrellas is worldwide. This step-down coverage is provided without underlying insurance requirements.
Caution: beware of limited worldwide coverage, which only covers claims abroad if the lawsuit is brought in the United States or Canada. There are two major umbrella writers that have that limitation!
Collision damage liability: This covers damage you cause to a car you rent or borrow that is excluded by the PAP's "care, custody, or control" exclusion. Granted, under most PAPs, collision coverage will transfer on an excess basis to a rental car, but only if you have collision coverage on at least one car. And again, under the PAP, there is no coverage outside the United States, Puerto Rico, and Canada. The right umbrella policy will cover collision damage you cause to a rented or borrowed car on a primary basis worldwide, subject only to the self-insured retention (SIR).
The beautiful thing about an umbrella policy that covers your liability for damage to a rental car is that it will also pick up claims for diminished value—claims that are not covered by collision coverage.
If someone does rent a car abroad, I still advise them to buy the collision damage waiver coverage from the car rental agency, keeping the umbrella as backup coverage. It greatly simplifies the vehicle return process and helps to avoid unnecessary delays in your vacation.
Auto contractual liability coverage: This covers the obligation you assume when you sign a contract to defend and pay any judgment against a rental car company—even if you aren't personally driving the vehicle. (An example would be renting a vehicle on a business trip with a coworker, where you sign the rental contract, but the coworker causes the accident.) In this case, your obligation is to defend the rental company and pay judgments against it, even if you have nothing directly to do with the accident.
Auto contractual damage coverage: This provides coverage for rental car damage that you did not personally cause but for which you have agreed contractually to be liable (e.g., hail damage, theft, etc.).
Watercraft, Aircraft, and Recreational Vehicle Coverage
Nonowned watercraft liability coverage: Bodily injury and property damage liability coverage is provided when you operate hired or borrowed boats that are not covered by primary homeowners liability coverage (e.g., 30-foot sailboats, houseboats, sometimes jet skis).
Nonowned watercraft legal liability coverage: Covers damage to nonowned watercraft either caused by you or for which you have agreed to be responsible under a rental contract.
Nonowned aircraft liability coverage: This covers your liability for bodily injury and property damage to others when you charter an aircraft with or without a crew. (It does not cover your legal liability for damage to the aircraft hull. That coverage is available only through the rental agency.)
Nonowned snowmobile, all-terrain vehicle (ATV), or recreational vehicle (RV) bodily injury and property damage liability coverage: Covers the liability for renting or borrowing these vehicles, none of which is normally covered by primary policies. The properly chosen umbrella will step down to the SIR and not require underlying coverage.
Nonowned snowmobile, ATV, or RV legal liability damage coverage: Covers damage you cause to rental units as well as all other damage you don't cause but for which you agree to be responsible under the rental contract (e.g., weather-related claims). The umbrella policy is excellent for plugging the gap created by the nasty care, custody, or control exclusion for damage for which the insured is responsible. Choose an umbrella that provides step-down coverage, with no underlying insurance required.
Premises Exposures
Heating oil tank pollution liability coverage: Coverage is provided for liability for property damage and cleanup costs arising from in-ground or below-ground heating oil storage tanks. Homeowners policies, of course, exclude pollution liability claims.
Work-related home premises liability coverage: This covers your liability for injuries to people entering your home for business purposes, such as to a courier who falls while bringing you a package from your employer and sues for injuries. Homeowners policies completely exclude business-related lawsuits. This risk concerns people who either have home businesses or who work on business at home. The exposure exists for probably half of all households, and I find it's one of the most commonly overlooked risks when I review homeowners policies for new clients. (Be careful with this coverage under the umbrella policy. Sometimes, it's provided only if there's underlying coverage on the homeowners. Yet, sometimes, even if underlying coverage is added, the umbrella will not extend unless you ask for and pay for a separate incidental office endorsement.)
Miscellaneous Exposures
Employers liability coverage: The exposure created by employing domestic workers (e.g., nannies, handymen, or personal care attendants) is completely excluded by underlying homeowners policies. Coverage is available through some umbrella policies. Some require underlying primary coverage, while others provide freestanding coverage, subject only to the SIR.
Nonprofit directors and officers liability coverage: This covers bodily injury, property damage, and personal injury claims arising from your volunteer services on a nonprofit board of directors (church councils, charities, condominium associations, etc.).
Assumed contractual liability coverage: This covers others' liability that you assume by signing a personal contract. This is a huge exposure because hardly anyone reads these "routine" contracts and thus people pick up a lot of liability risk unknowingly. The following are some examples from my client files in which I was able to find contractual coverage in an umbrella policy.
Each of these examples illustrates a major liability exposure that is largely uninsured by primary liability coverage. Many such exposures are excluded by some umbrella policies but are covered by others. To properly manage risk, first determine which liability risks your client faces that are not insured by his or her primary policies. Then find the umbrella policy or policies that best cover as many of these uninsured risks as possible.
Comparing Umbrella Policies
To compare umbrella policies properly, create a framework by taking the following steps.
1) Keep handy the most recent edition of the umbrella policy for each insurance company you represent or have access to (e.g., via surplus-lines brokers), including all mandatory endorsements for each state in which you operate.
2) Research the differences among the policies and their endorsements. I find using a spreadsheet works best. On the left side, I list all the possible coverages an umbrella can offer that are potentially not covered by primary insurance. Then I list the company names across the top. I read each company's policy and endorsements and fill in a "yes" or "no" under that company's name across from the potential coverage. I add footnotes for any exceptions needing clarification.
I suggest that you send the spreadsheets to the various companies' claims managers for confirmation that your interpretation of the coverage is correct. Go to the claims manager who interprets policy provisions at claim time rather than the underwriting manager.
3) Learn how to read and identify liability exposures in personal contracts. I always read contracts for my clients to help them identify risks to which they're unknowingly agreeing and to make sure their coverage will respond. When possible, I recommend that they fax me the contract before they sign it so that potentially adverse provisions can be negotiated or softened—and sometimes even eliminated. For future reference, as well as for errors and omissions protection, I scan copies of these contracts into the client's automated file.
4) Create a questionnaire from your spreadsheet that will help you determine which of the gap coverages available under umbrella policies your client needs.
Choosing the right umbrella: Use your questionnaire to determine where liability coverage gaps exist in a client's underlying insurance policies. Use your spreadsheet to select the umbrella policy or policies that best plug the gaps you've identified, then implement that umbrella for your client.
Sometimes underwriters require the underlying coverage to be placed with them as a condition of writing the umbrella. Covering the uninsured liability exposures is critical, but getting the right umbrella policy often means rewriting all the underlying insurance—usually a huge hassle for you and your client. That's why for new clients—especially affluent ones—it's important to first determine which umbrella policy affords the best gap protection before shopping for the underlying insurance, so you can then place the underlying insurance, if necessary, with the umbrella company. Catastrophic gap coverage of $1 million or more is usually much more important for those who serve on boards, rent boats, have an in-ground heating oil storage tank, etc., than any difference in premiums on alternative underlying insurance policies.
Don't judge an umbrella by its cover: Over the years, I've evaluated scores of umbrella policies. I've discovered that the size of the insurance company or its advertising budget has little to do with the scope and quality of its umbrellas. The most comprehensive umbrella policies I've seen include those of several large companies, but they also can come from smaller regional insurers that file their own forms. At one time, I even found a surplus lines umbrella policy that was broader than almost any primary market policy I'd ever seen, although the insurer eventually withdrew it from the market.
Three of the worst umbrella policies I've seen have come from well-known national insurers, often targeting more affluent personal lines clients with comprehensive package policies. Two of these umbrellas were straight excess policies offering no gap coverage at all. The other "umbrella" policy was even more restrictive than the company's primary policies. It wasn't even a straight excess!
Watch out for unannounced reductions in coverage on policy renewals: Don't assume that because an insurance company has always had a strong umbrella policy that it always will. For example, I know of a regional insurance company that for years had one of the best umbrellas I'd ever seen. But, without giving notice to agents or insureds, it began using the more restrictive AAIS umbrella form on policy renewals and added about a dozen more exclusions. Most states require that insurance companies notify customers if they renew a policy with more restrictive coverage than the original. That requirement doesn't seem to apply to personal umbrella policies, unfortunately.
You can reduce the chance of this kind of surprise by noting on your comparison form the edition date of all policies you're comparing. Then, for a given policy, compare its edition date on your form to the edition date of its renewal to determine if a new assessment is necessary.
Conclusion
Personal risk management requires a great deal of expertise in coverages and contracts, a commitment to building a risk management framework, and a great deal of additional time for each client. Nowhere is this truer than with selecting the right umbrella policy. Yet, the risk management approach makes such a huge difference in a personal lines client's welfare. It's extremely professionally rewarding, and I wouldn't practice insurance any other way.
This article originally appeared in the September 2007 issue of Property Casualty 360°. It has been revised by the author.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.