Plugging Liability Insurance Gaps with the Personal Umbrella Policy

A properly chosen personal umbrella policy is the single best tool available to plug liability coverage gaps that fall outside the scope of underlying auto, homeowners, and other personal policies. Determining what those insurance gaps are for each client and then recommending to your client an umbrella policy that provides step-down primary coverage for each of those uninsured exposures, subject only to the self-insured retention (SIR), is one of the most important functions of personal risk management.

What makes this task particularly challenging is the lack of consistency among umbrella policies. Unlike most personal auto and homeowners policies, which are fairly comparable, umbrella policies vary dramatically in the scope of their coverage. Other than the territory of coverage being broadened to worldwide, the scope of umbrella coverage is defined primarily through exclusions in the policy or exclusions in attached endorsements.

Here are some examples taken from my own client files of coverages normally excluded by primary policies that are available with the right umbrella policy. As you look at each of the following coverages, remember every single one will be provided by a personal umbrella policy unless it's specifically excluded.

Automobile-Related Exposures

Coverage is provided for clients who have no personal auto policy of their own and thus have no automatic coverage to drive non-owned cars (they either have no automobiles at all or only have a vehicle furnished by their employer). For someone in this situation, since underlying drive other car or named non-owner coverage is either expensive or unavailable, it is best and most economical to choose an umbrella policy that will provide step-down coverage subject only to the self-insured retention. About half the umbrellas I've looked at do provide step-down or drop-down coverage. If you're successful in avoiding the need for underlying coverage, the money you have saved your client will generally more than pay for the cost of the umbrella policy for an entire year!

This coverage is especially good for clients who neither own nor drive their own car (often elderly or disabled people), but who receive rides through the generosity of their friends or family members to shop, see doctors, etc. Under principal-agency case law, these passengers can be sued and held liable for accidents caused by their drivers because the car that caused the accident was on the road for the sole benefit of the passenger. Here again, it's important to choose an umbrella policy that does not require underlying insurance for this exposure.

For those who are either furnished or have access to a company vehicle and occasionally have coworkers as passengers, this coverage is desirable. If the driver's negligence injures a coworker, the business auto policy usually excludes coverage for "fellow employee" lawsuits. The driver's personal auto policy excludes coverage for vehicles "furnished or available for regular use." If underlying coverage is required by the umbrella, the extended non-owned endorsement needs to be added to the insured's personal auto policy, naming all drivers.

This provides coverage for bodily injury and property damage primary liability when renting cars abroad. The territory of the personal auto policy is the United States and Canada only. The territory of most personal umbrellas is worldwide. Thus, step-down coverage is provided without underlying insurance requirements.

This covers damage you cause to a car you rent or borrow, which is excluded by the "care, custody and control" exclusion of the personal auto policy. Granted, under most personal auto policies, your 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, there is no coverage outside the United States and Canada. The right umbrella policy will cover collision damage you cause to a rented or borrowed car on a primary basis and worldwide, subject only to the self-insured retention.

This covers the obligation you assumed when you signed the contract to defend and pay any judgment against the rental car company, even if you weren'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 solely, and the coworker causes the accident with injuries. In this case, your obligation is to defend and pay judgments against the rental company even though you had nothing to do directly with the accident.

This provides coverage for damage to rental cars that you did not personally cause but for which you have agreed contractually to be liable under a rental contract (i.e., hail damage, theft, etc.)

Watercraft, Aircraft, and Recreational Vehicle Exposures

Bodily injury and property damage liability coverage is provided while operating hired or borrowed boats that are not covered by primary homeowners liability coverage (i.e., 30-foot sailboats, houseboats, sometimes jet skis, etc.).

Covers damage to non-owned watercraft either caused by you or for which you have agreed to be responsible under a rental contract.

Covers your liability to reimburse a rental agency for the lost revenues from a boat that you had rented that you returned damaged.

This covers your liability for bodily injury and property damage to others when chartering an aircraft with or without crew. (Does not cover your legal liability for damage to the aircraft hull. This coverage is only available through the rental agency.)

Covers the liability for renting or borrowing these vehicles, none of which normally are covered by primary policies. The properly chosen umbrella will step down to the self-insured retention and not require primary underlying coverage.

Covers damage you cause to rental units as well as all other damage you didn't cause but for which you agreed to be responsible under the rental contract (i.e., weather-related claims). The umbrella policy, I think, is an excellent policy to avoid the nasty care, custody, and control exclusion for damage that you cause to non-owned property or are contractually responsible for. Choose an umbrella that provides step-down coverage with no underlying insurance required.

Premises Exposures

Coverage is provided for liability for property damage and cleanup costs arising from the in-ground or below-ground heating oil storage tanks. Homeowners policies, of course, exclude pollution liability claims.

This covers your liability for injuries to those coming on to your premises for business purposes, such as a courier bringing a package from your employer, who falls on your premises and sues for their injuries. Homeowner policies completely exclude business-related lawsuits. These are people that either have home businesses or bring business home to work.

This exposure exists for probably half the households out there, and is one of the most commonly overlooked exposures when I review homeowners policies for new clients. (Be careful with this coverage under the umbrella policy. Sometimes it's provided only if there is underlying coverage on the homeowners. But sometimes even if underlying coverage is added to the homeowners, the umbrella will not extend unless you ask for and pay for additionally a separate incidental office endorsement to the umbrella policy!)

Miscellaneous Exposures

For clients with domestic workers (nannies, handyman, personal care attendants), this exposure is completely excluded by underlying policies. It is available through some umbrella policies—sometimes requiring underlying primary coverage or sometimes as a free-standing coverage not requiring underlying coverage at all, subject only to the self-insured retention.

This covers bodily injury, property damage, and personal injury claims against you arising out of your volunteer services on a nonprofit board (i.e., church councils, charities, condominium associations, etc.). An example of such a suit would be if a child drowns in the indoor association swimming pool after hours. The board of directors failed to require that the entry door be locked at all times, and a lawsuit against board members results. An umbrella policy that covered service on nonprofit boards should defend and pay judgment against any unit owner insured by that umbrella policy. Caution: because an umbrella policy only covers claims arising out of bodily injury, property damage, and personal-injury, this umbrella coverage clearly doesn't replace the need for that board to carry D&O coverage.

This covers the liability of others that you assume in a personal contract that you sign. This is a huge exposure because hardly anyone reads those "routine" contracts that they sign, but nonetheless they pick up a lot of liability risk unknowingly.

These are some examples from my files for which I was able to find contractual coverage in an umbrella policy.

1. A wheelchair-bound client had an elevator installed in her 3-story home. The contract with the elevator maintenance company required her to defend and pay judgments against them even when the cause of the injury was at least partially caused by the negligence of the elevator maintenance company.

2. A wedding reception contract contained a restaurant requirement that the bride and groom defend and pay judgments against the restaurant even if caused by the negligence of the restaurant (i.e., 50 guests getting seriously ill from food poisoning!).

3. A group of four friends, all turning 50 years old, rented a huge agricultural building on the site of the state fair grounds for a big birthday bash. In the contract, my client agreed to defend and pay any judgment against the State of Minnesota and the fairground for injuries or property damage regardless of who was at fault!

Each of these examples above represents a major liability exposure that is largely uninsured by primary liability coverage. Many of these exposures are excluded by some umbrella policies but are covered by others. To properly manage risk, first determine what liability risks your client faces that are not insured by his primary policies. Then locate an umbrella policy or policies that best cover as many of these uninsured risks as possible.

Comparing Umbrella Policies

The following are the steps I personally take to compare umbrella policies properly.

1. Keep on hand the most current edition of the umbrella policy for each insurer you represent or have access to (i.e., surplus lines brokers) including all mandatory endorsements for each state in which you operate.

2. Research and discover the differences between the policies and their endorsements. I find a spreadsheet works best. On the left-hand side of the spreadsheet I list all the different possible coverages that an umbrella can offer that are potentially not covered by primary insurance. Then I list the company names across the top. I then read each company's policy and endorsements and fill in, under that company's name and across from the potential coverage, a "yes" or "no." I add footnotes next to any exceptions that need additional clarification. (If you do a comparison for yourself, I suggest sending the spreadsheets to the claims managers for each of the companies for confirmation that your interpretation of the coverage is correct. It is important to go to the claims manager who interprets policy provisions at claim time—not the underwriting manager.)

3. Learn how to read and identify liability exposures in personal contracts. I always read these contracts for my clients to help them identify risks that they are unknowingly agreeing to and to make sure their coverage will respond. If possible, I recommend that they fax me the contract before they sign it. Then, potentially adverse provisions in some of these contracts can be negotiated and softened and sometimes even eliminated. For future reference as well as 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 assist your clients to determine which of the "gap coverages" available under umbrella policies your client needs.

Use your questionnaire to determine where the liability coverage gaps exist in underlying insurance policies. Use your spreadsheet to select the umbrella policy or policies that best plug the gaps that you've identified. Then implement that umbrella for your client.

Sometimes, underwriting requires the underlying coverage be placed with them as a condition of writing their umbrella. Since covering the uninsured liability exposures is critical, getting the right umbrella policy often means rewriting all the underlying insurance, a huge hassle for you and your client. That is why, for new clients, especially those with some affluence, it is important to first determine which umbrella policy affords the best "gap protection" before shopping the underlying insurance. Then you can place the underlying insurance with that particular 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 the difference in premiums on underlying policies.

Over the years, I have evaluated scores of umbrella policies. I have discovered that the size of the insurance company or its advertising budget has little to do with the scope and quality of their umbrella policy coverages. The most comprehensive umbrella policies I've ever seen include the large companies like State Farm and AutoOwners, but also can come from smaller regional companies who file their own forms. At one time, I even found a surplus lines umbrella policy (Evanston) that was broader than almost any primary market policy I had seen before they withdrew the policy from the market.

Three of the worst 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 with no "gap coverage" at all. The other "umbrella" coverage was even more restrictive than that company's primary policies. It wasn't even a straight excess!

Don't make the mistake of assuming that because an insurance company has always had a strong umbrella policy it always will have one. Here is a good example.We have a regional insurance company with a local home office who, for years now, has had one of the best umbrellas I've ever seen.But without warning, without any notice to agents or insureds, renewal policies started adopting the more restrictive AAIS umbrella form.In addition, it added even more exclusions for guest passenger liability, punitive damages, and mold liability claims.The original privately filed form included about 11 exclusions, while the new form includes about 25 exclusions.In just one day, this insurance company went from having one of the best umbrellas to having one of the worst. Most states require insurance companies to notify customers if they have renewed a policy with more restrictive coverage.Unfortunately, that requirement doesn't seem to apply to personal umbrella policies.

You can reduce the chance of these kinds of surprises happening to you and your customers by noting on your comparison form the edition date of the umbrella policy you're comparing.Then you can compare the addition date and renewal policies to the addition date on the policy you evaluated to determine if a new assessment is necessary.

Conclusion

Doing personal risk management requires a great deal of expertise in coverages and contracts, a commitment to building a risk management framework from which to operate, and a great deal of additional time for each client. No where is that more true than the task of selecting the right umbrella policy. Yet risk management does make such a huge difference in a personal lines client's welfare. It is extremely professionally rewarding. I wouldn't do it any other way.

For more information on using umbrella policies to plug personal insurance gaps, see "Creating and Using a Personal Umbrella Comparison Form" and "Choosing the Best Umbrella Policy: Case Study." Also, there are two full chapters on the subject in Jack's book, Insurance for Dummies.