Expert Commentary

Reducing Umbrella Risks by Having One Agent

From a risk management perspective, consumers are better off having all their personal liability insurance coverage with the same company. If that is not possible, then consumers should at least have all their liability insurance with the same agent.


Personal Risk Management
March 2010

One big advantage of having all your coverage with the same insurance company is that the risk of having the wrong underlying limits, especially after an insurer has just raised their required underlying limits, is greatly reduced or even eliminated. Here's why. While the umbrella contract makes it the insured's responsibility to maintain the proper underlying limits, if the insurer has both the umbrella and all underlying policies, it can automatically raise the underlying limits with just an explanatory letter to the insured. This strengthens the insured's position in the event of a lawsuit. The insurer would be hard pressed to try to hold the insured responsible for the financial difference between the original and new underlying limits when it had the power to rectify the situation. If making the change automatically is not feasible or legal, the insurer would at least have an obligation to send a cancellation notice on the umbrella if the insured did not accept the underlying limits change.

Coverage Congruency

A second advantage of having all insurance with the same insurer is congruency of coverage. There is a much lower chance of an umbrella policy not covering what a primary policy covers. As an example, consider a family with working children and the risk that liability arising from that work would be excluded under the homeowners policy's definition of "business." That definition often has an exception for children of the insured who babysit, deliver newspapers, provide lawn care, etc. There are usually three requirements that must be met as part of the exception:

  1. The children have to be under a certain age (i.e., 23).
  2. They have to earn less than a specified amount per year (i.e., $2,000).
  3. They cannot have any employees.

It's imperative that the three requirements that allow coverage for children's business activities in the umbrella policy are no less broad in scope than the same requirements for the underlying homeowners policy, or there could be no excess coverage. With all policies with the same insurer, this type of umbrella coverage gap is much less likely to occur. A company's umbrella coverage should never be less broad than the same company's underlying policies (i.e., "following form" coverage at a minimum).

Notice of Change Requirements

A third advantage of having underlying and umbrella policies with the same insurer is that notification of any new primary exposures (e.g., a secondary residence, a boat, or an incidental office) would also be considered notification to that company's umbrella department. That would not be the case if the affected underlying policy exposure and the umbrella policy were not with the same company.

Clearly, having the umbrella policy with the same insurer as the underlying policy greatly improves the chances that a large liability claim will be covered by both policies. This is good for both the customer and the agent. It's good for the customer, because he has the coverage he needs. And it's good for the agent because his errors and omissions (E&O) exposure is reduced significantly.

Using One Agent but Different Insurers

If having all underlying policies and the umbrella policy with the same insurer is not feasible, it is imperative that they at least all be handled by the same agent. When there are increases in the umbrella insurer's underlying insurance requirements or new exposures to be added to the underlying policies, the agent, armed with the awareness of these changes, can adjust the customer's underlying policy liability limits or endorse the umbrella to cover the new exposures. Having different insurers for the umbrella and the underlying policy transfers the responsibility for making these types of changes from the insured to the agent. It correspondingly increases the agent's E&O risk.

In addition, when using different insurers, there will certainly be incongruence of coverage. Definitions won't match up, and neither will the exclusions. If there is a lawsuit that is covered by the underlying policy but not by the umbrella, there will be hell to pay! (And it won't be the insured who pays.) The best way an agent can protect himself from this incongruence happening is to always write the umbrella policy with an insurance company whose coverages are almost universally broader than the standard Insurance Services Office, Inc. (ISO), auto or homeowners policy. For example, when I have to use different insurers for the umbrella and underlying policies, I use Auto-Owners for the umbrella, whenever possible. I learned this because of research I conducted comparing umbrella insurers. See Creating and Using a Personal Umbrella Comparison Form. Auto-Owners will write a freestanding umbrella policy but, without the underlying auto insurance, limits coverage for cars to "following form" only. Without the underlying homeowners insurance, it takes away nonowned watercraft liability coverage.

Using Different Agents for Underlying and Umbrella Policies

The situation that is toxic to agents, customers, and companies alike is where the agent who handles the underlying policies is different from the agent handling the umbrella policy for the same customer. When an umbrella insurer raises its underlying limit requirements, it is up to the insured to notify all agents to make the change to whichever policies are affected. And, when the customer has a new exposure and requests coverage be added to her auto or homeowners policy or other underlying policy, it is that customer's job solely to notify the umbrella policy's agent.

Leaving these important responsibilities in the hands of an insured who is not an insurance expert is just too risky, and really unnecessary, for both the consumer or the agent. This is why I will not represent a customer who wants just an umbrella policy through me. I would not be doing either of us a favor.

Summary

Whenever possible, it's important to keep underlying liability insurance with the same insurer who handles the umbrella policy. The further you get away from that model, the more likely the risk of something falling through the cracks, and the greater the responsibility of coordinating underlying and umbrella coverages as it shifts from the insurer to the agent and ultimately to the customer.


Jack Hungelmann's book Insurance for Dummies, contains much of this information and is available at your favorite bookstore or online. For more information on his risk management and insurance business, go to www.JackHungelmann.com where you can check out sample newsletters, brochures, other articles written on various issues. For background information, see Mr. Hungelmann's biography.


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.

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