Time To Standardize Personal Umbrella Insurance Policies

Over the years, umbrella policies have become more and more restrictive and more and more difficult to analyze and compare with the competition. In this article I make a case for standardizing these policies. I appeal to the insurance industry collaboratively or the National Association of Insurance Commissioners (NAIC) legislatively to create universal standardized umbrella policies so that both agents and consumers will know exactly what they are buying just by the policy form number (much like homeowners policies).

As an insurance agent specializing in personal insurance and risk management for individuals and small-business owners, part of my job is to help people manage personal risk. I have been studying and comparing personal umbrella policies for over 15 years now. I put the results into a spreadsheet so that I can more easily compare the coverages and limitations of each of the policies available to my clients. The most current spreadsheet, updated February 2008, includes the new 2006 ISO form, the addition of General Casualty's umbrella, plus Progressive's decision to offer excess Uninsured and Underinsured Motorists coverage.

If you look carefully, the most significant observation you will make is that there's absolutely no consistency from one umbrella policy to another, and that being able to compare the scope of coverage between umbrella policies is certainly beyond the capability of any consumer and even beyond the capability of most personal insurance agents. What this means is that consumers who buy personal umbrella policies are largely buying a "pig in a poke." They have absolutely no idea whether the policy they're buying is one of the better umbrella policies or one of the worst. Personal umbrella policies, unlike auto and homeowners policies for example, are largely unregulated in the scope of their coverage. And, unlike auto and homeowners policies, the insurance industry has not really created any universally adopted umbrella forms. Those that have been created by ISO and AAIS (i.e. Western National) aren't broad enough in scope of coverage to be recommended.

There are three reasons the consumer buys an umbrella policy:

1. Additional liability coverage limits in excess of primary limits for the kinds of claims covered by the personal lines policies (auto, home, boat, etc.).

2. Excess defense coverage for those same claims because the primary policy defense coverage only defends up to its policy limits. Suits for limits in excess of primary limits will necessitate retaining one's own attorney to defense the excess amount.

3. A broader scope of coverage than underlying policies offer—in essence, covering many of the personal liability risks facing individuals that are not covered under underlying insurance policies. I refer to this broader coverage as "gap coverage."

Virtually all personal umbrella policies available today are extremely consistent in one way—they pretty much satisfy objectives 1 and 2 above. They provide excess liability coverage above the primary limits and provide excess defense coverage for the same type of claims covered by the primary policy.

The one area where there's actually no consistency is the scope of the gap coverage. Some umbrella policies provide virtually no broader coverage than is covered by primary policies. These are essentially straight excess policies. Most umbrella policies provide some gap coverage. There are only a small number of umbrella policies that provide coverage for most of the common exposures that consumers face not covered by their primary policies (the gaps). Vacation exposures—like renting vehicles abroad (U.S. auto policies typically provide coverage only within the United States and Canada) and liability for injuries and property damage caused when renting boats, snowmobiles, all terrain vehicles, etc.—are seldom covered by auto or homeowners policies. Or if, while renting these vacation vehicles, they are seriously damaged, rental agreements often hold the renters responsible for that damage. (Property in your custody is pretty much universally excluded under primary policies.)

Contractual liability risks are another problem, such as when a father signs a contract for his daughter's wedding reception, agreeing to indemnify the restaurant for any injuries to guests. Or, if alcohol is served at the reception, agreeing in the fine print of the rental agreement to defend and pay any judgment against the restaurant arising out of an automobile accident injury caused by a driver who had too much to drink at the reception. Consider also lawsuits for injuries to a coworker caused while driving a company-furnished vehicle. The lawsuit is neither covered by the company business auto policy nor the driver's personal auto policy, but can be covered by certain umbrella policies with no underlying insurance requirement.

Some consumers are kind enough to volunteer their services to nonprofit organizations, serving on a board of directors. Lawsuits against board members for injuries and property damage arising out of that service, such as injuries at the annual organization fundraiser, are not covered by underlying policies but can be covered by a good personal umbrella policy.

Homeowners policies often afford very little coverage for the regular business activities of children, such as newspaper delivery, baby-sitting, lawn mowing, etc. Umbrella policies can and often do pick up this exposure, at least up to certain age.

Some people have in-ground heating oil storage tanks. If the tank springs a leak, and the homeowner is sued for pollution cleanup expenses, they don't have coverage anywhere for that liability. A few umbrella policies provide coverage for that. Most do not.

Many states allow punitive damage awards. Although underlying policies often do cover those awards up to the policy limits, many umbrella policies do not provide excess coverage.

Standardizing Personal Umbrella Policies

The standardization of umbrella policies would help agents and consumers know the level of coverage they're buying. I suggest creating three umbrella forms in a format similar to that of homeowners insurance policies. They would look something like the following.

1. UMB1 (Basic Form)—A straight excess policy that provides excess bodily injury, property damage, and personal injury coverages, if covered by the underlying insurance policies. One difference would be the addition of worldwide coverage.

2. UMB2 (Broad Form)—A named-perils form covering liability for most of the activities that clients tend to get exposed to on occasion that aren't covered by a primary policy. This would include, for example, liability coverage for bodily injury and property damage claims arising out of:

   • the rental or borrowing of nonowned automobiles, watercraft, and recreational vehicles

   • damage caused to any of these nonowned vehicles/watercraft, subject to only the self-insured retention/deductible

   • contractual liability when the client/renter agrees to indemnify organizations in a contract when those organizations are sued as a result of that client's negligence (i.e., renting facilities or restaurants for wedding receptions, birthday parties, etc.)

   • sudden and accidental pollution liability (i.e., your underground home heating oil storage tank springs a leak)

   • automatic incidental premises liability for home offices to the extent covered by underlying insurance; services of directors and officers for nonprofit organizations

3. UMB3 (Special Form)—The "all-risk" form covering any lawsuit other than a few exclusions like intentional acts, transmissions of communicable diseases, criminal activities, aircraft physical damage legal liability, or pollution liability from seepage that occurs over a long period of time (i.e., is not sudden and accidental). Nearly all other risks that appear on my comparison spreadsheet would not be excluded, and thereby covered, such as:

   • mold liability

   • aircraft vicarious liability coverage

   • coverage for fellow employee lawsuits when operating a company furnished car for regular use

   • business activities of minors, providing they don't earn more than $5,000 per year, for example, and don't have any employees

   • excess employers liability coverage for injuries caused to domestic workers, etc.

All three forms would include an option to add at least $1 million of excess uninsured and underinsured motorist coverage.

Conclusion

Doing an analysis and comparison of umbrella forms is very difficult and very time consuming, but until such time as the insurance industry develops standardized umbrella forms or state insurance departments force them to do so, insurance agents practicing risk management must perform these comparisons on their own.

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.