Commercial Umbrellas - How Do They Work...

and When Don’t They Work?

SPONSORED BY

Commercial Umbrellas

How Do They Work?……and When Don’t They Work???

Michael C. D’Orlando, CIC, LIA, CPIAInsurance Training & Consulting Services

11 Lake Shore DriveAmesbury, MA 01913

(978) 314-5743mcdorlando@aol.com

“I read the news today, oh boy…” (With apologies to Lennon & McCartney)

Jury Awards $7.4 Million in Ephedra SuitHOUSTON (AP) -- A jury awarded $7.4 million to a woman who suffered brain damage in a stroke two years ago after taking a diet supplement that contained the now-banned herbal stimulant ephedra.

Texas Jury Awards $23.36 Million in Fen-Phen Lawsuit On Friday, August 6, 1999, in the first Fen-Phen diet drug jury trial to reach a final verdict, a Texas jury awarded 23.36 million dollars to Debbie Lovett, a 36 year old woman who suffered heart valve damage after taking Pondimin, the brand name for Fenfluramine. There are over 3,000 pending lawsuits against American Home Products for their marketing and sales of Pondimin and Redux.

Baxter v Jimmy Byrnes Club

A nightclub patron was awarded $1,500,000 for injuries sustained when he fell down steps because of a missing handrail.

Bakken v DeAngelo Pest Control

A woman became a paraplegic when she leaned against a porch railing which had termite damage and she fell two stories to the ground. She was awarded $2,300,814.

Ziles v A.J. Metler Hauling and RiggingA 42 year old man was killed in a tractor trailer collision and his family was awarded $5.9 million dollars.

Murray v A.J. Metler Hauling and RiggingA $3.6 million dollar settlement was reached in a wrongful death case arising from injuries received in a tractor trailer collision.

* Special Note: Umbrellas are not standardized and they can vary dramatically from carrier to carrier. If you represent ten different carriers, you are probably writing ten different Umbrellas! The term “Umbrella” is like the terms “All-Risk”, “Comprehensive” and “Dinosaur”. When Lloyds first introduced the Umbrella in the 1940’s, there were very few exclusions and the word “Umbrella” may have been an appropriate term. Numerous unanticipated losses generated more and more exclusions and today’s “Umbrellas” might be better described as “Excess” liability policies.

A. The Purpose of Excess/Umbrella Liability Policies

1. Increase liability limits

2. Provide broader coverage...

but…

It is important to note that in relation to underlying coverage, some excess liability policies are:

a. Broader, or …

b. Same, or …

c. More limited or restrictive, or …

d. Broader in some areas and more limited in others!

3. Provide primary coverage when:

a. Underlying aggregates are exhausted, or

b. Loss covered by excess and not by underlying

B. “Excess” Liability Policies versus “Umbrellas”

1. Excess

a. Provides additional limits of liability

b. Provides only additional layer of protection on specific exposures selected

c. Only comes into play when payment has been made under primary layer

d. May be same as underlying, or narrower, or broader and narrower at the same time

e. Usually follow form

f. No standard form

2. A "True Umbrella"

a. Additional/higher limits of liability protection

b. Affords broader coverage for exposures not covered by underlying policies

c. Drop-down provision - automatic replacement coverage for underlying liability policy aggregates that are exhausted by a loss

d. No standard form

C. Examples of areas where Excess/Umbrella Policies MIGHT be broader than underlying coverages:

1. Personal Injury – May provide contractually assumed liability for Personal Injury; May provide coverage for discrimination, mental anguish, humiliation

Sample wording

Insured contract means any written or oral agreement…in which the insured assumes tort liability of another to pay damages because of “bodily injury”, “property damage”, “personal injury” or advertising injury…

Personal Injury means: 1. False arrest, detention or imprisonment 2. Malicious prosecution 3. Wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a ……………………………… : : 6. Discrimination (unless insurance thereof is prohibited by law)

Personal Injury means: 1. Bodily harm or injury, sickness, disease, disability, shock, fright,

mental anguish or mental injury 2. False arrest, detention or imprisonment 3. Malicious prosecution : 7. Discrimination or humiliation

2. Coverage Territory – Usually “Worldwide” and in some cases “Universe-wide”!

Sample wording

“Coverage territory” means anywhere in the world if the “insured’s” responsibility to pay damages is determined in a “suit” on the merits in the United States (including its territories and possessions), Puerto Rico or Canada…

We will pay on behalf of the insured the ultimate net loss…because of personal injury, property damage or advertising injury, anywhere in the world.

We will apply this agreement to covered injury or damage that results from events or offenses that happen or are committed anywhere.

3. Non-Owned Watercraft – May provide coverage for use of watercraft which exceeds the 26 foot limitation imposed by the CGL

Sample wording

We will not cover bodily injury or property damage that results from the ownership, maintenance, use…of any watercraft over 50 feetlong unless:

a. such bodily injury or property damage is covered by your basic insurance; or b. you notify us within 30 days after you acquire such a watercraft and we agree to provide coverage.

4. Who Is an Insured – May broaden named insured definition

Sample wording

“Any newly acquired or formed organization over which the named insured maintains majority interest and to which more specific insurance does not apply, provided that this policy does not apply to any injury or damage that took place before you acquired or formed the organization.”

This wording does not have the 90-day limitation found in the CGL

D. Examples of areas where Excess/Umbrella Policies MIGHT be narrower than underlying coverages:

1. Punitive Damages – While most CGL’s are silent on punitive damages and could, therefore, provide coverage when allowed by law, many Excess policies have a punitive damages exclusion

2. Pollution Liability – Although pollution liability is excluded in the CGL, the exceptions to the exclusion give back quite a bit of coverage under certain circumstances. Many Excess policies have “absolute” pollution exclusions

3. Aggregate Limits – Unlike the CGL, the Business Auto Policy does not have aggregate limits. In many Excess policies, the aggregate limits apply to all losses, including auto

4. “Batch Clause” – Claims arising from all products made in the same “batch” will be a single occurrence!

E. Example of higher limits

Fred Flintstone, owner of The Very Hard Rock Café, has a CGL with limits of $1,000,000 per occurrence/$2,000,000 general aggregate and a $5,000,000 Umbrella Policy. Someone tripped and fell in the restaurant and was seriously injured. The injured party sued Fred and was awarded $1,200,000. How will Fred’s policies respond?

Commercial General Liability Policy $_____________

Umbrella Policy $_______________

F. “Drop Down” examples

1. Underlying aggregates are exhausted …

Sample wording

1. If the limits of underlying insurance have been reduced by payment of loss, this policy will drop down to become immediately excess of the reduced underlying limit; or

2. If the limits of underlying insurance have been exhausted

Following the $1,200,000 claim, Fred’s CGL paid another trip-and-fall claim in the amount of $200,000. During the same policy period, a chandelier falls and injures a customer and the award is $1,000,000. How will Fred’s policies respond?

Commercial General Liability Policy $_____________

Umbrella Policy $________________

2. Loss covered by Excess and not by Underlying …

Fred charters a 40 foot boat to take some of his regular customers out fishing. Someone sues Fred after falling overboard and he is awarded $300,000. Fred discovers that his CGL has a watercraft exclusion, but will provide liability coverage for non-owned watercraft less than 26 feet long. His Umbrella policy also has a watercraft exclusion but will provide liability coverage for non-owned watercraft less than 50 feet long. How will his policies respond?

Commercial General Liability Policy $________________

Umbrella Policy $________________

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G. SELF-INSURED RETENTION (SIR)

1. A Self-Insured Retention is a type of deductible which only applies to those claims which are covered by the Umbrellaand for which no underlying coverage is required

2. SIR requirements vary by ...

a. Carrier

b. State regulation

3. SIR may be on a “Per Occurrence” basis or a “Policy Period” basis

Sample wording

“We will be liable for only that portion of damages, subject to the Each Occurrence limit stated in the Declarations, in excess of the “retained limit”, which is the greater of:

The total amounts stated as applicable limits of underlying policies listed in the Schedule of Underlying Insurance and applicable limits of any other insurance providing coverage to the “insured” during the policy period; or

The amount stated in the Declarations as Self-Insured Retention as a result of any one occurrence not covered by the underlying insurance listed in the Schedule of Underlying Insurance nor by any other insurance providing coverage to the “insured” during the policy period.”

4. In the example on page 10, if Fred’s policy has a $10,000 SIR, how will the loss be paid?

CGL Limits $1,000,000 per occ. $2,000,000 gen. agg.

Umbrella $5,000,000 per occ. $5,000,000 agg. $ 10,000 SIR

Fred Flintstone, owner of Fred’s Very Hard Rock Café, charters a 40 foot boat to take some of his regular customers out fishing. Someone sues Fred after falling overboard and he is awarded $300,000. Fred discovers that his CGL has a watercraft exclusion, but will provide liability coverage for non-owned watercraft less than 26 feet long. His Umbrella policy also has a watercraft exclusion but will provide liability coverage for non-owned watercraft less than 50 feet long. How will his policies respond?

Commercial General Liability Policy $_____________

Umbrella Policy $_____________

Fred’s Very Hard Rock Café $_____________

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H. CONCURRENCY

A. Common policy period

1. The underlying policies and the Excess or Umbrella policies should have the same inception and expiration dates

2. If underlying policies are not concurrent, they should be cancelled and rewritten if possible or renewed short term to coincide with the Excess or Umbrella policy dates

B. Problems with "Non-Concurrency"

1. Aggregates

Underlying Limits shown on the Declarations must be unimpaired at policy inception

2. Continuous or repeated exposures

The definition of “occurrence” includes “continuous or repeated exposure to substantially the same general harmful conditions”

Sample wording

“It is a condition of this policy that the policy or policies referred to in the attached Schedule A, including renewal or replacements thereof, shall be maintained, without alteration of terms or conditions, in full effect during the currency of this policy except for any reduction or exhaustion of the aggregate contained therein solely by reason of losses that arise out of occurrences which take place during the period of this policy. Failure of the insured to comply with the foregoing shall not invalidate this policy, but in the event of such failure, the Company shall be liable hereunder only to the extent that it should have been liable had the insured complied therewith.”

Example of Concurrency

Excess

$1,000,000

Primary $500,000 per occ./$1,000,000 agg.

1/1/07 3/1 5/1 8/1 1/1/08

1. On March 1, a customer was injured after tripping in your hardware store and was subsequently awarded $200,000.

Primary policy pays $200,000

2. On May 1, one of your employees hit a customer with a forklift. The customer was awarded $500,000 for her injuries.

Primary policy pays $500,000

3. On August 1, two customers were seriously injured when a shelving unit collapsed and they were struck by heavy equipment. Each person was awarded $450,000.

Primary policy pays $__________

Excess policy pays $__________

Example of Non-Concurrency

7/1/07 7/1/08 Excess $1,000,000

Primary $500,000 per occ/$1,000,000 agg

1/1/07 3/1 5/1 8/1 1/1/08

1. On March 1, a customer was injured after tripping in your hardware store and was subsequently awarded $200,000.

Primary policy pays $200,000

2. On May 1, one of your employees hit a customer with a forklift. The customer was awarded $500,000 for her injuries.

Primary policy pays $500,000

3. On August 1, two customers were seriously injured when a shelving unit collapsed and they were struck by heavy equipment. Each person was awarded $450,000.

Primary policy pays $___________

You pay $___________

Excess policy pays $___________

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Example of Non-Concurrency: Continuous or Repeated Exposure

7/1/07 7/1/08

$1,000,000 Excess

$500,000 Per Occurrence $500,000 General Aggregate

1/1/07 4/1 10/31 1/1/08 $800,000 continuous loss

1. A continuous loss totaling $800,000 occurs over a seven month period from 4/1 to 10/31. Due to prior losses, the General Aggregate, which was originally $1,000,000, had been reduced to $500,000

a. The Primary policy pays $500,000

b. The General Aggregate is reduced to $0

2. The Excess Policy was in effect for four of the seven months

Months Excess in Force Length of Occurrence X Amount of Loss = Aggregate Satisfied

4 Months 7 Months X $800,000 = $456,000

a. $456,000 does not exceed the underlying requirement

b. $44,000 gap exists in the Excess for the remainder of the policy period

I. FEATURES OF EXCESS/UMBRELLA LIABILITY POLICIES

1. Underlying Insurance

a. Requirements

Underlying policies must be maintained to respond as primary coverage. The types of coverage required will vary by carrier, but it will typically be for the most common exposures (Auto, CGL, Employers Liability) and others specific to the insured’s business and activities (Watercraft Liability, Liquor Liability, Professional Liability, etc.) if the exposure exists

Required limits vary by carrier, but $1,000,000 is very common for most exposures

Required underlying limits may be higher if Excess carrier does not write underlying (ex. the CGL requirement might be $500,000 if written by the same carrier, or $1,000,000 if written by another carrier)

b. How will the Excess Policy respond if …

Underlying limits are not maintained or underlying policy is canceled?

There is a material change to underlying policies?

There is bankruptcy or insolvency of the underlying insurer?

The underlying defense costs are within the underlying limits?

Examples of policy wording:

Underlying must be maintained …

You agree to maintain in force without alteration of terms or conditions the underlying policies listed in Schedule A, except for any reduction of aggregate limits subject to Condition J …

Renewals or replacements cannot be more restrictive …

You may renew or replace the underlying policies, but they may not be more restrictive than the policies listed in Schedule A …

Excess will not drop down due to insolvency of underlyer

If you are unable to recover from your basic insurance because the basic insurer is unable to pay, or you fail to comply with the terms of your contract with that insurer, this agreement will only apply to amounts over the limit shown in the Schedule of Basic Insurance.

If the required underlying isn’t there, you’re going to have one heck of a deductible!!

If you do not maintain in force the policies listed in Schedule A or meet all conditions and warranties of those policies, this policy shall apply as if those policies were available and collectible.

Exhaustion of underlying limits in defense costs will not cause this Excess Policy to drop down and respond!

“In the event that the limits of underlying insurance have been reduced by payment of damages, this policy will become immediately excess of the reduced underlying limit…”

More Examples

Fred has a $5,000,000 Umbrella Policy with a Self-Insured Retention of $10,000. The policy requires unimpaired underlying limits as follows:

CGL $1,000,000 Per Occurrence $2,000,000 General Aggregate BAP $1,000,000 CSL

1. Fred’s employee, Barney, used the company van to pick up some supplies and on his way back to the café, he hit and severely injured four people in another vehicle. The awards totaled $1,200,000.

Underlying Carrier $____________

Umbrella Carrier $____________

Very Hard Rock Café $____________

3. Unbeknownst to Fred, one of his waiters is prejudiced against vegetarians. He treats them very badly and gives them very poor service. One day, a vegetarian sued the café for discrimination and was actually awarded $100,000. Fred’s CGL does not cover discrimination, but his Umbrella policy does.

Underlying Carrier $____________

Umbrella Carrier $____________

Very Hard Rock Café $____________

J. Insuring Agreements

1. "Pay on Behalf Of"

We will pay on behalf of the “Insured” those sums in excess of the “Retained Limit” which the “Insured”…shall become legally obligated to pay…

a. Insurer assumes defense

b. Insurer pays judgment or settlement directly to the third party

c. Insurer may not place insured in jeopardy by refusing to settle within policy limits when possible

2. "Indemnify"

We will indemnify the “insured” for “Ultimate Net Loss” in excess of the “Retained Limit” because of “bodily injury” or “property damage” to which this insurance applies…

a. Insured assumes defense

b. Insured pays judgment or settlement

c. Insured looks to insurer for reimbursement, including defense

d. Insurer has no obligation to settle

K. Territory

1. "Following form"

Territory would track with the underlying policies

2. Anywhere in the world

Very common

3. Where suit may be brought

May be worldwide or may be more limited like most underlying policies

Who Is an Insured

1. "Following form", or …

2. Umbrella may broaden insured definition, or ...

3. Umbrella may narrow insured definition

L. Defense

1. May be in addition to the limits as Supplementary Expenses or may be within the limits as damages

Sample wording

We will defend any suit against the insured alleging liability insured under the provisions of this policy…

Any payment of amounts incurred above will serve to reduce the limits of liability of this policy…

We have the right and duty to assume control of the investigation, settlement or defense of any claim or suit against the insured for damages covered by this policy…

In those circumstances where the above paragraph applies, we will pay our expenses in addition to the applicable limits of insurance…

2. May “pay on behalf of” or “indemnify”

3. May provide first-dollar defense for claims subject to SIR or SIR may apply to defense costs

M. Exclusions

1. Where do we find them?

a. Definitions

b. Exclusion section

c. Endorsements

d. Following Form

2. No standard forms, but often included are:

a. Aircraft and watercraft

b. Property in care, custody or control

c. Discrimination

d. Injury to fellow employee

e. ERISA/Employee Benefits Liability

f. Punitive damages

g. Product recall

h. Uninsured and underinsured motorists

i. Pollution

j. Nuclear

k. Occupational disease

l. Professional

m. Liquor

n. Employment Related Practices

N. Alternatives for Structuring Excess Coverage

1. One carrier

2. Layering

Using multiple carriers to stack layers of coverage on top of each other

3. Quota share

Two or more carriers share a layer and respond proportionately

4. Buffer

An amount of coverage to bring a specific underlying policy up to the required underlying limit. Used when the underlying carrier cannot or will not provide the amount needed on the underlying policy

O. Price Determination

1. Relationship to "burning layer" (first layer)

- Lowest layer has the highest cost - First to pay/Last to recover - Highest layer has the lowest cost

2. Underlying requirements

- The higher the underlying, the lower the premium

3. Judgment and market conditions

P. OCCURRENCE & CLAIMS-MADE ... A "MIXED" PROGRAM

1. Problems

a. Occurrence over claims made

b. Claims made over occurrence

2. Solutions

a. Avoid

b. If cannot be avoided:

(1) Try to confine "claims made" policies to the upper layers

(2) If the umbrella is "claims made”, buy the highest limits you can in the underlying

(3) Keep all policies in a layer identical when a quota share arrangement exists

(4) Try to keep retro dates consistent through all layers

(5) Try to negotiate guaranteed availability of a "Supplemental Extended Reporting Period" in

the event of non-renewal

(6) Put in writing for all parties