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Most of our clients these days buy an umbrella or excess liability policy. It’s a sensible thing to do, with multi-million dollar jury awards becoming increasingly commonplace. If you have any business relationships that require you to provide evidence of insurance, like leases or contracts for example, you’ll also see requirements for high limits that can only be covered at reasonable cost by an umbrella policy.
Umbrella policies sit over the policies that lie under them. Typically, these will be, at minimum, your general and auto liability policies, and the employers liability section of your workers compensation policy. Other lines of underlying insurance may also fall under the umbrella depending on your particular situation. Since the umbrella policy(ies) sit over these underlying policies and limits, umbrella underwriters can’t offer a proposal until they know what they are covering over. For that reason it will usually be the last policy we arrange for you.
In terms of what they cover, umbrella policies can do two things. Umbrella policies all provide additional insurance limits over the primary underlying liability insurance policies carried by the insured in the event that those primary underlying limits are exhausted by one large loss or several losses. These additional limits are the main reason to buy these policies; it’s an economical way to buy higher limits. Although the umbrella will cover over several underlying policies, it has, in effect, a very large deductible built in, equal to the limits of the underlying polices. Large deductibles equal lower premiums, and with required underlying limits typically starting at $1,000,000, umbrella policies can be written relatively inexpensively.
True umbrella policies also offer another advantage. They may provide coverage for liability exposures or claims that might not be covered by the primary underlying policies. This happens with true umbrellas because they are unique, separate policies, with their own terms, conditions and insuring agreements. Since these true umbrella policies may drop down to provide some primary coverage in limited circumstances, there will be a separate deductible included for these types of claims; usually $10,000, it is commonly described in the policy as a self-insured retention (SIR).
The presence of an SIR in an umbrella quote is a pretty good indicator that you are looking at a true umbrella policy. Unfortunately, many policies commonly referred to as “umbrella” policies these days really aren’t. The other variation in these types of policies is properly called an excess liability policy. These policies give you the same advantage as umbrellas in terms of adding limits to underlying policies. The difference is that they are written on a “follow form” basis; if something is covered in an underlying policy it will be covered in the excess liability policy; if it’s not, it’s not.
That’s basically the insuring agreement in a true excess liability policy, so it doesn’t take a lot of paper or verbiage to write such a policy. That is a tip off you are looking at an excess liability policy versus a true umbrella; it will only have a few pages. And that’s a good rule of thumb to distinguish between umbrellas and excess liability policies. If the declaration pages show an SIR, it’s probably an umbrella; if there are just a few pages to the policy, it’s probably an excess liability policy. That rule will be pretty accurate in the majority of cases.
So, why does all this make a difference? Both these types of policies are still commonly referred to as “umbrellas”, even though often they are not. The main reason people buy either of these policies is to get higher limits cheaply, and either will do that. When umbrella policies were first developed decades ago there might have been some extra coverage built in, but that’s mostly gone away by now. Arguably, umbrella policies are less desirable right now; as separate policies with their own terms and conditions they require separate analysis to make sure they mesh with underlying policies; follow form policies make things much easier.
Either way, here are some things to be aware of when buying one.
1. Pricing Variability Pricing for these policies can vary widely. Umbrella policy rating is almost entirely a matter of individual insurance company and underwriter judgment, and market appetite of the insurer. As long as you are dealing with financially sound insurance companies, it pays to shop around. We do this for you routinely.
2. Underlying coverage Umbrella policy conditions usually call for maintenance of underlying coverage. The umbrella insurer’s part in a loss is determined as if the underlying policy were in force, even if it’s not. The only exception is when an underlying policy is totally exhausted by payment of loss, in which case the umbrella policy “drops down” to replace the exhausted underlying protection. In some umbrellas drop-down coverage also may become effective if the primary insurer is insolvent. In any event, remember, if an underlying policy is not scheduled in the umbrella policy declarations, there is probably no coverage in the umbrella, and certainly no coverage in a follow form excess liability policy.
3. Defense coverage A significant variation in policies has to do with defense coverage. Almost all umbrella liability contracts have provisions that, in effect, protect the right of the umbrella insurer to take over or participate in the defense of a claim that it may become involved in. Also, some contracts include defense coverage of losses when, because the underlying insurance is exhausted by the loss payment, the umbrella policy comes in as primary coverage. Some policies may include defense and appeal costs within the limits of coverage while others provide them as supplementary payments outside the limits of coverage.
4. Additional insured Any additional insured under any policy of underlying insurance should automatically be an insured under the umbrella policy. The coverage isn’t any broader than the coverage provided by the underlying insurance.
5. Indemnity or pay-on-behalf-of policy Indemnity policies only require the insurer to make payment to the insured after the insured has first paid for covered damages or expenses. The language requires you to use your own money first and then seek reimbursement from the insurance company. With the far better pay-on-behalf-of policy the insurer promises to pay damages on behalf of the insured; the policyholder does not have to write any checks. Expenses for defense are normally paid by the insurer as they are incurred if the umbrella insurer has taken over defense, even with a pay-on-behalf-of policy.
6. Exclusions Both umbrella and excess liability policies can contain exclusions not found in underlying policies. Don’t assume that if something is covered in the underlying policies the umbrella also covers; look for any added exclusions.
An umbrella (or excess liability) policy might be right for you, but be sure you understand what the policy covers and what it excludes before buying. Like all things about insurance, it’s not a simple purchase.