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How To Structure Umbrella Coverage

Umbrellas are non-standard policies, which means that every company has its own policy language. To make sure you’re getting the best possible coverage, we recommend you look for the following:

“Pays on behalf of”

Most umbrella policies offered by excess and surplus lines companies promise to “indemnify” rather than to “pay on behalf of” the insured. Since to “indemnify” someone means to make them whole after a loss, a policy that promises to idemnify could technically require you to pay costs arising from a claim and then reimburse you. However, policies written by standard carriers usually “pay on behalf of” the insured. This means they will pay for covered losses (including legal defense costs) up front.

“Broad as primary” or “following form” clause

Most umbrellas furnish broader coverage and have fewer restrictions than general liability policies. If yours doesn’t, ask you insurer to add a “broad as primary” or “following form” clause to your umbrella. These provisions indicate that the primary policy’s conditions will automatically be included in the umbrella coverage, thus helping you avoid coverage gaps.

Definitions of “occurrence”

How your policy defines “occurrence” determines whether it will provide coverage in a specific instance. For example, a policy that defines an occurrence as an “accident” would not provide coverage for libel or slander, which are considered inten-tional acts. Ask your broker to be sure that the umbrella provides the right definition of occurrence for your needs.

Broader coverage than your primary policies

An umbrella can cover exposures that your primary policy or policies exclude. For example, many newer commercial general liability policies have near-absolute pollution exclusions — that is, they will not cover most pollution-related claims. However, some umbrellas cover “sudden and accidental” pollution claims.

Identical language

When you have several layers of insurance, be certain that covered losses are identical and that “drop down” language is coordinated, so that if one layer “drops down” to pick up losses after primary limits have been exhausted, higher layers will also drop down.

Coinciding coverage terms

To avoid potentially damaging coverage gaps or overlaps, make sure anniversary dates of all underlying and umbrella coverages coincide.

Defense costs

Many umbrellas written by excess carriers include defense costs within the policy limits. This means that the amounts available to pay a settlement or judgment will be reduced by any amounts paid toward defense. (Defense costs include the costs of mounting a legal defense when your company is named in a suit, including discovery, attorneys’ fees, etc.) If your umbrella includes defense costs within its policy limits, you may want to purchase higher limits. Most umbrellas written by standard carriers do not include defense costs as part of the policy limit.

“Severability of interests”

If the policy will cover more than one company (such as subsidiaries or affiliated companies), be certain it includes a “severability of interests” clause. This will treat each company as a separate insured if an employee of one company makes a claim against another insured company.

Package deals

Most insurance companies offering primary liability policies also sell umbrellas. In many cases you’ll get the best deal on coverage and price from your primary commercial liability carrier. You’ll also experience smoother claims processing if only one insurer handles claim — particularly for large, complex claims an umbrella would respond to.

Comparative quotes

Notwithstanding our comments on package deals, be sure to shop around. Umbrella rates can vary widely — you’ll probably find the lowest rates in the excess and surplus market, but standard carriers usually provide the best coverage at the best prices. Also, direct writers tend to offer lower rates for the umbrellas they write over their own primary policies than do companies that market through independent agents. 

riskVue | The webzine for risk management professionals
February 2004