(October 2020)
Commercial umbrella liability coverage is designed to dovetail with the named insured's underlying Commercial General Liability, Commercial Automobile Liability, Employers Liability, and other primary liability coverages. The extent and amount of underwriting required to evaluate a given umbrella risk properly depend on a number of issues and circumstances. The following analysis briefly addresses some of them.
The coverages that the American Association of Insurance Services (AAIS) CU 0002–Commercial Umbrella Liability Coverage Form provides should be briefly reviewed in conjunction with examining the underwriting considerations.
This insurance covers claims for bodily injury, and property damage that exceeds the retained limit (either the self-insured retention or the available underlying limits) that arise from the named insured business' premises and operations and products/completed work exposures. Coverage applies on an occurrence basis.
This insurance also covers claims that arise out of owning, maintaining, using, loading, and unloading covered autos. It does not apply to automobile no-fault, uninsured and underinsured motorists (UM/UIM), first party physical damage, personal injury protection (PIP), automobile medical payments, and similar coverages. Coverage for claims-made exposures is available by endorsement.
This insurance covers claims for personal and advertising injury that exceeds the retained limit (either the self-insured retention or the available underlying limits) that arise from the named insured's business exposures.
The typical commercial umbrella book of business consists primarily of risks written on an account basis. In other words, umbrella coverage tends to be written primarily (and often only) for clients that have some or all of their primary insurance with the same company. This is why the underwriting criteria used to evaluate the primary coverages in many cases simply extends and applies to the umbrella coverage. As a result, the umbrella mirrors the carrier's appetite for certain classes of business or types of risks it writes on a multi-line basis. One benefit to this approach is that the company avoids high hazard risks in addition to those that fall outside its underwriting appetite or "comfort zone." The following are some examples of high hazard risks:
Umbrella liability underwriters have the experience and expertise to evaluate a specific risk's loss potential and usually underwrite commercial umbrella liability business. This business usually has a long tail and must be approached using a longer and broader underwriting perspective. In addition, the primary focus when underwriting this line of business is potential loss severity.
Instead of obtaining the traditional three to five years of loss experience, ten or more years of claim information may be more appropriate or even required. Proper risk selection involves being aware of and sensitive to current and emerging issues and trends that may affect future liability. The following are a few issues that have developed relatively recently:
In addition to instinct, experience, and simple "seat of the pants" risk analysis, umbrella underwriters also use sophisticated research tools and skills to identify and evaluate emerging issues that may affect or determine the potential for severe losses in the future for a specific insured.
Another important underwriting concern is whether the underlying coverage is written on an occurrence or claims-made basis and how closely the excess coverage dovetails with the primary layer. Underwriting acceptability is a more important issue if there is a potential for significant drop-down liability.
Commercial liability insurance coverage forms and policies usually insure liability obligations due to specific, listed written contracts or agreements and exclude all others. It is important to be familiar with every contractual obligation and determine if it is covered or not covered. Written contracts usually shift obligations and requirements from one party to another. As a result, it is important to know the responsibilities or obligations the insured assumed as well as what the insured transferred contractually or avoided completely.
Additional insured endorsements are available that respond to certain requirements that additional interests impose because of contractual requirements. The named insured makes its limits available to the additional insured for claims for loss that may be brought against the additional insured because of its relationship with the named insured.
Related Article: AAIS Commercial Umbrella Liability and Commercial Excess/Umbrella Coverage Available Endorsements and Their Uses
This requires adequate information on previous losses. The loss history should have a reasonably recent valuation date and include at least five full years of experience in addition to the current year. Ten or more years of loss experience may be required on larger risks or those engaged in high risk operations. As a minimum, it should include loss dates and descriptions, whether the losses are open or closed, and the amount paid or the current reserve amount. Some carriers do not provide reserve information because they are estimates that may change at any time.
Small losses that occur frequently may not result in an unacceptable loss ratio, but the number of them may suggest unresolved problems. Slips and falls may mean housekeeping problems or structural conditions that could lead to a sizeable loss. Small property damage claims may indicate quality problems or lack of attention to detail that suggest morale hazard issues on the named insured's part. The key to evaluating a series of small losses is to determine if there is an identifiable and quantifiable pattern that can be analyzed and corrected.
Umbrella liability carriers are not usually involved with paying frequency-type losses. However, they are concerned because such losses reduce the aggregate amount available to pay severity claims.
The umbrella liability carrier is especially interested in large losses. It knows that multiple significant losses can occur unless and until the named insured takes appropriate steps to prevent them. Loss details and the named insured’s action after the loss to prevent or minimize it happening again are important and may determine the risk’s acceptability. Thorough post-loss analysis by both the named insured and the insurance company are important to ensure that everything related to the loss is reviewed, evaluated, understood, and any outstanding matters resolved satisfactorily.
Umbrella pricing starts with a manual premium but then uses a significant amount of underwriting judgment based on understanding the type of risk and its severity potential.
Related Article: AAIS Commercial Umbrella Liability Coverage Rating Considerations
Simple endorsement change requests from the named insured can be anything but simple. Underwriters and others should review endorsement change requests from the underwriting standpoint. A name change can mean a change in ownership that may significantly affect the operations conducted. An address change should lead to questions concerning new locations and activities. Unusual insurance certificate language requests should be challenged and questioned with respect to possible changes in operations. Many change requests contain hints that suggest possible changes in operations or emerging issues and exposures that must be evaluated.
Writing umbrella liability insurance over another carrier’s underlying coverage forms and policies requires carefully and seriously examining that carrier's financial solvency. Many umbrella carriers require that the primary carrier meets specific minimum financial criteria or have a certain rating from a recognized rating service, such as A. M. Best, Fitch Ratings, or Standard and Poor's. Others may require that the underlying company be successfully engaged in the insurance business for a certain number of years. The reason to pay close attention to a carrier's financial condition is that the umbrella carrier may have to assume defending the named insured if the underlying carrier's limits are close to being used up. While the umbrella carrier is not required to provide limits to satisfy the underlying carrier's limits, it must provide a defense to conceivably prevent the claim from penetrating into the umbrella layer if it appears that the claim may exceed the underlying limits.
The umbrella liability underwriter must know everything about the underlying coverage forms and policies and any change endorsements issued that affect or modify coverage. If the underlying coverage is not as broad as the umbrella's, the umbrella coverage "drops down" (subject to the retained limit) to respond to and cover any gaps in coverage, unless it is endorsed to provide coverage to the same extent as the underlying coverage. On the other hand, if the underlying coverage is broader than the umbrella’s, the umbrella underwriter should either charge for the broader coverage required or notify the producer in writing of the difference in coverage. Doing so documents the extent of the umbrella coverage provided, points out the differences (gaps) in coverage, and eliminates any conflicts with respect to the extent of the coverage provided if or when a loss occurs.