(April 2019)
Commercial liability umbrella or excess liability coverage is designed to dovetail with the named insured's General Liability, Automobile Liability, Employers Liability, and other primary liability coverage forms and policies. The degree of underwriting involved with a given umbrella risk depends on several issues and circumstances. Some of these are addressed below.
Except for a comparatively few insurance companies, the typical commercial liability umbrella book of business is fairly small and usually consists of account risks. This means that liability umbrella coverage tends to be written solely for clients that have some or all their primary insurance with the same carrier. In these cases, the primary coverages underwriting criteria extends and applies to the umbrella coverage as well. A byproduct of this approach is to avoid high hazard risks in addition to risks that fall outside the carrier's underwriting appetite or "comfort zone." Examples of high hazard risks include:
Experienced specialists with the skill to evaluate a specific risk's loss potential usually underwrite this line of business. Liability umbrella business usually has a long tail and the underwriter's approach must involve a longer and broader underwriting perspective. The underwriter must concentrate on potential loss severity.
Ten or more years of verified loss experience may be more appropriate (if not required) instead of the usual three to five years of experience. Umbrella underwriters must be aware of and be extremely sensitive to current and emerging trends that may affect future liability. Consider a few of the issues that have developed in just the past few years:
Underwriting also includes using sophisticated research tools and skills to identify and evaluate emerging issues that may affect or determine a specific insured's potential for severe losses.
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 layers. Underwriting acceptability is a more important issue if there is potential for significant drop-down liability.
Liability umbrella underwriters must consider the underlying carrier’s financial solvency when they write a liability umbrella over another carrier’s underlying coverage forms or policies. Many liability umbrella carriers require that the primary carrier meet specific minimum financial criteria or have a certain rating from a recognized rating service, such as A. M. Best or Standard and Poor's. Others may require that the underlying company have successfully engaged in the insurance business for a certain number of years. The reason for such close attention to a carrier's financial condition is because the liability umbrella carrier assumes the insured's defense if the underlying carrier cannot. While the liability umbrella carrier is not required to provide limits to satisfy the underlying carrier's limits, it may have to provide a defense to keep the claim from making its way into the umbrella layer.
Umbrella underwriters must be aware of 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" to respond to and cover any gaps in coverage, unless it is endorsed to cover on a follow form basis. This coverage expansion is subject to the self-insured retention. 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 of the difference in writing. Doing so documents the extent of the umbrella coverage provided, points out the differences in coverage, and eliminates any conflicts with respect to the coverage provided if or when a loss occurs.
Related Articles:
ISO Commercial General Liability Coverage Forms Underwriting Considerations