PERSONAL UMBRELLA UNDERLYING/EXCESS INSURER ISSUES

(July 2019)

Several issues regarding umbrella coverage are fairly typical. One, only a fraction of persons who should carry umbrella insurance purchases the coverage. Two, it is usually bought after many years of regularly owning underlying coverage. Three, since umbrella coverage is still far from standardized, it is also likely that the umbrella insurer is not the same company that writes the primary coverage. This should be a cause of concern.

Companies do care about the carrier relationship between the primary and excess layers of coverage. They demonstrate their concern with money, typically allowing discounts when the same company writes both the underlying and the umbrella/excess coverage. For various reasons, there are situations where different policies will be written by different carriers and this can cause problems when losses occur. This article discusses a few notable items that make single-carrier coverage worth strong consideration.

Definition Concerns

"Business" under some umbrella policies means any trade, profession or occupation. In other words, it means any regular (as opposed to occasional or infrequent) activity that is pursued for income. This definition could differ from a standard HO policy, including the latest (2011) edition of the ISO Homeowner policy. Under the '11 program, “business” also refers to such activity EVEN when it occurs only on a part-time or occasional basis. The policy’s definition does exclude the following instances from its business definition:

· Activities that only reimburse volunteers for expenses that are directly related to the activity

· An insured who provides home day care to his or her relatives

· Mutual exchanges of home day care services

“Family member” under various umbrella forms, may refer to a household resident who is:

· A relative, including a ward or foster child

· A person younger than 21 who is in the care of an “insured” who is at least 21 years old.

Some underlying policies may also specify that foster children, wards and adoptees fully qualify as insured family members.

When coverage is written with the same insurer, differences in defined terms among the primary and excess policies are likely to be minimized. Even if the difference is significant, a single carrier would be hard-pressed to justify its handling a primary section of a loss differently than it did an excess portion of the same loss. However, the opposite is true if separate carriers issued the underlying and umbrella policies.

Example: Aacob Hardbyrne notifies his Homeowner and Umbrella Insurers about a lawsuit. He is being sued by more than two dozen members of a local teachers association for some remarks he made on his Internet blog "A Case of Hardbyrne." The interesting twist is that his new blog has a number of paid subscribers (friends pitching in money to help support the cost of Aacob's website). Since separate carriers are involved, their respective claims departments are closely studying whether the loss qualifies for coverage.

Excess Insurer Self Interest

One real danger of having an umbrella or excess carrier that is different than your underlying carriers is the possibility of conflicting interests. Even when a personal umbrella policy has multi-million-dollar limits, the annual premium collected for that coverage is very low. However, the liability faced by a given carrier is extremely high. When the excess carrier is a different insurer than the underlying carrier, the former may be highly motivated to monitor serious claims to make sure that they remain the responsibility of the underlying carrier. An umbrella or excess carrier's ability to protect itself is not passive. Under the PUP's legal defense provision, the umbrella carrier has the discretion to participate in proceedings when, in its opinion, the loss has the potential of triggering coverage under its policy. Later in the PUP form, under the Appeals provision, the umbrella carrier has a right to contest (appeal) any judgment that exceeds the "retained limit."

Any defense costs paid by either the underlying or the umbrella insurer do not affect the policies' stated limit of coverage. However, depending upon loss circumstances, a separate umbrella insurer could be at odds with the primary carrier as well as the insured. So, the feature of separate defense coverage is not necessarily for everyone's benefit.

Example: Let's consider the Hardbyrne loss from the previous scenario. Let's assume that there is coverage for the loss under the HO policy. There are several plaintiffs and they are highly motivated to press their lawsuits. Initially the primary insurer handles the defense against their insured. The insured's HO liability limit is $100,000. After a few months pass by and the insurer's defense costs exceed $40,000, the primary insurer decides to settle and just pay out the policy limit. At this point, the umbrella insurer steps in. The plaintiffs' total request for damages barely exceeds the underlying policy limits. If the underlying carrier could be a bit more aggressive, coverage under the umbrella may be totally unnecessary. The umbrella carrier decides to get involved in order to prevent the initiation of an umbrella claim.

In this instance, the best interest of one company was in direct opposition with the other company, so they were in conflict. It may have been in the insured's best interest to settle the losses under whatever portions were necessary under both policies. The umbrella insurer's decision to get involved in the loss may not turn out to serve their insured's interest best.