Insuring Against Large Losses: What Size is Your Umbrella?

More and more people are becoming concerned about protecting themselves and their families from liability exposure and damages they might incur in the wake of a serious accident. More people are purchasing personal umbrella policies to cover those large exposures should the worst happen.

The well-trained insurance professional will take great care in procuring such a policy, and with good reason. Significant E&O claims have arisen out of the marketing and procurement of personal umbrella policies and the lack thereof. Let’s take a look at some landmines that we have seen blow up on an agent placing personal umbrella coverage.

1. UM/UIM
Does the personal umbrella policy provide coverage above the primary auto policy on an underlying Underinsured Motorist (UIM) or Uninsured Motorist (UM) claim?  Personal lines carriers vary on whether their policies cover this exposure. The cautious insurance professional should always check with the umbrella carrier to see if their policy covers UIM or UM coverage above the primary limits and advise the customer in writing if it does not. Otherwise, if the customer is involved in a catastrophic accident and the umbrella does not provide coverage, they could – and often do – turn to the agent and their E&O carrier for relief. This is a growing area of concern in the E&O world because umbrella claims tend to involve substantial damages.

2. Late notice
Failure to promptly report claims to the carrier is another common trigger of E&O claims. That includes those involving umbrella policies.  The agency notifies the primary carrier of an accident or loss involving one of its policyholders, but fails to notify the personal umbrella carrier at the same time. The most common reason for such failure is that the underlying loss does not appear serious at first blush. Sometimes the initial investigation is inaccurate or the facts change as the investigation progresses.  Another possible scenario – the policyholder confidently assures the agent that he or she was not at fault for the accident.

Invariably, the agency is never made aware of a change in circumstances with respect to the underlying claim and therefore does not report the loss to the personal umbrella carrier. The problem is, most personal umbrella policies contain language requiring the loss to be reported to them as soon as possible or as soon as practicable.

To avoid this exposure, it is critical to report every claim to every potential carrier as soon as the agency is aware of the claim. This way, the agency has satisfied their duty to report the claim, eliminating a potential future E&O exposure for failure to timely report.

3. Mind the gap  
The thorough insurance professional will determine whether the primary policy limits satisfy the requirement of the umbrella policy. That is particularly true if the primary and umbrella policies are with different carriers. A common example: the customer procures his own primary auto policy from one of several ‘direct’ carriers, while the independent agent places homeowners and personal umbrella coverages. Umbrella policies usually have an attachment point that requires a certain amount of underlying coverage before their coverage will attach.  The agent should always get a copy of the declaration pages for all primary policies and should advise the customer in writing of potential gaps in coverage.

4. Changes in circumstances
The agency should handle any policy change request from the customer with fresh eyes. For example, if an insured couple gets divorced, the agent should follow state law in executing any policy changes. Information regarding who is to be insured following the divorce has to be received in writing, clearly stated. Any policy change with respect to named insureds should be communicated to all parties in writing, especially if a separated spouse winds up with less coverage than they had in the marriage.

5. Limits
Does the umbrella policy provide the amount of protection needed by the client? For example, is a $1 million umbrella enough? The savvy insurance professional will carefully review the umbrella policy with the client to confirm that the umbrella policy meets the client’s expectations with respect to limits and the exposures it covers. As in many other lines of insurance, personal umbrella policies differ in the amount of limits they offer and whether they “follow form” to cover the underlying risks covered by the primary policy.

Placing personal umbrella policies can result in large E&O claims if the placement is not handled with care. Imagine a storm is coming and you hand your customer an umbrella that is too small, has holes in it, or simply does not open. Will they be pleased with the service you provided? Doubtful. Experience tells us that your agency is likely to be soaked financially by the time that customer is through with you.

About the Author
Brian Butcher is a vice president, claims expert with Swiss Re Corporate Solutions and teleworks out of the office in Overland Park, Kansas. Insurance products underwritten by Westport Insurance Corporation, Overland Park, Kansas, a member of Swiss Re Corporate Solutions. 


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Have questions about your E&O or need a quote?
Contact IIAT Advantage E&O’s Cari Senefsky or Gunnar Kephart at 800.880.7428.

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