Each day stories arise of local building fires, small business owners being sued for $20 million, and trucking accidents.1 What may not be heard is that often times these individuals do not have the proper insurance to cover the entire accident or lawsuit. General Liability (GL), Business Auto, and Employers Liability policies most commonly have a $1 million per occurrence limit. This is where Umbrella or Excess Liability policies come into play.
“In the insurance business, Umbrella is used as a generic term,” said Tom Ryder, Associate Vice President and Director, Excess Casualty Center of Excellence, Burns & Wilcox. “I hear from many brokers and agents that request an Umbrella policy, when an Excess Liability policy is actually a better fit. While Umbrella and Excess Liability are very similar in what they do, they differ in how they do it.”
Differences between Umbrella and Excess Liability
Umbrella and Excess policies are designed to provide limits on top of primary coverage and cover multiple underlying lines of coverage. While typical Umbrella policies will have more than 10 pages in the insuring agreement, an Excess Liability policy is usually only a page or two.
“Excess policies are also known as ‘follow-form’ policies,” said Dave Eudy, Underwriting Manager, Excess Casualty Center of Excellence, Burns & Wilcox. “However, brokers need to review terms very carefully as oftentimes carrier-specific exclusions are added in the Excess layers not shared in the primary terms. It really depends on how a particular market approaches each class of business.”
Umbrella policies come with a self-insured retention – something not available with Excess Liability. Self-insured retention is a specific amount that the insured pays before the Umbrella policy will kick in. Amounts are usually in the thousands and are not required.
Eudy added, “Functionally, there is no difference between the way we underwrite Umbrella and Excess Liability submissions, including pricing.”
“The insurance industry is moving away from true Commercial Umbrella policies and more toward cleaner, easy-to-read Excess Liability follow-form agreements,” said Eudy.
The extensive language in an Umbrella policy, while broader, may conflict with wording in the GL and could create gaps, explains Ryder.
Lawsuits on small businesses are increasing, making Umbrella and Excess Liability policies more critical than ever. Each year between 36 and 53 percent of small businesses are involved in at least one lawsuit.2 “Since most GL policies have a $1 million per occurrence limit, many businesses are adding on an Excess layer in case of a major lawsuit,” said Eudy.
Explaining the need to your clients
“One of the things we suggest brokers and agents do is ask their clients how much they are willing to lose,” said Ryder. “This perks their ears because one unusual circumstance that could have never been predicted may mean bankruptcy for a small business if they are not properly covered.”
Liability accidents can come up at any time for any number of reasons. For instance, say a truck driver is pulling into a grocery store parking lot, his brakes fail, and he ends up running through the wall of a store putting store employees and customers in harm’s way. In just this one occurrence, repairs to the truck and store will need to be made, business interruption costs will be incurred, and lawsuits from the store and customers will need to be settled. The costs add up fairly quickly.
While many clients may think Excess Liability coverage is over and above, or nice to have, brokers and agents should consult them on its true purpose. In most circumstances, while an Excess Liability proposal does require a separate submission, much of the information used to generate the primary terms is also used to develop the Excess submission. Since the work to develop primary terms generally happens first, a broker or agent usually has a shortened timeframe to turnaround that Excess submission.
“Speed is the name of the game in Commercial Excess business,” says Eudy. “Partnering with an underwriter that specializes in these types of coverages, with the ability to work quickly yet diligently, will almost guarantee a smooth submission process.”
For clients to be prepared and protected, Umbrella or Excess Liability policies are a must. They provide a more complete protection of the clients’ assets, and will help keep them financially stable should a catastrophic loss occur. Annual conversations with clients are the best way to keep these policies top-of-mind. After all, when lawsuits are raining down, an Umbrella would come in handy.