24 Mar Are the Underlying Limits Satisfying the Umbrella Requirement?
Since the beginning of time (well maybe not that long), about 5 percent of E&O claims involve umbrella coverage, both personal and commercial. While some of the claims involve allegations of failure to place, failure to suggest, exclusions in the umbrella form in which the client was not aware, etc. – the biggest issue involving the umbrella line of business probably deals with gaps where the underlying limits were not at the required level. Typically, the amount of the gap will constitute the damages.
Here is a sample claim:
The umbrella carrier required a $500,000 CSL for the underlying auto coverage. The agency had advised the umbrella carrier that there was a $500,000 CSL in place for his client and the umbrella policy was issued showing this $500,000 limit. In actuality, the agent had only secured a 250/500 policy instead of the $500,000 CSL. A serious accident occurred resulting in brain damage to a person in the other car. The case was settled for $5 million with the auto carrier paying its $250,000 limit, and the umbrella carrier paying $4.5 million (the umbrella carrier factored in the $500,000 limit that the underlying auto policy should have included). This resulted in a $250,000 gap which was the crux of the E&O claim filed against the agency. The agency lost.
There are a number of issues that can contribute to this type of claim scenario. One issue is the fact that the underlying limits required by the umbrella carriers are not always the same. Agency staff should focus on this issue especially when the umbrella coverage is not with the same carrier as the underlying. In addition, when an agency moves the umbrella to a new carrier, there should be a procedure to verify the underlying limits requirements of that new carrier.
Some best practices for consideration:
- Where possible, the various underlying coverages and the umbrella should have a common effective date.
- When proposing umbrella coverage (new and renewal), the agency should know what the underlying limit requirements are and verify those limits are in place. The required underlying limits may change, so be sure to know what the requirements are at the time of each subsequent proposal (new and renewal).
- If the agency looks to move the umbrella, identify what the requirements are for the new carrier you are considering. They may not be the same.
- Discuss with the client all of the coverages that can be scheduled in order for the umbrella to respond at the time of a loss. If some of the policies are not written with your agency, advise the client (in writing) of the requirement. Securing a dec page of those policies is also suggested.
- Don’t write just the umbrella coverage! This is a formula for disaster.
It appears to be more common today (than in years past) for umbrella policies to be excess over uninsured and underinsured motorist coverage. If your state allows this, it is suggested to include the underlying UM/UIM limits as part of the schedule of coverages.
Bottom line, every agency should have a best practices / procedure which requires a total analysis of the umbrella requirements and whether those limits are being satisfied at the time of the placement of the umbrella or any of the underlying coverages. This is also a great issue to include in the agency’s audit process.