11 Jul Is There a Gap?
Imagine the following:
One of your insureds calls (or emails) and advises you they would like to reduce their auto limits. They explain that the current economy has hit them pretty hard, and they need to find a way to reduce some of their expenses. In addition to the latest carrier rate increase, they state that they don’t drive as much as last year and don’t feel they need to carry limits of 250/500/100. They request a reduction in their auto limits to 100/300/50.
Unfortunately, due to the economic conditions that many families are facing, this type of request has become more common. So, based on this request, you process an endorsement request reducing the limits. A few months later, the client is involved in a serious auto accident with significant bodily injuries, injuries that will be above the 100/300 limits. When the client contacts the agency to report the claim, they comment, “We are so glad we have an umbrella policy.”
Is there a problem? Most definitely. As you are all hopefully aware, umbrella carriers require underlying limits to be at a certain minimum level. In this scenario, the umbrella carrier required the 250/500 limits, but based on the insured’s request, the limits had been reduced to 100/300 at the time of the loss.
Regarding E&O claims statistics, umbrella/excess coverage typically generates around 4% of all E&O claims. However, due to the nature of the coverage, the size of the E&O claims can be very significant. In the latest Swiss Re claims stats, E&O claims involving umbrella/excess coverage are fourth highest behind Commercial Property, Commercial Liability, and Commercial Auto. What would likely happen based on the above claim scenario? The auto carrier’s responsibility would be for the 100/300 limits, and the umbrella carrier would be responsible for damages at the 250/500 requirement (even if those were not the actual auto limits), thus creating a gap of $150,000 (250 required limit – 100 actual limit). The insured would be responsible for the $150,000 gap where there was no insurance. This is likely when they would get an attorney and bring legal action against your agency.
What should the agency staff person have done when they received the phone (or email) from the insured? They should have checked the entire account and noted the insured had an umbrella. This would (and should) prompt a discussion with the insured that to maintain the umbrella, there is a requirement that all underlying policies be at certain minimum levels. Whether the insured then decided to cancel their umbrella or do nothing would be their decision.
Could this scenario happen in your agency? Does your agency have a procedure that requires a review of an insured’s total insurance portfolio when requests such as the above occur? The next time your division has a staff meeting, spend a few minutes on this issue to ensure that this problem could never occur in your shop.
Some other common issues involving umbrellas include:
- Never state, “We recommend a $1 million umbrella.” This could be a problem if the insured has a loss above the $1 million umbrella level and alleges the agency provided poor advice. It is best to offer limit options and let the insured pick the limit they feel is right for them.
- Always offer an umbrella for the insured to consider. Sometimes, you will need to advise them that they will need to increase some underlying limits.
- Be alert for any conditions/exclusions that the umbrella carrier imposes. I have seen some where the umbrella carrier excluded certain drivers due to their loss history. These special conditions/exclusions must be brought to the insured’s attention – in writing!