E&O Insights: Why Businesses Need Umbrella Protection

Umbrellas are apparently not as simple as many would like to believe because various issues involving umbrellas cause more than their fair share of errors and omissions claims. Due to the nature of umbrella coverage, the exposure can be significant when a problem develops.

What are those issues?

Coverage Not Placed

Potentially because of the economy, umbrella coverage has become an expense some businesses choose to go without. These businesses either don’t believe they could have a claim that would penetrate the umbrella layer, or it is possibly an expense that is just not in the budget. Agents must be careful not to make any judgments on whether a client can afford an umbrella. The proposal should include umbrella coverage so the insured can make the decision.

While the client will obviously secure general liability, workers’ compensation and property coverages, he or she might want to hold off securing the umbrella, choosing instead to “think about it.” That can be dangerous. Make sure the conversation/decision is documented not only in your systems, but also with a letter/email back to the client advising that umbrella coverage has not been bound. Here is an actual claim where such documentation would have made a huge difference.

The agency client, a tow truck operator, was involved in a claim where the tow truck apparently hit a car in the rear end, causing an occupant of the car to become a wheelchair-bound paraplegic. The underlying case was worth $5 million to $10 million. The client was a new customer, had provided a copy of his previous policy to the agent and asked for coverage. The agent stated that he saw the previous policy had $1 million primary and $4 million umbrella. The agent stated he told the client he was only going to obtain a primary policy for $1 million and that the client was going to think about whether he wanted umbrella coverage. According to the agent, the client never got back to him on the umbrella. The client testified in the underlying action that he told the agent to duplicate his prior policy, and assumed he had umbrella coverage. Unfortunately, none of alleged conversations between the agent and the client were documented in writing. The claim was settled for the limit of the agency’s policy, $1 million.

Coverage Gaps

This may sound fairly basic, but errors and omissions (E&O) claims do arise from gaps between the underlying and the umbrella. Ensure the necessary underlying limits are secured to satisfy the requirement of the umbrella carriers. It seems this is caused when the umbrella and some of the underlying coverages don’t have the same expiration date. If the underlying coverages were to get moved during the year, it is possible different underlying limits were secured, potentially causing a gap. For this reason, it is best that the umbrella and various underlying coverages have the same expiration date. A great way to address this issue is to make sure the underlying and the umbrella are written with the same agency.

Limits

When you provide a proposal that includes umbrella coverage for a client, the proposal must include various limit options with a statement that “higher limits are available.” What if an agent were to “recommend” that the client secure a $1 million umbrella and then the client suffers a loss where the limit was not sufficient? Chances are the agent would be faced with some type of litigation alleging “improper advice” for “recommending” a limit. If you were to ask any of your carriers, they could undoubtedly advise you of some very significant umbrella losses. If the client currently has a $1 million limit, don’t just duplicate it. Provide options for higher limits and then get the client’s sign-off on the limits not taken.

Claims

E&O claims arising out of alleged errors or omissions by agency claims staff are occurring at an alarming rate. One of the issues involves umbrella carriers not being put on notice when an underlying claim occurs. Why would an agency not put a carrier on notice? Probably because the agency (and client, too) does not believe the claim has even the remotest chance of penetrating the underlying coverage limit. If the umbrella carrier was not put on notice and the claim adversely develops, the umbrella carrier may look to “deny for late reporting” when it is finally put on notice. When an underlying claim occurs, putting the umbrella carrier on notice is highly recommended — even if it’s for record purposes only. This will give the carrier the opportunity to practice due diligence in investigating/monitoring the matter. Placing the umbrella with the same carrier as the underlying would seem to alleviate this issue.

Claims-Made Basis

Are any of the underlying policies written on a claims-made basis? How well does the umbrella address that exposure (underlying policies written on both a claims-made and occurrence basis)? If one of the coverages is on a claims-made basis, is full prior-acts being afforded or is there a retro date? There is a critical distinction you, as the agent, must bring to the client’s attention.

Review Forms

Not all umbrella forms are the same. When getting proposals from multiple carriers, review the forms to identify any distinctions. This can be a daunting task, but there are resources available such as FC&S Umbrella. This service not only provides a summary of the coverages afforded by an umbrella policy and how an umbrella policy functions, but also offers an analysis of various umbrella forms with policy comparison worksheets. Check, too, if there are any exclusions in the excess policy, not in the primary. Both you and your client need to know.

Additional Sales, Solid Protection

With the current economy, many customers are looking to reduce expenses. While an umbrella may be “optional” in your client’s mind, offer a variety of umbrella limits on all proposals — whether the customer is new to your agency or is a long-time client. This will no doubt lead to additional sales and will serve as solid protection against an E&O claim.