Umbrella liability insurance policies are largely a matter of the judgment of the insurer, the authors explain, and rating is almost entirely a matter of individual judgment, not only from insurer to insurer, but also varying with the individual risk. Many of the umbrella provisions are negotiable with most underwriters.

2. Underlying coverage

A requirement for underlying liability limits of $1 million is common, the authors say. For insureds with severe advertising or other personal injury, or other special liability exposures, underlying coverage with high limits in these areas may also be required if these exposures are to be included in the umbrella coverage.

Umbrella policy conditions usually call for maintenance of the underlying coverage, with the umbrella insurer’s part in a loss being determined as if the underlying contract were in force, even if it’s not. The only exception is when an underlying policy is totally exhausted by payment of the loss, in which case, the umbrella policy “drops down” to replace the exhausted underlying protection. Drop-down coverage also may become effective when the primary insurer is insolvent.

3. Defense coverage

A significant variation in policies has to do with defense coverage, the authors explain. Almost all umbrella liability contracts have provisions that, in effect, protect the right of the umbrella insurer to take over or participate in the defense of a claim that may involve it. These policies include defense coverage for uninsured exposures, the authors say, even when the loss doesn’t appear likely to involve the umbrella contract.

Also, some contracts include defense coverage of losses when, because the underlying insurance is exhausted by the loss payment, the umbrella policy comes in as primary coverage. Some policies include defense and appeal costs within the limits of coverage while others provide them as supplementary payments outside the limits of coverage.

4. Additional insured

Any additional insured under any policy of underlying insurance is automatically an insured under the umbrella policy. But the coverage isn’t any broader than the coverage provided by the underlying insurance.

If the underlying insurer or the insured elects not to appeal a judgment in excess of the retained limit, the umbrella insurer reserves the right to do so at its own expense. The umbrella insurer also pays for taxable court costs, pre- and post-judgment interest and disbursements associated with the appeal.

5. Indemnity policy or pay-on-behalf-of policy

Indemnity policies don’t require the insurer to make payment to the insured until the insured has first made payment for covered damages or expenses. The language requires you to use your own money first to pay for damages and defense and then seek reimbursement.

With a pay-on-behalf-of policy the insurer promises to pay damages on behalf of the insured. This means that the insured doesn’t have to first make payment and then seek reimbursement from the insurer. Expenses for defense are normally paid by the insurer as they are incurred if the umbrella insurer has taken over the defense role, even with a pay-on-behalf-of policy.

6. Common exclusions

The Commercial Liability Umbrella Form, CU 00 01 04 13, excludes certain coverages that apply to specific situations. The following are only a few of the exclusions provided in the form. For more information, refer to the form itself and the detailed analysis provided by the authors.

• Liquor liability
• Workers compensation, employers liability, and employment-related practices
• Pollution
• Aircraft or watercraft, and racing activities
• Recall of products, work or impaired property
• Electronic data

An umbrella policy might be right for you, but be sure you understand what the policy covers and what it excludes before buying.