Comparing multiple umbrella liability insurance policy forms simultaneously is a complex task. This is in large part due to the fact that there is little if any standardization among the various policy forms in the marketplace today. FC&S Umbrella provides powerful tools to help readers understand and compare important umbrella coverage features. These tools include the following:

Historic Development: The history and development of the umbrella form and various other forms of catastrophe liability insurance are discussed to give context to modern day excess and hybrid umbrella forms and their usage.

Policy Terms and Condition Discussions: Important features of umbrella coverage are discussed in detail, including common policy conditions, exclusions, definitions, defense provisions, and other terms used in umbrella policies.

Summary Comparison Worksheets: Policy comparison worksheets summarize over 200 features of dozens of common and not-so-common umbrella forms.

Underlying Coverage: Each major type of primary coverage commonly required by umbrella underwriters is discussed. These discussions cover general liability, auto liability, and employers' liability coverages that an insured usually purchases.

Topics covered:
Note to the Reader
History of the Umbrella Liability Policy
Umbrella Origins
Early Umbrella Insurers
Early Umbrella Coverage
Lloyd's Restricts Coverage
Advent of Present Coverage
Catastrophic Loss Protection: Umbrella Liability Insurance
Levels of Insurance Coverage
An Umbrella Insurance Policy Provides Coverage over Exhausted Underlying Insurance
Excess Liability Insurance
“Following Form” Coverage
Self-contained Policy Forms

Note to the Reader

It is important for readers to note that the term “umbrella,” first coined by underwriters at Lloyd's of London, technically describes an insurance product that has largely been replaced in the insurance marketplace with variations of excess liability insurance or hybrid umbrella/excess policies. Except perhaps in remote instances, true umbrella coverage is rare. Because many insurers, agents, brokers, and others still use the term “umbrella,” FC&S likewise retains this terminology in the title of and throughout this publication. As such “umbrella,” as used in FC&S Umbrella, includes all forms of excess and hybrid umbrella liability insurance policy forms, which are collectively regarded as providing insureds with catastrophe liability protection. In addition, some insurers have developed their own primary general liability policy forms or extensively modify so-called standard or proprietary general liability forms by endorsement. Such manuscript or modified forms sometimes form the basis of umbrella policy wording. In such cases, the discussions contained in FC&S Umbrella may not address all possible differences between the primary liability and umbrella forms compared.

History of the Umbrella Liability Policy

Numerous excess catastrophe insurance policy forms were developed and introduced during the 1930s and early 1940s. The need for higher coverage limits for specific exposures such as those arising out of railroads, large industrial operations, mining, utilities, and automobile manufacturing appears to have been the driving force behind the development of such excess catastrophe policies.

One of the most popular excess lines during this period was automobile liability. This popularity was largely due to the fact that primary coverage limits were often written at very low levels—in many cases, the minimum manual or state financial responsibility limits. As the courts awarded increasingly higher damages, such low limits proved inadequate and the need for higher policy limits became more apparent to a growing number of insureds. Insurers responded by developing a new kind of insurance policy designed specifically to address the heightened exposure. This new policy was intended to be excess and following-form of specific underlying liability coverages. Bodily injury liability, property damage liability, and other exposures were usually covered by separate excess policies.

While this approach provided additional limits of liability, it proved cumbersome, as it was necessary for an insured to have many different excess policies in order to attain comprehensive catastrophe protection for all of its liability exposures.

The following two distinct methods of providing excess coverage were used:

1.A certificate, which was following-form over the underlying insurance, was attached to the underlying policy. A separate premium charge was made for the certificate. This represented a simple method of providing additional limits, but coverage was limited by the breadth of the underlying insurance and the limits available by the issuing insurer.

2.A separate policy, complete in itself, was the other method used to provide catastrophe coverage. Like underlying insurance policies, the policy contained its own declarations, insuring agreements, definitions, exclusions, and conditions. Although such catastrophe policies were often following-form of the underlying insurance, it also was possible to broaden the terms of the policy. This separate, modifiable policy approach was the genesis of the modern umbrella policy.

Umbrella Origins

The practice of providing catastrophe protection for many different kinds of liability exposures through the use of a single blanket policy soon became the preferred method. Although catastrophe policies that provided blanket excess, following-form coverage may have been available as early as the mid-1930s, it is unclear by whom or for whom the first true umbrella policy was written. As with many other types of insurance, underwriters at Lloyd's of London may have been the originators of umbrella-type liability coverage. The original name for umbrella coverage was “broad form third-party excess liability,” but the term “umbrella” was coined by the London market to facilitate ease of cabling and survives today as a descriptive term for the many variations of catastrophe liability coverage.

Minimum underlying insurance limits or a self-insured layer of $25,000 was usually required by early umbrella insurers in order to keep the catastrophe limits of the umbrella policy remote from “working layer” primary losses. Such arrangements preserved the higher-limit umbrella policy for true “catastrophe” protection and permitted it to be written for a more reasonable premium.

One unpublished source (an MBA thesis by Mr. Robert Berry) on the history of umbrella liability stated,

The umbrella policy was introduced in the United States in the middle or late 1940's, through the joint efforts of Lukis, Stewart and Company and certain large American brokerage firms, working through the London brokers, Price, Forbes and Company…The consensus of industry opinion points to the American brokerage firm of Marsh and McLennan as being instrumental, if not solely responsible, for initiating the umbrella movement.

A published study by the Northern California Chapter of the Society of CPCU (CPCU Annals, Winter 1960) stated that the umbrella policy was originated by Lloyd's Underwriters in London and introduced in the United States, probably first in Massachusetts, in 1947. An interesting passage from this report reads, in part, as follows:

The original purpose of the new form was to provide in one policy, additional limits of liability, often not available in the domestic market, over all exposures covered by underlying insurance; and, in addition, to provide protection for exposures not normally insured under a primary program, as well as excess coverage over those areas voluntarily self-insured.

As nearly as our committee could determine, the form was brought to the attention of the American insurance buyer by a large brokerage firm somewhat as a sales gimmick. Its appeal to the large buyer of insurance was through providing superior protection and perhaps higher limits for the same premium or a lower premium by a new method of marketing coverage. The mechanics were to revamp the conventional liability program by depressing the bodily injury limits to $25/50,000 or perhaps as low as $10/20,000 and to reduce the property damage limits to a similar low level.

An umbrella policy would be placed as excess in a single limit from $500,000 up to provide the total coverage needed. This procedure was successful in cracking the domestic market's increased limits scale and it delivered a better insurance program at the same time. Unfortunately, it also defeated the original intent of the umbrella form which is that of a catastrophe form. At these low levels of underlying coverage, the umbrella was practically primary insurance, especially for the large corporation.

An added benefit of early umbrella coverage was the possibility that an insured could reduce the coverage limits of its general liability insurance policy to the point where the premium savings more than offset the cost of the umbrella policy. Following this strategy, many insureds were able to substantially increase overall coverage limits and still enjoy a premium savings. Insurers were soon to respond with higher required underlying limits and modified umbrella pricing to eliminate this anomaly.

Early Umbrella Insurers

With the liberalization of state surplus lines laws, American insurers were better able to compete with underwriters at Lloyd's and began writing umbrella liability insurance in the mid- to late-1950s. Although it is unknown precisely how many companies entered and withdrew during the early years of the umbrella's introduction, at least eight American insurers were known to be offering umbrella-type coverage by 1960:

• American Reinsurance (as treaty reinsurer of umbrella underwriters; entered market in 1960)

• Continental Casualty (CNA Group; began writing in late 1958)

• Employer's Reinsurance (as treaty reinsurer; beginning in 1960)

• Employers' Mutual of Wausau (beginning in 1960)

• Employers' Surplus Lines (Commercial Union Group; beginning in early 1959)

• General Reinsurance (as a facultative reinsurer; beginning in 1960)

• Insurance Company of North America (entered market in May 1957)

• Travelers (entered market in September 1959)

Because of the participation of major reinsurers in the umbrella market, many smaller insurers probably “fronted” umbrellas at that time, retaining relatively small net coverage amounts, if any. All available sources indicate that the market was in a state of flux during the late 1950s and early 1960s, with insurers reportedly entering, and then withdrawing, from the market with some frequency.

By the early 1970s, the umbrella market became quite competitive, and it is estimated that approximately seventy insurers were offering umbrella coverage. Almost all of the large U.S. insurers were included in this group. Many other umbrella markets were available through surplus lines brokers. The following exhibit identifies thirty-five of the more common umbrella forms available in the United States during this period.

Early Umbrella Coverage

Early umbrella policies provided extremely broad coverage. They contained only a few of the exclusions and limitations found in modern umbrella policies. As a result, claims under these early umbrella policies generated substantial losses that underwriters had not anticipated.

Some of the more notable features of the early umbrella forms included the following:

Personal Injury: Originally, personal injury coverage was extremely broad. The policy definition included the words “but not by way of limitation” before a small list of injuries. Thus, coverage was virtually unlimited. The definition was broad enough to include alienation of affection, unfair business practices, and even damages to partnerships or corporations—encroaching on the property damage liability coverage. When underwriters realized this, they attempted to define personal injury more carefully but with sufficient breadth to satisfy the needs of most insureds.

Exclusions: All exclusions were conditional upon underlying insurance. Thus, the exclusion would apply only if an underlying policy exclusion also applied or if there was no underlying coverage at all. However, there still could be problems if nonconcurrent exclusion wording was interpreted differently by the primary and umbrella insurers.

Property Damage: Property damage liability was covered on an occurrence basis. This was considered quite controversial in the 1950s. Prior to 1960, “occurrence” was defined to mean an event or continuous or repeated exposure to conditions that unexpectedly caused injury during the policy period. The word “unexpectedly” was deemed to be necessary to preclude any attempt to cover results of insureds' acts that were intentional or reasonably foreseeable. It was about 1960 that the term “occurrence” was modified with the additional word “unintentionally.” Some umbrellas still define the term as meaning bodily injury, personal injury, property damage, or advertising liability that is neither expected nor intended from the standpoint of the insured.

Care, Custody, or Control: There usually was no exclusion for property rented, loaned to, or in the care, custody, or control of the named insured. In present day umbrellas, this is still an important limitation that is treated inconsistently.

Intangible Property: Intangible property was covered. The original Lloyd's property damage definition stated, “The term 'property damage' shall include, but not by way of limitation, damage to or destruction or loss of property.” There was no specific reference to tangible property, as is still the case with some modern umbrella policies.

Aggregates: There were no aggregate limits imposed on coverage. These early, broad umbrella policies were often written for a period of three years and were modestly priced. However, by 1959 rates began to increase dramatically. It quickly became no longer possible to save the cost of the umbrella by reducing primary limits to unrealistically depressed levels.

Lloyd's Restricts Coverage

Lloyd's of London shocked umbrella buyers in January 1960 by introducing a new umbrella form called the LRD 1-60 form, which was more restrictive than many of the primary insurance programs being written at the time. Important new restrictions contained in the new Lloyd's form included the following:

•All of the exclusions were absolute.

•Personal injury was restricted and defined by a list of enumerated injuries.

•Property damage was defined as “damage to or destruction of tangible property.”

•A new warranty was added, which read, “This policy shall not apply to any claim arising from a pre-existing event or condition which to the Named Assured's knowledge might give rise to a loss hereunder.”

•Contractual liability was restricted to written contracts only.

•A new exclusion that read, “This policy shall not apply to liability of the insured arising from any negligent act, error or omission which is a breach of professional duty on the part of the assured in the conduct of the assured's business.”

•The policy did not provide advertising liability coverage. Such coverage originally had been included in the personal injury coverage and had been so broad that reportedly some claims for patent infringement were paid. Underwriters had never intended to cover such losses.

The “errors and omissions” exclusion was an attempt to settle the problem of prior claims that arose from so-called “business risks.” But the pre-existing condition warranty was an especially fertile area for denying coverage because every event in an insured's history might at some point result in a loss.

Advent of Present Coverage

Responding to an outcry from brokers and insureds over the restricted coverage provided by the new form, Lloyd's rapidly developed a second, modified umbrella form called the LRD 6-60 form. The revised form was introduced in June 1960 and remained in use until development of a new umbrella form 1970. The LRD 6-60 form contained the following features:

•Property damage was defined as “loss of or direct damage to or destruction of tangible property (other than property owned by the Named Assured).”

•Blanket contractual liability coverage for oral contracts was restored.

•The “business risk” (errors and omissions) exclusion and pre-existing condition warranty were removed.

•Advertising liability coverage was restored but with the limitations found in nearly all modern umbrellas forms.

•A new definition of “occurrence” was introduced.

•Four of the eight exclusions on the LRD 6-60 were conditional, which meant that the exclusion was not applicable if there was underlying coverage. These conditional exclusions were the following:

Assault and battery

Owned aircraft

Owned watercraft

Fellow employee injury

•The remaining standard exclusions, however, were absolute:

Workmen's compensation

Faulty workmanship

Advertising limitation

War

Most of the important changes to umbrella forms occurring since the mid-1960s have been in response to developmental changes in the coverage provided by underlying liability insurance policies. For example, the Insurance Services Office (ISO) has made numerous substantive changes to its standard general liability policy, revising it in 1966, 1973, 1976 (BFCGL), 1981 (BFCGL), 1986, 1988, 1993, 1996, 1998, 2001, 2004, and 2007. Perhaps the greatest impact on the scope of umbrella insurance occurred with introduction of the 1986 ISO CGL (commercial general liability) policy forms.

Because of the numerous changes embodied in the 1986 forms, ISO prepared advisory material to assist insurers in developing their own commercial umbrella liability policy forms for use in conjunction with its new CGL policy forms (both occurrence and claims-made versions). The text of ISO's advisory policy form was organized in separate sections that could be combined to generate the type of policy wording desired by each insurer. The text could be used to create three separate policy formats: excess coverage, extended liability coverage, and umbrella liability coverage.

However, there was, and still is, no universally accepted standard umbrella form. and today true umbrella insurance coverage has largely been replaced with numerous versions of excess and hybrid umbrella policies. For various reasons, most insurers largely ignored this advisory text when drafting their commercial umbrella policies. They continue today to rely largely on their own wording. However, ISO introduced a standardized umbrella policy form in 2000 (revised in 2001 and in 2004), but the extent to which insurers will use these ISO umbrella forms remains unclear.

The American Association of Insurance Services (AAIS) also developed a series of commercial general liability policy forms that may serve as the basis of some umbrella policy wording. Like ISO, AAIS is a nationwide multiline rating organization that provides technical support and advisory information to property and casualty insurers. Originally more oriented toward personal lines coverages, AAIS has grown in both size and scope, and its membership now includes numerous mid-size and larger commercial insurance companies.

One of the AAIS commercial liability coverage forms (GL-200 [broad form coverage]) closely resembles the ISO CGL forms (occurrence version) in terms of coverage scope and format. Other AAIS commercial general liability forms provide either more restricted coverage or coverage specifically tailored for particular exposures, such as owners and contractors protective liability or farm premises and operations. The AAIS also has recently introduced its own umbrella liability coverage form.

The practice that some insurers follow of borrowing wording from other forms may give an illusory appearance of standardization of umbrella policies. In reality, while the wording used by some insurers may be similar, important and sometimes subtle differences usually exist. Changes in the scope of the basic umbrella form are often made by insurers based on individual underwriting philosophies and adverse legal rulings regarding specific policy wording.

Many umbrella policies issued by insurers today contain some wording similar or identical to that found in the ISO CGL forms. However, because coverage may be based upon the AAIS or other underlying general liability forms and is almost always modified by endorsement, umbrella policies continue to vary widely in coverage scope and format.

Catastrophic Loss Protection: Umbrella Liability Insurance

For many entities, excess catastrophe protection—whether it be in the form of a true umbrella policy, a form of excess or hybrid umbrella, or some combination—is the most important component in an organization's insurance portfolio. Umbrellas provide at least part of the high limits needed for catastrophic loss protection and at least historically were broader than underlying liability insurance. True umbrella coverage serves three principal functions, as illustrated in the following diagram:

Increased coverage limits: The umbrella policy is used to raise the limits of the underlying policies (working layers) to protect against catastrophic losses. Most umbrella policies provide limits in excess of underlying limits, although some may have a limit inclusive of underlying limits.

Broader coverage: An umbrella policy should provide broader coverage than the combined scope of the underlying insurance. However, depending on the umbrella form, underwriting factors, the scope of coverage provided by underlying policies, and other variables, the umbrella coverage actually may be more restrictive than underlying insurance.

Drop-down feature: When underlying aggregate policy limits are reduced or exhausted through the payment of loss, or when there is no underlying coverage, the umbrella should “drop down” to become the primary insurance for defense, indemnity, and related expenses.

Levels of Insurance Coverage

Umbrella policies have been described as “policies of insurance sold at comparatively modest cost to pick up where primary coverage ends, in order to provide an extended protection from $1 million to $100 million or more.” Coverage under such a policy is regarded as excess over and above the primary coverage. This contrasts with “primary insurance coverage,” whereby under the terms of the policy, liability attaches immediately upon the happening of an occurrence that gives rise to liability.

“Excess coverage” is coverage whereby, under the terms of the policy, liability attaches only after some predetermined amount of primary coverage has been exhausted. Therefore, the risk of loss to the excess insurer is greatly reduced, which is reflected in the cost of the policy. “Excess insurance coverage,” on the other hand, generally provides additional “excess” coverage where other valid and collectible insurance covers the occurrence in question. However, the excess insurance policy will provide coverage only for liability above the maximum coverage of the primary policy. It does not provide broader coverage. Umbrella insurance may “overlap” with excess insurance coverage, but it is not triggered until “primary” and “excess” insurance coverages are exhausted or if coverage is not provided in the “primary” or “excess” policies. In such a case, the umbrella policy drops down to provide primary coverage.

Umbrella insurance can be considered “excess” in two respects: (1) it provides extra limits with a combined blanket single limit over other existing liability coverages, and (2) it provides extra coverage for other liability exposures not covered by the underlying liability contracts. Some of the coverages provided by umbrella forms, but not by underlying insurance, may include worldwide operations liability, discrimination, owned watercraft or aircraft liability, or other coverages. These additional coverages usually apply only above the insured's self-insured retention limit or deductible (if any). The result is that important catastrophe liability protection is achieved.

An Umbrella Insurance Policy Provides Coverage over Exhausted Underlying Insurance

An umbrella insurance policy provides coverage only after coverage provided by all other policies of insurance has been exhausted. It then covers that amount over and above any underlying coverage limits, subject to any applicable self-insured retention or deductible. Additionally, an umbrella insurance policy may drop down to provide coverage that is not provided in the “primary” or “excess” policies, again subject to any applicable retention or deductible. Once the limits of a primary insurance policy are exhausted, any other valid and collectible insurance providing coverage may be required to absorb the remaining loss on a pro rata basis up to the limits of their policies, before any umbrella insurance will provide coverage.

Where there is a conflict in the coverage provisions of two policies and only one is an umbrella policy, the underlying excess or primary liability policy must first be exhausted before umbrella coverage attaches. This analysis was used in a case where an excess liability policy stated that it was to be considered excess insurance over any other valid and collectible insurance, and a separate umbrella policy provided that it be in excess of and not contribute with other insurance.

Excess Liability Insurance

Excess liability insurance differs from umbrella liability insurance in several ways. As discussed previously, the umbrella was originally intended to provide (1) additional limits to cover potential catastrophic losses, (2) coverage broader than primary in some areas, and (3) coverage that drops down to replace reduced or exhausted primary aggregate limits.

Excess liability policies, while providing limits that are excess of an underlying coverage amount, usually do not provide some of the other features typical of umbrella policies. While there may be exceptions, one feature noticeably absent from a typical excess policy is coverage that is broader than the primary policy. Another is the absence of a drop-down coverage feature found in the typical umbrella policy.

“Following Form” Coverage

Excess liability coverage generally is provided either by a so-called “following form” coverage format that a policy is presumed by its title to use the same terms and conditions of underlying policies, or by a complete self-contained policy, sometimes referred to as stand-alone excess liability. Unfortunately, many policies that are labelled following form are not and in such instances reliance on such misnomer can have catastrophic results and lead to disappointment at the time of loss. Some common problems with following form policies can include but not be limited to the following:

1.The following form policy does not include or misidentifies policies that should be considered as underlying coverage. This is a common mistake. Each excess layer of coverage should be carefully checked to ensure that all appropriate underlying insurance is identified and that any references to policy number or terms of coverage are accurate.

2.The so-called follow-form policy is so highly endorsed or includes its own key definitions, terms, and conditions that it creates a false sense of protection and in fact may exclude important and desirable coverage elements of the primary policy.

3.Where numerous policies are layered or stacked to achieve a particular limit of protection, the unique coverage features, exclusions, and endorsements of each layer may be so inconsistent as to create gaps of coverage, uncertainty, or ambiguity as to what coverage is actually available at a particular layer.

4.For many insureds the renewal process is rushed, not allowing ample time to evaluate in detail the oftentimes complex nuances of each layer of coverage and potential gaps or other problems and to negotiate possible corrections or solutions prior to the placement, binding of coverage, and issuance of policies.

5.Identifying gaps or ambiguities in coverage after policy issuance and review can leave the insured in a weak or impossible position to negotiate corrections.

When excess coverage purports to follow the terms of underlying coverage, it may do so only to the extent that the terms of the underlying policy do not conflict with the terms of the excess policy. When there is a conflict in policy terms between the primary and excess policy, the terms of the excess policy may govern interpretation. Because of this, gaps in coverage between policies may be present. Such gaps can sometimes be avoided by endorsing the excess policy to provide coverage on the same terms and conditions as the underlying policy.

To help ensure continuity of coverage between primary and excess layers, insureds should require the excess policy to provide coverage on the same terms and conditions as the underlying policy(ies), including any endorsements.

Self-contained Policy Forms

Another method of providing excess coverage is through the use of a self-contained policy. All terms and conditions relevant to coverage are included in the basic policy form. Coverage is provided only on the basis of these terms, and the policy is not dependent upon the terms of any underlying insurance. Because the wording of exclusions, definitions, and other policy terms and conditions in self-contained policies may differ from the wording in underlying policies, there may be a greater likelihood for coverage gaps between the primary and excess policies. Such gaps can sometimes be eliminated through the process of endorsing the excess policy to provide “following-form” coverage.