Most agents and brokers have access to a variety of umbrella insurers. To do their job effectively, they must closely match the coverage provided by a particular policy form to the exposures created by an insured's operations. The marketing process includes three distinct tasks: (1) accurate completion of the application, (2) selecting appropriate markets and soliciting quotations, and (3) final placement of the risk. In addition, the agent or broker may need to prepare a coverage comparison of the forms involved, with the aid of FC&S Umbrella.

Completing the Application

Completing insurance applications is one of the most important steps in the successful placement of any type of insurance coverage. The sample ACORD application forms and their contents have been discussed in detail. Important principles to follow when completing an application include the following:

1. Answer all questions. All questions should be answered as completely as possible. Underwriters do not like to guess whether blanks mean that an exposure does not exist or that the person who completed the application overlooked the question. It is always preferable to indicate “not applicable” if an insured does not have an exposure or the question does not apply. Avoid using “N/A” or “NA” as abbreviations for “not applicable”—an underwriter may mistake these as shorthand for “not available.”

2. Define the insured's operations accurately. The description need not be lengthy, but it should be specific, complete and accurate.

3. Provide accurate underlying coverage information. To the extent known, the types of underlying coverage, limits and premiums should be complete on the application. If some details regarding underlying policies are not available, provide the known facts and state that further, complete information will follow.

4. Summarize lengthy submissions. If a complex risk requires lengthy and detailed underwriting specifications, a completed umbrella application form still should be included as a summary of the information. Detailed specifications should provide substantiation of the facts contained in the application. They do not, however, replace the application form. Also, extensive detail tends to discourage prompt handling by underwriters because of the volume of paper they must handle. Using the ACORD forms as a summary of the entire application package helps to obtain faster quotations. Avoid answering application questions with “see attached.” Give an answer to the question and also note that a more detailed answer or schedule has also been included.

5. Arrange coverages concurrently. Primary and umbrella or excess liability coverages should be arranged with concurrent anniversary dates. It is also sometimes important to request concurrent wording of policy definitions, exclusions or other terms and conditions of the umbrella policy that may differ from those of underlying coverage.

It also is sometimes advisable to indicate the premium required. This allows the underwriter to realistically evaluate his or her chances of writing the account. In soft market cycles, however, requesting a certain premium may not be advisable. When insurance premiums are falling rapidly, underwriters need little encouragement to quote competitive premiums. Giving the insurer a “target” premium may result in a price that is higher than the underwriter would have otherwise quoted.

Choosing Markets

Finding the appropriate individual insurance markets (insurers) to which umbrella applications should be submitted is one of the most important functions of the insurance agent or broker. Effective marketing is usually not accomplished by sending applications to every company represented by the agent. Also, finding an umbrella insurer for hard-to-place risks may require the use of excess and surplus lines (E&S) brokers, who should be selected as carefully as umbrella insurers. To increase chances of a successful umbrella placement, the following guidelines should be observed when choosing individual umbrella markets:

1. Pre-qualify markets. Underwriters may be reluctant to provide quotations on an insured with a poor loss or financial history, or an insured involved in an especially hazardous line of business. Reviewing the applicant's merits with the underwriter prior to submitting the application is an efficient method of determining the insurer's interest in quoting on the risk.

2. Learn the underwriter's philosophy. All underwriters operate under constraints based upon their own expertise or imposed by management or by their reinsurance treaties. Underwriters should be sent only those applications they are likely to accept. Don't burden them with submissions you know they can't possibly entertain.

3. Know the E&S market. It is important to determine which excess and surplus lines brokers have the authority to bind, to issue policies, or to place reinsurance.

4. Control E&S marketing. If an umbrella application is submitted to more than one E&S broker, the companies to be used by each broker should be specified. Often several E&S brokers will have access to the same underwriters. Failure to exercise this control may result in chaos, with two or more E&S brokers asking the same insurers for quotations. This “overlap” can result in failure to obtain the most advantageous quote or even in an insurer's refusal to quote.

When facultative reinsurance will be used, it usually is wise to learn which reinsurers will be approached by the E&S broker. If reinsurers see the same submissions coming from several sources, they may conclude the risk is inordinately difficult to place and accordingly increase their price. They may even refuse to provide a quote.

5. Find good umbrella underwriters. Better overall pricing usually results when knowledgeable, reputable underwriters with large capacity take a substantial share of the risk. Their pricing often will be used as a reference point by other insurers that write the higher coverage limits. The total price will also usually be lower if facultative reinsurance is not required.

Placing the Risk

Obtaining a quote is only one of the challenges in placing coverage. It also is necessary to determine that the insurers whose quotes are considered are financially capable of paying current and future claims, that they have a record of good service to their insureds, and that they will provide a policy form which meets the coverage requirements of the insured. Therefore, the following additional factors should be carefully evaluated before placing a risk:

1. Use well-established, reputable insurers and surplus lines brokers. The selected insurer should not only be in business at renewal time, but also when their assistance is needed in adjusting claims. Having confidence in the underwriting and management abilities of the insurer is extremely important. If in your judgment the insurer is not qualified to handle a complex risk, the insured may be better served by another established market with expertise in the type of risk you are placing.

It is best to avoid placing coverage with insurers that have been in business for less than five years. In fact, some insurer-rating services, such as A.M. Best, do not consider an insurer eligible for rating until it has five consecutive years of operating history. Many undercapitalized companies have closed their doors within the first five years of operation. Keep in mind that occurrence-based liability claims can be presented 10 to 20 years or more after the policy has expired.

Close monitoring of financial stability is necessary even with respect to the most solid insurers who have a long operating history. While proven staying power is a valuable asset, the insurance industry is notorious for its occasional volatility and an insurer's financial status can change dramatically in a short period of time.

Be cautious if the insurer has created its own offshore reinsurance company. In the past, many insurers have used such non-regulated methods to manipulate the reinsurer's (and their own) funds. The failure of an offshore reinsurer may foreshadow the parent insurer's financial demise.

2. Evaluate the insurer's ability to pay claims. Most insureds rely heavily upon their agent or broker and expect him or her to consider only quality insurers when placing insurance coverage. Most large brokers have established standards they follow when selecting insurers and may maintain an approved list of acceptable insurers. The most sophisticated brokers have staffs dedicated to the task of researching insurer solvency.

Some risk managers believe the broker is the insurer of last resort. But in the absence of a contractual guarantee or negligence by the broker, there could be considerable uncertainty about a broker's responsibility for a loss not paid by an insolvent insurer. Expecting an agent or broker to assume the liability of a failed insurer to pay claims will likely lead to disappointment. Insureds in recent years have had limited success in proving agents or brokers liable for such obligations.

In addition to regulating insurance commerce, most state insurance departments have created procedures for dealing with insurer insolvencies. These procedures include rehabilitation, liquidation and the formation of guaranty funds. Unfortunately, once a state agency has taken control of an insolvent insurer, there is frequently little that can be done to revive the insurer. Rehabilitation is often only an interim solution until liquidation of assets can be achieved.

Because recoveries from companies in liquidation are often small and the process can take years, insureds may rely on state guaranty funds to pay for claims. However, here, too, recoveries can be limited. All state guaranty funds have caps on the amount of recovery that can be made, usually between $100,000 and $500,000 for each loss. These limitations effectively eviscerate the protection from catastrophic loss intended to be addressed by umbrella and excess policies. State guaranty funds also restrict coverage to losses stemming from policies issued by “admitted” (state-licensed) insurance companies. Because of the limited protection offered by guaranty funds, they are usually considered as the least desirable option to pay for claims.

Since they are ultimately responsible and at risk for outstanding losses when an insurer fails, insureds should conduct their own due diligence when selecting or approving an insurance company. While there are no infallible procedures, agents, brokers and insureds can help reduce the likelihood of selecting a near-bankrupt insurer by doing the following:

a. Verify that the insurer is admitted (licensed) to do business in your state, or is an excess and surplus lines insurer approved by either the National Association of Insurance Commissioners (NAIC) or your state's surplus lines association. Contact the NAIC at 2301 McGee, Suite 800, Kansas City, MO. 64108-2604; telephone 816-842-3600.

b. Review and compare the rating and financial data published by various third-party reporting agencies. Such comparisons should span a period of five or more years. The better known of these agencies are identified as follows:

A.M. Best Company, Inc.

Ambest Road

Oldwick, NJ 08858

908/439-2200

www.ambest.com

Conning & Company

One Financial Plaza

Hartford, CT 06103-2627

860/299-2000

www.conning.com

Standard & Poor's

55 Water Street

New York, New York 10041

212/438-2000

www.standardandpoors.com

Demotech, Inc.

2715 Tuller Parkway

Dublin, OH 43017-2310

800/354-7207

www.demotech.com

Moody's Investors Service

7 World Trade Center at 250 Greenwich Street

New York, NY 10007

212/553-1653

www.moodys.com

Weiss Research, Inc.

15430 Endeavour Drive

Jupiter, FL 33478

877/925-4833

www.weissgroupinc.com

Fitch, Inc.

One State Street Plaza

New York, NY 10004

212/908-0500

www.fitchratings.com

Be aware, however, that insurer rating services base their evaluations on information submitted by the insurer in the form of sworn financial statements filed with the various state insurance commissions. Because the potential for insurer fraud can undermine the relevancy of rating services, consideration must be given not only to the assigned rating, but how the rating was arrived at and what it means. Be aware, too, that ratings can change quickly, so monitoring of the umbrella insurer's financial condition should be ongoing. Most insureds rely on the broker to do this, but we have seen many instances where the insured is not alerted of an insurer's deteriorating financial condition until well after a substantial downgrade.

c. Obtain copies of the annual “convention” statements, reports to stockholders, and the form 10-K of current or proposed insurers to obtain more detailed information about asset (investment) quality, known loss reserves, incurred-but-not-reported (IBNR) loss reserves, and to learn about their reinsurers. Prudent retention levels with reputable reinsurers are a “must” for excess liability insurers.

d. Obtain the latest results of the Insurance Regulatory Information System (IRIS) tests calculated by the NAIC for each of your U.S. insurers. Booklets explaining these tests and new risk-based capital requirements for insurers are available by contacting the NAIC.

Solvency tests and past financial performance indicators are not perfect predictors of insurer insolvency. There are numerous examples of insurers with clean ratings that ultimately failed with little warning. IBNR claims and adverse loss development in liability and some property insurance lines, if not properly documented in the insurer's financial statements, can cause explosive deterioration in an insurer's assets and surplus.

Reserve studies, conducted after claims have developed to their ultimate values, indicate that most insurers under reserve claims. Such studies also indicate that the margin by which an insurer is under reserved increases when loss ratios are high. This problem causes surplus to be artificially inflated, buyers to have a false sense of security, and insurance prices to continue at unrealistically low levels. Many insurers overvalue assets.

3. Establish your threshold of acceptability. Consider a minimum standard for the insurers you are willing to use. Some risk managers and brokers will only entertain or present quotes from “blue-chip” insurers that have a high financial rating, while others are willing to do business with smaller, lower-capitalized insurers. Risk managers may find it difficult, however, to explain to senior management why the company must pay both the premium and the claims if their insurer fails. To avoid such situations, it is sometimes better to pay a little more for coverage with a larger company.

4. Be cautions of insurers that outsource claims handling. While the outsourcing of claims administration can sometimes be desirable, it may also mean the company does not have the resources to handle claims properly. Quality controls can be maintained only if claims are handled in-house or if a stringent control program is in place and closely monitored. If the insurer should become insolvent, the administrator's recovery from state guarantee funds or the agent/broker who placed the business may be inadequate to pay the claims.

5. Read the policy. Obtain a specimen copy of the policy and all endorsements that will be attached. Review this material thoroughly before the inception date. Relying on price alone to select from a number of quotations, rather than analyzing the coverage being quoted, often results in disappointments and misunderstandings when losses occur. Because they can be exposed to malpractice lawsuits, agents and brokers should pay special attention to the adequacy of coverage provided.

While FC&S Umbrella analysis and comparison of various umbrella forms aids in this process, they are based upon the policy forms and any mandatory endorsements provided by the insurers at the time of analysis. Other endorsements that may be attached to the specimen policy must be studied before an evaluation of the coverage offered can be completed. Also, insurers tend to revise their forms periodically. It is therefore important to make certain the number and edition date of the form the insurer is using is the same as that appearing in FC&S Umbrella.

6. Know the payment terms. Determine the amounts required for minimum and deposit premiums (as they are not necessarily the same), whether the premium is fixed or subject to adjustment, and whether the minimum premium applies if the policy is canceled mid-term.

7. Determine hidden costs. Excess and surplus lines premiums are usually subject to additional state taxes and fees. Because many insurers used by E&S brokers are not licensed in all states, special charges are levied against policies they issue when they provide coverage for risks in non-admitted states. These taxes vary from state to state, and should be charged only to premiums developed from exposures in states where the insurer is non-admitted. Surplus lines quotes sometimes are presented without these extra charges, and thus direct comparison to quotations from standard, admitted insurers may be unwise. Whenever possible, these charges should be determined or at least estimated before a quotation is selected.

8. Avoid rates that are too good to be true. Watch out for insurers that are on a fast track to gain market share or that write only high-profile accounts. Some insurers “buy” business by offering ridiculously low pricing or by writing exposures that no one else will write. If the coverage and cost seems too good to be true, it probably is.

Umbrella Coverage Formats

In 1986, and strictly on an advisory basis, the ISO suggested excess and umbrella policy language to assist insurers in developing their own commercial umbrella liability policy forms for use with its new Commercial General Liability (CGL) policy forms (both “occurrence” and “claims-made” versions).

The advisory language, which was developed by ISO staff without formal committee participation, was only a guideline. It was not intended to suggest that other language was inappropriate for some or all risks. In face, the ISO affirmed at the time that it would continue to maintain its traditional role of noninvolvement in the excess umbrella field. ISO also stated that it did not intend to file or advocate the advisory policy language with any insurance department, or to support the language with statistical, rating, rules or other services. However, not withstanding its previous position, the ISO has now published its own commercial umbrella policy, CU 00 01.

Umbrella and excess liability insurers continue to use a wide variety of coverage formats which makes evaluation and comparison of forms so complex. Although it is impossible to easily categorize umbrella and excess coverage approaches, most occurrence and claims-made umbrellas and excess liability policies are generally arranged in one of two ways.

Free-standing Umbrella Forms

Free-standing umbrella policies typically provide coverage based only upon the terms of the umbrella or excess policy itself and any attached endorsements. Most of these policies provide occurrence-based coverage only. However, some may have a dual-coverage trigger (occurrence or claims-made) so as to track with underlying coverage, whether the underlying coverage is on an occurrence or claims-made basis. With few exceptions, the scope of coverage provided by these self-contained contracts is not dependent on the terms of the underlying insurance. Some exceptions include the “drop-down” coverage feature and who is insured. Because coverage under this umbrella format is independent of the primary policy, there is a potential for coverage gaps between the umbrella and the underlying policy. To lessen the potential for such gaps, insurers often modify these forms with endorsements that make certain coverages apply only if and to the extent that underlying coverage applies.

Many umbrella insurers use the format and much of the wording found in the 1986 and later versions of the ISO-CGL policy forms. Other insurers, however, have developed umbrellas that vary considerably from the ISO-CGL forms both in language and format.

Hybrid Umbrella Forms

Many of the umbrella forms designed for use with the 1986 and later versions of the ISO-CGL forms use a hybrid coverage A/coverage B (or coverage 1/coverage 2) format. Coverage A usually is occurrence or claims-made excess coverage that follows many of the terms and conditions of the underlying policy.

Since it provides coverage on essentially the same basis as the underlying policy, coverage A is dependent upon many of the terms of the underlying policy. However, coverage A also may have its own terms and conditions which will control in the event of a conflict with any wording in the primary coverage. Thus, coverage A is sometimes not true following-form coverage.

Coverage B is intended to provide occurrence or claims-made umbrella protection for exposures not encompassed under coverage A. However, this coverage B is not likely to be as broad as insureds were accustomed to receiving under the pre-1986 umbrella forms. One reason cited by umbrella underwriters for limiting the scope of coverage B in their post-1986 forms is that coverage A is broad enough to eliminate much of the need for umbrella coverage. This explanation assumes, however, that the terms of the primary layer of coverage “followed” by coverage A combined with coverage B produces overall protection as broad as that provided by most umbrellas issued prior to 1986. This assumption may not always be true.

When primary coverage is adequate, this hybrid coverage A/B format often provides better protection from potential coverage gaps than free-standing umbrella forms. However, such is not always the case. It is therefore necessary to carefully evaluate the scope of both primary and hybrid umbrella coverage to determine the extent to which any potential coverage gaps are eliminated.