INTRODUCTION

Commercial umbrella coverage is designed to complement the insured's underlying Commercial General Liability, Commercial Automobile Liability, Employers Liability, and other primary liability coverages. The amount and scope of underwriting needed to assess a specific umbrella risk properly depends on various factors and circumstances. The following analysis briefly discusses some of these considerations.

COVERAGES

The coverages provided by the American Association of Insurance Services (AAIS) CU 0001 Commercial Excess/Umbrella Liability and CU 0002–Commercial Umbrella Liability Coverage Forms should be briefly reviewed alongside the underwriting considerations.

Coverage L–Bodily Injury Liability and Property Damage Liability

This coverage applies to claims involving bodily injury and property damage that exceed the retained limit, whether it's the self-insured retention or available underlying limits, due to the insured's business premises, operations, or products and completed work exposures. It applies on an occurrence basis.

It also covers claims related to owning, maintaining, using, loading, and unloading covered autos. However, it does not extend coverage to automobile no-fault, uninsured or underinsured motorists (UM/UIM), first-party physical damage, personal injury protection (PIP), automobile medical payments, or similar coverages.

Coverage for claims-made exposures can be added by an endorsement.

Coverage P–Personal and Advertising Injury Liability

This coverage applies to claims for personal and advertising injury exceeding the retained limit (such as the self-insured retention or underlying limits), which result from the business activities of the named insured.

ELIGIBILITY

The typical commercial umbrella book of business mainly consists of risks written on an account basis. In other words, umbrella coverage tends to be written primarily (and often only) for clients who have some or all of their primary insurance with the same company. This is why the underwriting criteria used to evaluate the primary coverages often extend and apply to the umbrella coverage.

As a result, the umbrella reflects the carrier's preference for certain classes of business or risk types it desires across multiple lines. An advantage of this approach is that the company can steer clear of high hazard risks and those outside its underwriting appetite.

Here are some examples of high hazard risks:

Aviation risks
Professional liability
Risks with asbestos exposures
High-risk construction projects
Hazardous products liability exposures
Other risks the carrier typically does not write

UNDERWRITING

Underwriting the Risk

Umbrella underwriters have the experience and expertise to evaluate the loss potential of specific risks. They mainly underwrite commercial umbrella insurance, which often involves a long tail, which requires a broader underwriting approach. Additionally, when underwriting this line of business, the primary focus is on potential loss severity.

Instead of relying on the usual three to five years of loss history, using ten or more years of claims data might be more suitable or even required. Effective risk selection requires awareness of current and emerging issues and trends that could influence future liability. Here are some issues that have surfaced relatively recently:

Cyberliability

Commerce-related treaties
Environmental liability
Employment-related practices (including workplace violence and harassment issues)
Electronic data issues
Silica injuries
Toxic mold
Trends in jury verdicts for certain types of injuries

In addition to instinct, experience, and simple "seat of the pants" risk analysis, umbrella underwriters also use advanced research tools and skills to identify and assess emerging issues that could impact or determine the potential for severe losses in the future for a particular insured.

Another key underwriting concern is whether the underlying coverage is written on an occurrence or claims-made basis and how well the excess coverage aligns with the primary layer. Underwriting acceptability becomes even more critical if there is a potential for significant drop-down liability.

Contractual Exposures

Commercial liability coverage forms and policies usually cover liability obligations due to specific, listed written contracts or agreements, while excluding all others. It is crucial to review each contractual obligation to determine whether it is insured. Written contracts often transfer obligations and requirements between parties. Consequently, understanding the responsibilities the insured has taken on and what has been contractually transferred or avoided is vital.

Additional Insureds

Additional insured endorsements are available to address certain requirements imposed by contractual obligations of additional interests. The named insured makes its coverage limits available to the additional insured for claims for loss that may be brought against the additional insured due to their relationship with the named insured.

It’s important to understand that the more additional insureds added to the policy, the more diluted the coverage limits become.

LOSS HISTORY

This requires adequate information on prior losses. The loss history should have a reasonably recent valuation date and include at least five full years of experience, in addition to the current year. For larger risks or those involved in high-risk operations, ten or more years of loss history might be necessary.

At a minimum, the loss runs should include loss dates and descriptions, whether the losses are open or closed, and the amount paid or the current reserve amount. Some carriers will not provide reserve information since these are estimates that can change at any time.

Frequency

Frequent small losses might not significantly impact the loss ratio, but their frequency could indicate underlying issues. Incidents such as slips and falls may suggest housekeeping issues or structural flaws that could lead to significant losses. Minor property damage claims may reveal quality control issues or a lack of attention to detail, potentially indicating morale hazards on the part of the insured. The key in evaluating a pattern of small losses is to identify whether there is a clear, measurable trend that can be analyzed and addressed.

Umbrella liability carriers usually do not cover frequency-type losses. However, they are concerned because these losses reduce the aggregate amount available to pay severity claims.

Severity

The umbrella carrier is especially concerned about large losses. It knows that multiple significant losses can occur unless the named insured takes proper steps to prevent them. Loss details and the actions of the named insured after a loss, aimed at preventing or reducing future occurrences, are important and may determine the risk’s acceptability. Thorough post-loss analysis by both the named insured and the insurance company is crucial to ensure everything related to the loss is reviewed, evaluated, understood, and any unresolved issues are resolved satisfactorily.

PRICING

Umbrella pricing starts with a manual premium and then relies heavily on underwriting judgment, considering the risk type and its potential loss severity.

ENDORSEMENTS

What appears to be a straightforward endorsement change request from the insured can actually be complex. Underwriters and other stakeholders must assess these requests from an underwriting standpoint. Many change requests indicate possible operational changes or reveal emerging issues and exposures that need to be evaluated.

For example, a name change could signify a shift in ownership that might significantly affect business operations. An address change should lead to questions about new locations and associated activities. Requests for unusual insurance certificate language should be thoroughly examined and questioned for potential operational changes.

UNDERWRITING THE INSURANCE COMPANY

Writing umbrella liability insurance over another carrier’s underlying coverage involves carefully assessing that carrier's financial stability. Many umbrella insurers require the primary carrier to meet certain minimum financial criteria or to have a specific rating from recognized agencies like A. M. Best, Fitch Ratings, or Standard and Poor's. Some might also require the insurer to be active in the insurance industry for a specified period of time.

The reason to pay close attention to a carrier's financial condition is that the umbrella carrier may have to defend the insured if the underlying carrier's limits are close to being exhausted. Although the umbrella carrier is not required to provide limits to satisfy the underlying limits, it must offer a defense to prevent the claim from reaching the umbrella layer if there's a chance it could surpass the underlying limits.

UNDERWRITING UNDERLYING COVERAGE FORMS AND POLICIES

The umbrella underwriter must be fully aware of the underlying coverage forms, policies, and any change endorsements modifying coverage. If the underlying coverage is narrower than the umbrella policy, the umbrella coverage "drops down" (subject to the retained limit) to fill coverage gaps, unless it is explicitly endorsed to match the scope of the underlying coverage.

Conversely, if the underlying coverage is broader than the umbrella policy, the umbrella underwriter should either charge for the additional coverage or notify the producer in writing about the coverage gap. This process documents the scope of the umbrella coverage, identifies any coverage differences or gaps, and helps prevent conflicts regarding coverage if a loss occurs.