Personal Umbrellas For Business Clients: A Great Peace-Of-Mind Practice Builder

Consider the following examples:

A neighbors child is playing on our backyard swing set or trampoline and a tragic accident occurs.

Were coaching little league soccer and an irate parent, supposedly under our supervision, slugs someone elses child.

The charitable organization on whose board we serve is served with a lawsuit.

Our college-aged kids let some of their friends use the vacation cottage we thought only they were using and…you can fill in the blank.

It is not hard to make the connection. Liability lawsuits are on the rise and we do not see any interruption in the trend. In our society, when someone is injured, they look to sue firstand ask questions only through their personal injury attorney. Should the exposure and a subsequent jury award or settlement be great enough, the personal assets of any business owner, and the business itself, can be in jeopardy.

It does not happen that often, but in a real tragedy, the coverage limits of the underlying policies can be easily exceeded. Without an umbrella protecting us, we risk getting soaked through and through.

Let us now look at four aspects of this business-personal nexus with respect to personal umbrella coverage.

1 Parallel coverage principle

In this case, we are protecting the individual from a catastrophic-type claim against a business. Should a claim exhaust the insurance coverage of a business, those winning a judgment can come after the personal assets of the businesss owners.

For example, an individual who owned a chain of stores in malls across America had $50 million in commercial liability coverage. His agent insisted that he also take out a $50 million personal umbrella, a parallel coverage. It was excellent advice and I endorse the reasoning behind it.

2 Peace of mind

Personal lawsuits are distracting and time consuming. Imagine the internal turmoil when the business owner, already consumed with operating his or her business, is now facing a claim that could jeopardize both personal and business assets. In such cases, the personal umbrella provides both peace of mind and security to the business owner.

3 Business continuity

If an individual does not have a personal umbrella, a large judgment could even force the sale of a business to satisfy that judgment. Partnerships, buy-sell agreements, generational succession or key employee agreements could also be disrupted or threatened. In this case, the personal umbrella helps ensure business continuity.

Thus, the obligation to secure a personal umbrella could be part of a partnership agreement. The considerations are similar to the valuation, business continuity and asset division issues confronted in "high-profile" divorces or contested estates.

4 Value for premium

We are perhaps more familiar with businesses taking out umbrella coverage, often mandated by contract conditionsa familiar instance being the construction industry. However, I estimate that only about one-third of small-to-midsize businesses have a business umbrella coverage. When the economy gets rockier or when we are in a hard insurance market, the level of insureds slips further.

When it comes to the personal umbrella, the percentage is much less, with about 5 percent of homeowners having personal umbrella policies. Yet, as we know, the umbrella is a relatively inexpensive coverage and, overall, a profitable product for our industry. With a base rate of about $200 per $1 million, your client could likely secure $5 million in coverage for an annual premium of $500 to $700, a modest investment in peace of mind and business protection.

The three main payout areas in personal umbrella underwriting remain teenage drivers, uninsured motorists and a miscellaneous category, in which many of the claim situations discussed at the beginning of this article would apply. As we know, the excess liability coverage of the umbrella policy follows what is covered by the insureds primary policies, with most situations covered by the comprehensive liability that is part of every homeowners policy or the liability portion of the automotive policy. Many high-net-worth individuals will also operate off-road recreational vehicles, watercraft and motorcycles.

Whether you write the personal umbrella policy yourself or make referral to a colleague, be aware that todays umbrella, like all others, is subject to more underwriting scrutiny than in the past. In particular:

Do not assume that all underlying coverages are written over. Umbrella underwriters are "picking and choosing" more than ever.

Expect more exclusions as to classes of liability allowed.

Expect much greater scrutiny of primary policies, both for conditional language and amount of coverage required before the umbrella coverage will be written.

The existence of a business or personal umbrella policy is generally not considered to be discoverable during a deposition or other legal proceeding. While that may be offered as a "why would I need a personal umbrella" argument, the reality is that business owners generally have many more assets than the average citizen. Juries know that and like to rule accordingly. Agents should have their clients consult with a personal attorney regarding these issues.

As suggested earlier, changes in society are bringing the business and personal sides of our lives into greater potential for conflict than ever before: multiple-dependent families; complicated business partnership structures, including mergers and acquisitions, buy-sell agreements, and fractional ownership for key employees; more second and third homes, with fluctuating rosters of possibly unsupervised guests; homeowners associations; the business owners involvement in non-paid community activities; a general claimant mindset that eschews recovering reasonable damages in favor of pursuing a windfall.

The lead-in to get a client to consider the coverage can be as simple as saying something like, "Now, that we have examined all of your business exposures, let us take a quick look at your personal assets and their protection." In doing so, you demonstrate to your client an interest in and ability to conduct comprehensive risk analysis. This activity becomes a great practice builder that also "buys" your client peace of mind and a more favorable business continuity environment.

William M. McCord is a senior vice president and the director of personal lines for Service General, the personal lines division of Burns & Wilcox Ltd., an independently owned managing general insurance agent, headquartered in Detroit/Farmington Hills, Mich.

Reproduced from National Underwriter Edition, September 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.