Does your business client need 'umbrella' insurance?

The term “umbrella” technically describes a type of insurance that was replaced in today’s market by variations of excess liability and hybrid excess policies.

The practice of providing catastrophe protection for many kinds of liability exposures with a single blanket policy has become 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, who first coined the term "umbrella," 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 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.

Various excess catastrophe liability insurance policy options expanded in 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 due to primary coverage limits often being extremely low, sometimes at the minimum legal or state-required levels. 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. The new policy aimed to extend coverage and match underlying liability coverage. Separate excess policies typically covered bodily injury liability, property damage liability, and other exposures.

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

Two methods were used to provide excess coverage:

1. A certificate, which was following form over the underlying insurance, was attached to the underlying policy. A separate premium charge was applied for the certificate. This method provided a straightforward way of offering additional limits, although the coverage was constrained by both the scope of the underlying insurance and the limits set by the issuing insurer.
2. A separate, stand-alone, policy 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.

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 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 entering, and then withdrawing, from the market with some frequency.

By the early 1970s, the umbrella market became quite competitive, and at least seventy insurers were offering umbrella coverage including most large U.S. insurers. Many other umbrella markets were available through surplus lines brokers.

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 coverage was on an occurrence basis. This was quite controversial in the 1950s. Prior to 1960, as an “occurrence” meant an event or continuous or repeated exposure to conditions that unexpectedly caused injury during the policy period. The word “unexpectedly” precluded any attempt to cover results of insureds' acts that were intentional or reasonably foreseeable. It was approximately 1960 that the term “occurrence” was modified with the addition of the 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 an important limitation.
• Intangible Property: Intangible property is 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.
• Aggregates: There were no aggregate limits imposed on coverage. These early, broad umbrella policies were 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 coverage restrictions

Lloyds 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 exclusions were absolute.
• Personal injury is limited and defined by a list of enumerated injuries.
• Property damage meant “damage to or destruction of tangible property.”
• A new warranty 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 applies 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 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. In June 1960, a revised form was introduced which remained in use until the 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 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 limitations
• War

Adapting to industry changes

Most of the significant 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.

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.

There is still no universal standard for umbrella insurance, and it has been replaced by various excess and hybrid umbrella policies. For assorted reasons, most insurers ignored this advisory text when drafting their commercial umbrella policies. They continue today to rely on their own wording. However, ISO introduced a standardized umbrella policy form in 2000 (with subsequent revisions), 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.

This is an abridged version of an article that was first published by FC&S Expert Coverage Interpretation.

See also:

• Small business owners fear inflation and labor concerns most in 2025
• Uber has its eye on commercial auto insurance reform
• AM Best: Signs point to trouble ahead for D&O insurance sector