Claims-Made Umbrella Policy Features
April 27, 2015
In 1986, the Insurance Services Office (ISO) introduced two new general liability policy forms. While both of these new forms were titled "Commercial General Liability," one provided coverage on a "claims-made" basis. Shortly thereafter, some umbrella insurers developed their own policy forms to be used in conjunction with the new claims-made ISO-CGL policy.
Although claims-made umbrella forms are uncommon, the following discussion provides a review of claims-made features and is generally applicable to primary, excess and umbrella forms.
The obligation of an insurer to pay for a claim and related expenses under a claims-made umbrella or excess policy is usually triggered only after a covered claim is first made against the insured during the policy period or extended reporting period. Claims-made policies contrast with the more common occurrence-basis policies, which are triggered by the date the loss or injury occurs, even though the claim may not be made until months or years after the policy expires. A graphic example of the key difference between these two types of policies is shown in the following figure.
In this example, assume a loss occurs in 2013 but the resulting claim is not presented until 2015. A claims-made policy in effect during 2013 would not provide coverage for the claim. Rather, the 2015 claims-made policy would be called upon to respond to the claim. In contrast, an occurrence-basis policy in effect in 2013 would respond to the 2015 claim, since the occurrence resulting in the claim took place in 2013.
ISO Excess and Umbrella Proposed Wording
When the claims-made version of the ISO-CGL form was introduced in 1986, the ISO prepared advisory material that suggested wording to assist insurers in developing their own commercial umbrella liability policy forms. This material was designed to provide three separate policy formats, commercial excess liability coverage, commercial extended liability coverage and commercial umbrella liability coverage that is a combination of both the preceding formats.
The initial expectation of widespread claims-made general liability coverage failed to materialize and today few insureds are forced to purchase primary liability on a claims-made basis. As a consequence, few modern umbrella forms provide coverage on a claims-made basis. However, some insurers may still offer claims-made excess or umbrella policies for use when underlying coverage is written on a claims-made basis. The following discussion reviews policy provisions unique to claims-made umbrella and excess policies.
Coverage Formats
The most common claims-made umbrella format is a "free-standing" policy form. Such forms are similar in format to most "occurrence" umbrella forms except that they provide coverage on a claims-made basis. All terms and conditions relevant to the policy are included within the basic form. Coverage is usually provided on the terms of the umbrella policy only and is not dependent upon the terms of underlying insurance.
Some claims-made coverage follows the terms and conditions of the underlying claims-made policy. While such policies may be labeled "following form," coverage does not necessarily follow all of the terms and conditions of the underlying policy. In this regard reliance on any reference to the policy being "following form" without a careful reading of the policy can be misleading and dangerous. In most instances however, following form excess coverage is generally subject to the terms of the underlying policy only when those underlying terms do not conflict with the terms of the excess policy. Where there is a conflict, the terms of the excess policy may control. Also, such excess forms usually apply only excess of a stated amount. There usually are no provisions that allow coverage to drop down when underlying aggregates are exhausted or when there is no underlying coverage in effect. Additionally, defense coverage is seldom provided.
Some excess claims-made forms are self-contained and not dependent on the incorporation of terms from underlying coverage. However, these forms are still considered excess forms because they usually apply only excess of a specific amount, contain no drop-down wording and do not provide defense coverage. Some of these self-contained forms will not credit underlying defense costs towards exhausting underlying limits, even when defense is included in those underlying limits.
Many claims-made umbrella and excess liability policy forms use what is sometimes referred to as coverage A/B (or coverage 1/coverage 2) format. Under such an approach coverage A is arranged so as to follow the form of, and apply on the same basis as primary coverage. However, such forms may follow the terms of the underlying policy only to the extent that those terms do not conflict with the terms of coverage A. When there is a conflict in terms, the coverage A terms usually prevail.
Coverage B is designed to provide umbrella coverage. However, in many instances this coverage is not as broad as is usually found in free-standing umbrella forms. For example, coverage for advertising injury may be more limited under coverage B than in free-standing forms that do not follow this hybrid approach.
A few insurers provide claims-made coverage through the use of a claims-made endorsement that is attached to an "occurrence" policy. Because of the many terms and conditions that must be revised this coverage approach is rare.
Aggregate Limits
The policy aggregate limit controls the amount that an insurer will pay in any one annual policy period. The meaning of the term "aggregate" and what it entails is therefore of special importance.
In the 1986 and later versions of the ISO-CGL claims-made form there are two aggregate limits. One aggregate limit applies to the products and completed operations hazard and the other aggregate limit applies to all other coverages. It would be preferable to have both of these aggregate limits included in the excess layers of coverage as well. However, not all umbrella and excess policy forms contain aggregate limit provisions similar to those found in the ISO-CGL forms.
Some claims-made umbrella and excess forms are subject to a single aggregate limit for all coverages. A single aggregate limit is undesirable because it could be exhausted much faster than if the umbrella were subject to two separate aggregate limits. Most claims-made umbrella and excess forms, however, do include two aggregate limits in a manner similar to that used in the ISO-CGL forms.
Another important element of claims-made umbrella coverage is the extent to which aggregate limits are subject to reduction by the payment of defense costs. If both damages and defense costs reduce the aggregate limit, such limits could be exhausted faster than would be the case if the aggregate were reduced only by the payment of damages.
Coverage Trigger—ISO-CGL Policy Forms
The term trigger, which is used frequently in discussions of claims-made coverages, refers to the events or circumstances that actuate the policy's coverage. Under the wording of the 1986 and later versions of the ISO-CGL claims-made policy forms, bodily injury and property damage coverage is triggered by a claim first made during the policy period (or any applicable extended reporting period as discussed below). For coverage to apply, the claim must arise from an occurrence that takes place on or after the policy's retroactive date.
In the 1986 ISO-CGL claims-made form, coverage for personal injury and advertising injury is triggered by an "offense" that takes place during the policy period, regardless of when the claim is reported (in essence, the policy provides "occurrence" coverage for personal injury and advertising injury.) In the 1989/90 and later versions of the ISO-CGL forms, the personal injury and advertising injury coverage trigger was changed to track with the bodily injury and property damage coverage trigger. In these forms, coverage for personal injury and bodily injury is triggered by a claim made during the policy period (or any extended reporting period) that results from an "offense" that occurred on or after the policy's retroactive date.
Coverage Trigger—Umbrella Forms
Coverage for bodily injury, property damage, personal injury and advertising injury under nearly all claims-made umbrella and excess forms developed in response to the ISO-CGL claims-made form is based on an "occurrence" and is triggered by a claim made during the policy period (or any applicable extended reporting period). For coverage to apply, the claim must result from an occurrence that takes place on or after the policy's retroactive date.
Few of these early claims-made umbrella and excess forms include a dual coverage trigger to track both claims-made and occurrence coverage. In some umbrella and excess forms, coverage is triggered by an "incident," so that coverage is better able to track with either an occurrence or a claims-made underlying coverage trigger. As an alternative, some umbrella and excess occurrence policies contain an endorsement that creates a dual coverage trigger. Such a claims-made endorsement provides a claims-made trigger that applies when underlying coverage is on a claims-made basis. The occurrence trigger included in the umbrella or excess policy would apply in instances underlying coverage responds on an occurrence basis.
Additional Trigger Requirements in Umbrella Policies
To determine how a claims-made umbrella or excess policy is triggered, it is necessary to locate and identify the following claims-made features and requirements within the policy form being reviewed. These elements combined constitute the policy trigger.
1. What constitutes a claim and when is a claim made?
2. What are the requirements in reporting the claim to the insurer?
3. What are the time limitations regarding when the wrongful act is deemed to take place?
The umbrella or excess policy provisions that answer these questions may not always be easy to identify, as they may be hidden in the most unexpected parts of the policy. In some cases there may be nothing in the policy to answer the question. For example, while almost all insurers use the term claim in their policy forms, not all provide a definition of claim.
Only a few claims-made umbrella or excess policies contain a definition of claim. An example of an umbrella policy definition of claim is as follows:
"CLAIM" means a written demand upon the insured for compensatory damages or services and shall include the service of suit or institution of arbitration proceedings against the insured. "Claim" does not include reports of accidents, acts, errors, occurrences, offenses, or omissions which may give rise to a claim under this policy.
This claim definition wording creates a distinction between an actual demand for damages or services made upon the insured and a notification that such a demand may be made in the future. Under the definition, notice of an occurrence that may later result in a claim will not trigger coverage under the policy. Coverage is only triggered upon presentation of the actual demand for damages or services.
The absence of a definition of claim is not a negative policy feature. Policies that do not define claim often provide more liberal coverage than policies that restrictively define claim.
Claim-reporting requirements establish when claims made against the insured must be reported to the insurer. Often the policy requires that the claim be reported to the insurer during the policy period or any extended reporting period, or within a specified number of days after claim is made. Sometimes language in the insuring agreement includes such requirements, but most policies provide a more elaborate description elsewhere in the policy under captions such as Notice of Claims, Notice, Claim Reporting, etc. Some examples follow:
NOTICE REQUIRED DURING THE POLICY PERIOD
I.Insuring Agreements
1.The Company hereby agrees to pay on behalf of the Insured the Ultimate Net Loss but only up to an amount not exceeding the Company's Limit of Liability as shown in Item 3 of the Declarations as a result of CLAIMS FIRST MADE AGAINST THE INSURED AND REPORTED TO THE COMPANY DURING THE POLICY PERIOD. Payment of Ultimate Net Loss will be in excess of the Underlying Insurance.
IMMEDIATE NOTICE REQUIRED
E.Notice of "Occurrence", "Claim" or Suit:
2.Notice of "Claim" or Suit
a.(1) It is a condition of this insurance that, in order for coverage to apply, the first Named Insured must give us immediate written notice of any "claim" or suit which is reasonably likely to involve this policy. . .
NOTICE TO INSURER REQUIRED AS SOON AS PRACTICABLE
(d)Notice of Occurrence and Claim:
If any claim is made against any Insured likely to involve this Policy, the Named Insured shall, as a condition precedent to the rights of any Insured under the Policy, give written notice thereof to the Company as soon as practicable and shall promptly forward to the Company copies of any written claim, demand, notice, summons, complaint or other process received by the Insured or its representatives or agents. Failure to provide such written notice as required herein shall result in a forfeiture of any rights to coverage hereunder.
Compliance with provisions that require reporting either during the policy period or some limited period after policy expiration may be difficult or impossible to meet when claims are made against the insured at or near the end of the policy period. Even under the most favorable circumstances, it may take a number of days to advise the insurer of a claim. The corporate risk manager or other executives responsible for the insurance program may not be available to respond, or the specific reporting procedures may not be fully understood by the person who actually first receives the claim.
It is preferred that the policy specify who is responsible for giving notice of an occurrence. For example, the policy could state that notice of an occurrence must come as soon as practicable after an officer of the company or employee of the risk management or legal department becomes aware of the occurrence. Without this clarification, disputes over notification of an occurrence are almost certain to arise. Unfortunately, few claims-made umbrella and excess policies contain this clarification.
Also, policy forms that do not impose a time limitation upon the insurer and require only that the claim be reported as soon as "practicable" are preferable to those forms that require immediate notice or that impose a time limitation.
Potential Claim
Circumstances that the insureds feel may give rise to a claim generally must be reported to the insurer during the policy or extended discovery period. In most cases the insureds are required to provide the insurer with specific details regarding such circumstances. These details are sometimes referred to as specificity requirements. The policy may require the insured to identify the specific wrongful act that is likely to result in a claim, the specific potential injury or damage, the likely claimants and other similar information.
Overly restrictive notice requirements may severely impair the insured's ability to trigger the policy as respects claims that may be made in the future. Even when the insured believes a claim is inevitable, unless the specific notice provisions can be met, the policy will not be triggered. Policies that have limited specificity requirements or provisions that only require the insured to describe the general circumstances afford the insured greater control in triggering coverage.
Claims-made reporting requirements imposed on the insured either for actual or potential claims—including provisions that require written notice or special mailing requirements—often have been strictly upheld by the courts.
Retroactive Dates
When issued without language to the contrary, claims-made primary, umbrella and excess liability policies provide coverage regardless of the time between the occurrence or offense and the claim being made against the insured. Frequently, however, policies will contain or be endorsed with language that is sometimes referred to as a retroactive date limitation. Such provisions preclude coverage for claims arising from occurrences or offenses that take place prior to the stipulated retroactive date, even if the claim is made during the policy period.
When applicable, the retroactive date is usually shown on the policy declarations or it may be shown on a policy endorsement. Two examples of where retroactive date provisions may be found are as follows.
IN THE POLICY INSURING AGREEMENT
INSURING AGREEMENTS
B.This insurance applies to "Personal Injury", "Property Damage" or "Advertising Injury" only if a "claim" for such damages:
1.is first made in writing against the "insured" during the policy period, and written notice of such "claim" is received by the "insured", the underlying insurer or us, whichever comes first; AND
2.the "Personal Injury", Property Damage" or "Advertising Injury" occurs on or after the Retroactive Date shown in the Declarations and prior to the expiration date of the policy period.
BY ENDORSEMENT
In consideration of the premium charged, it is hereby understood and agreed that this policy only provides coverage for Loss arising out of claim for alleged Wrongful Acts occurring on or after [date] and prior to the end of the Policy Period and otherwise covered by this policy.
Generally there are three ways insurers may apply retroactive dates.
1. The insurer may impose a retroactive date that is the same as the policy inception date.
This restriction normally occurs when the insured organization is a newly formed entity, when no previous claims-made coverage existed, or when a change in the insurer is made. Underwriters are reluctant to provide coverage for occurrences that may have occurred in a prior period, especially if no prior insurance was in force. The risk is that the insurer may inadvertently assume the exposure for an unknown number of occurrences or offenses that may develop into future claims.
The following chart illustrates a claims-made policy in which the insurer has imposed a retroactive date that is the same as the policy inception date. There is no coverage for claims made during the policy period that are based on occurrences that took place prior to the retroactive date. The shaded area represents this period.
A potential problem with all claims-made policies occurs when each successive renewal policy imposes a retroactive date that is the same as the renewal date. This condition is known as Advancement of the retroactive date. When this condition occurs, the policy provides coverage only for claims made and based on occurrences or offenses that take place during the current policy period. A graphic example follows.
Retroactive-date advancement normally occurs only when a policy has been cancelled, when the insurer declines to renew, or when the insured changes insurers. New insurers often are unwilling to provide coverage for claims based on unknown occurrences or offenses that took place in prior periods. Another instance when a retroactive-date advancement might occur is when the insurer discovers that the insured has not fully disclosed information considered material to its underwriting decision. Such material could include information about past circumstances that the insurer feels may develop into a future claim. As a condition of renewal, the insurer advances the retroactive date. As a practical matter, however, insurers can advance the retroactive date on any renewal. There usually is no guarantee that a specific retroactive date will be maintained.
The insurer may impose retroactive dates that are the same as the expiring policy (policy provides "prior acts" coverage).
This example depicts successive policies, each maintaining the original retroactive date of the previous policy. Subsequent occurrences would be covered by the policy in effect at the time the claim was brought against the insured. Successive policy renewals maintaining the expiring policy's retroactive date are said to provide "prior-acts" coverage.
The insurer may choose to impose no retroactive date or issue the policy with a provision stating that all prior occurrences or offenses are covered (policy provides "full-prior-acts" coverage).
Because this arrangement imposes the least restriction on the insured, it is the most desirable.
As the following chart illustrates, there is no restriction in the policy as to when the occurrence must take place, only that a claim based on the occurrence be made against the insured during the policy period. Full-prior-acts coverage is an improvement over any policy containing a specified retroactive-date limitation. Competing insurers sometimes offer full-prior-acts coverage as an enticement for insureds to switch insurers.
Issues Involving Umbrella Retroactive Dates
In addition to the problems associated with the manipulation of retroactive dates discussed previously, additional issues are pertinent to the topic of retroactive dates as they apply to umbrella and excess coverage forms. These additional issues are discussed subsequently.
Advancement of Retroactive Dates
According to the ISO, a primary insurer's ability to advance the retroactive date was to be controlled under the 1986 ISO-CGL claims-made form through the use of a set of manual guidelines established by the ISO. However, compliance with those guidelines limiting the circumstances under which the retroactive date can be advanced was not mandatory. As a result, primary insurers did not have to comply with those guidelines.
Many umbrella and excess liability underwriters indicated at the time that they would not arbitrarily advance the retroactive date. However, with the exception of the potential for litigation arising out of such an act, there is little incentive built into the policy forms to ensure that this advancement cannot in fact occur.
There are legal theories that could be used by the courts to require coverage when the umbrella or excess insurer advances the retroactive date, such as the reasonable expectations doctrine which, according to Black's Law Dictionary, holds that ambiguities in insurance policies are to be resolved in accordance with the reasonable expectations of the insured. In addition, insureds might allege that they relied on the umbrella insurer to follow the same manual guidelines set forth by the ISO for primary liability insurance. Their reliance can be considered justified due to the early publicity surrounding those guidelines for primary coverage and a lack of information to the effect that the umbrella might not follow those same guidelines.
However, reliance on legal doctrines means the insured may become involved in litigation. If the insured must go to court to enforce coverage, the insurance is not doing the job it was intended to do. Further, there is no guarantee that the insured would succeed in any such effort. Fortunately for insureds, some courts have already ruled that the reasonable expectation of the insured dictates how claims-made coverage will be interpreted.
When an insured is three or four years into a claims-made program that has had the retroactive dates manipulated, coverage at any given time may be difficult for the insured to ascertain. If the insured has justifiably relied on the existence of coverage, a court could nullify the retroactive date that is precluding coverage.
Yet another reason insurers may be reluctant to advance retroactive dates is that they do not want to force the insured to purchase an extended reporting period, thereby creating a long-term exposure for the insurer. Eliminating this type of long-term exposure was a principal reason claims-made coverage was introduced.
If no retroactive date is stated on the insured's policy, it may be difficult for the insurer to argue that a retroactive date should apply. Because of the broad coverage this might provide to an insured, most insurers would be extremely careful to ensure that this does not occur. Some insurers may use wording that automatically stipulates that the retroactive date is the first day of that policy period when no other retroactive date is shown. This wording is included in the declarations page of its policy form. If such wording is included in a policy, the insured's failure to have the insurer specify an earlier retroactive date would automatically result in the retroactive date being advanced.
Concurrency of Retroactive Dates—Primary and Excess Coverage
Another problem that must be addressed when reviewing an excess program is the concurrency of retroactive dates between primary and excess coverage. If the retroactive date for primary coverage is advanced but the retroactive date of the excess coverage is not advanced (or vice versa), a gap in coverage could result. The following examples help illustrate this point:
In this scenario, assume an occurrence took place in 2014, after the January 1, 2014 retroactive date that applied to both primary and excess coverage. The retroactive date for the primary coverage remained the same while the retroactive date for the excess coverage was subsequently advanced to January 1, 2017.
When a claim is made in 2017, the 2017 primary policy applies because the occurrence took place after the January 1, 2017 retroactive date. The 2017 excess policy will not apply because the occurrence took place prior to its retroactive date which was advanced to January 1, 2017.
Because the excess policy's retroactive date had been advanced, the insured would have had to have purchased an extended reporting period on the 2014 excess policy in order to have excess coverage available.
Other Implications
There are also external factors that can affect the interaction of retroactive dates with other coverage features. For example, the courts have established varying doctrines regarding the time an occurrence will be deemed to have taken place. These doctrines vary not only by jurisdiction but also by the type of coverage and injury involved.
An analysis of when the occurrence took place, for purposes of determining whether it occurred before or after a retroactive date, might require the assistance of legal counsel. For example, if a loss occurs over a long period of time, more than one policy period may be triggered, complicating analysis of the application of the retroactive date.
In cases involving bodily injury that occurs over a period of time, the courts have developed at least four theories to determine when the occurrence triggering coverage took place.
Under the exposure theory, the injury occurs during the policy period in effect when some cellular damage to the body takes place, even if the injury cannot be diagnosed because it has not manifested itself.
Under the manifestation theory, the bodily injury is deemed to have occurred during the policy period in which the injury first becomes manifest, even if the injury is found to have existed sometime earlier.
Under the injury-in-fact theory, the occurrence is deemed to have taken place during the policy period in which the actual injury is found to exist. It does not matter when the injury occurred or became manifest.
Under the multiple-trigger theory, coverage would apply on a broader basis than under other theories. As an example, consider an injury involving long-term exposure to hazardous chemicals such as asbestos. Each insurer whose policy was in effect during the entire period of exposure could be held liable for a portion of the total loss, regardless of any imposed retroactive dates.
The following example illustrates some of the complexities in determining the application of specific coverage when existing legal doctrines are considered in analyzing the application of retroactive dates.
Assume that the insured was exposed to asbestos, fiberglass, or other hazardous material in 2013.
1. Under the exposure theory, a claim made in 2016 based on the 2015 exposure might not be covered since the exposure occurred prior to the January 1, 2016 retroactive date. To be covered, the claim must be made in the year of the exposure (2015). Unfortunately, the injurious exposure may not be discovered for several years.
2. Under the injury-in-fact and manifestation theories, a claim would be more likely to be covered since it would probably be filed during the policy period in effect when the injury was diagnosed or discovered.
3. Under the multiple-trigger theory, coverage would be broadest, though more difficult to apportion. All of the insurers that provided coverage during the three years shown could be held jointly and severally liable.
As the discussion illustrates, the application of coverage triggers and retroactive dates can be dependent upon more than policy wording. In addition, aggregate limits and extended reporting periods must also be considered. All of these policy provisions and conditions interact to determine how coverage is triggered.
Extended Reporting Periods—Tail Coverage
Most claims-made umbrella and excess policy forms contain provisions allowing the insureds to extend the policy's coverage to include claims first made after the policy expiration or cancellation. The extension applies as respects occurrences taking place on or after the policy's retroactive date and before the policy's expiration or cancellation date. Such provisions are especially desirable in the event of policy cancellation or nonrenewal, or when a renewal policy contains a retroactive date later than the retroactive date of the expired policy.
The implications and practical application of extended reporting periods (ERPs) as they apply with respect to the ISO-CGL policy forms are discussed at length in the Underlying Coverage section of FC&S Umbrella. Many of the problems associated with the use of extended reporting periods in the primary layer of coverage will also be present in the umbrella and excess layers.
The following illustration depicts an insured that exercised its 12-month ERP when the policy was not renewed for the 2014 policy term.
This claim scenario would result in the following:
Claim No. 1 Because the wrongful act #1 occurred within the retroactive period and claim was made against the insured within the extended reporting period with subsequent reporting to the insurer, these actions would trigger the 2015 policy for potential coverage.
Claim No. 2 Although wrongful act #2 also occurred within the retroactive period, a claim was not brought against the insured until 2017, after the extended reporting period had expired. Therefore, wrongful act #2 would not trigger the 2015 policy. It also should be noted that unless the 2017 policy contained a retroactive provision that would encompass the date of the wrongful act occurring in 2014, the 2015 policy also would not be triggered.
Claim No. 3 Most ERP language provides coverage only for claims based on wrongful acts occurring prior to the policy expiration date and after the retroactive date. Claims based on wrongful acts taking place during the extended reporting period usually are not covered. In this example the claim was reported to the insurer during the extended reporting period; however, because wrongful act #3 occurred after the policy expiration date, it would be precluded from coverage under the 2015 policy.
ERPs are desirable because they give insureds some protection if coverage is cancelled or not renewed by the insurer. ERP language varies among insurers.
The value of an ERP depends on a number of factors, including:
1. Under what circumstances is the ERP available?
2. For what time period does the ERP apply and at what cost?
3. When and how is the ERP activated?
The 1986 and later versions of the ISO-CGL claims-made policy forms provide an automatic basic extended reporting period (BERP) of five years and an automatic supplemental extended reporting period (SERP) of unlimited duration, whenever any of the following occurs:
1. The policy is cancelled or nonrenewed for any reason including nonpayment of premium.
2. Claims-made coverage is renewed with occurrence coverage.
3. Claims-made coverage is renewed with an advanced retroactive date.
Many claims-made umbrella and excess policies do not track well with the ISO-CGL forms and are more restrictive in the extended-reporting-period coverage made available. The ERP offered by most umbrella and excess policies is not made available in all three of the circumstances shown previously. For example, few claims-made umbrella and excess policies make the extended reporting period available when coverage is cancelled for nonpayment of premium. Also, many of these forms do not make an extended reporting period available when the replacement for claims-made coverage is offered on an occurrence basis or with a later retroactive date.
Some claims-made umbrella and excess policies allow the ERP to be purchased only when an ERP is available with primary coverage, or when the insurer initiates cancellation or nonrenewal. A provision limiting availability of the ERP to instances when the insurer cancels or nonrenews the policy is known as a one-way tail. When the ERP is available if either the insurer or the insured cancels the policy, the provision is known as a two-way (or bilateral) tail. Examples of both types of provision are shown below.
ONE-WAY TAIL
If Underwriters shall:
a)refuse to renew this Policy for reasons other than the Insured's non-payment of premium or non-compliance with the terms and conditions of this Policy, or
b)cancel this Policy for reasons other than the Insured's non-payment of premium or non-compliance with the terms and conditions of this Policy, or
c)on renewal require an exclusion of a product or products, or
d)on renewal require an exclusion in respect of activities other than as provided for in c) above,
then the Insured, upon payment of an additional premium calculated at the percentage, set out in Item 7 of the Declarations, shall have the right to extend the period in which a Claim made against the Insured after the expiry date of this Policy is treated by Underwriters as made on the expiry date of this Policy. . . .
TWO-WAY (BILATERAL) TAIL
1.We will provide an Extended Reporting Period if the policy is either cancelled or not renewed by the first Named Insured or by us for any reason except non-payment of premium. Non renewal by us shall mean the refusal by us to renew the policy on any terms. Non renewal by us shall not mean change in premium, deductible, or underlying required limits, or any other terms and conditions.
A few umbrella and excess forms are ambiguous on the point of providing an extended reporting period when claims-made coverage is replaced with occurrence coverage or coverage containing a later retroactive date. These forms state that the extended reporting period is available only when the renewal coverage requires the exclusion of a specific product or for activities other than a specific product. However, when such a restriction is present, the courts could require an extended reporting period be made available when coverage is renewed with a later retroactive date or on an occurrence basis.
As stated previously, extended-reporting-period (ERP) coverage may not be provided on as broad a basis in umbrella and excess forms as it is under the ISO-CGL claims-made forms. In addition, the length of the ERP coverage provided by most claims-made umbrella and excess forms also does not track with the length of that coverage under the ISO-CGL forms.
The automatic "basic" ERP available under the ISO-CGL claims-made forms is five years for claims arising out of occurrences reported during the policy period. The ERPs offered by umbrella and excess forms vary. Some insurers provide a 60-day period, while others provide a period of one year or more.
The length of the automatic extended reporting period for occurrences that were not reported during the policy period is less of a problem. The ISO-CGL claims-made forms provide a sixty-day extended reporting period for claims based on occurrences that were not reported during the policy period. Most claims-made umbrella and excess policies contain a similar provision.
The supplemental (optional) ERP coverage provided by the 1986 and later versions of the ISO-CGL claims-made forms does not always track well with similar coverage offered in umbrella and excess forms. The ISO-CGL forms offer an unlimited optional extended reporting period. Some claims-made umbrella and excess policies do not offer any supplemental (optional) ERP, relying solely on the automatic extended reporting period provisions contained in their forms. Other umbrella and excess forms offer extended reporting periods of varying lengths. Some umbrella and excess forms provide an extended reporting period of only 60 days, while others offer a period of one year, three years, or five years. Only a few insurers offer an unlimited optional extended reporting period that tracks with the ISO-CGL forms.
Almost all umbrella and excess policies clearly define both the period of the ERP and the additional cost. The premium required to exercise the ERP option usually is a percentage or multiple of the annual premium. This additional premium percentage is typically found within the policy's extended reporting period provisions, on the policy's declarations page, or in an attached endorsement.
Not all insurers fully describe the ERP in the policy form. Certain features, such as the period of discovery and additional premium, may be specifically negotiated and may appear on the policy declarations page or in an endorsement.
There also may be differences between primary and excess coverage regarding the amount of time the insured is given to exercise its right to purchase the optional extended reporting period. The ERP is typically available upon the insured's request and payment of the required additional premium within a specified number of days after the policy expiration or cancellation date. In the ISO-CGL claims-made forms, this time period is 60 days. The length of time given the insured under claims-made umbrella and excess forms varies. Some policy forms provide the insured as little as 15 days to exercise the option to purchase the ERP.
Insureds should not assume that the umbrella or excess policy provides the same time limit to purchase the extended reporting period coverage as the primary form does. If the time allowed by the excess insurer is less than that provided by the primary policy, insureds may find they have waived their right to purchase this protection in the umbrella or excess layer. Also, the umbrella policy may require insured to notify the insurer in writing that the discovery period is desired. Failure to elect coverage under the ERP within the election period and in the fashion described terminates the insurer's obligation to provide such coverage.
Some claims-made umbrella and excess forms provide an automatic extended reporting period through the use of a "Notice of Circumstance or Occurrence" provision. These policy provisions state that, if the insurer is notified of an occurrence during the policy period, claims made within a specified time period (usually 36 months) of the date the insured was notified of the occurrence will be treated as if they had been made on the last day of the policy period.
One of the principal advantages to a notice of circumstance provision is that it provides an extended reporting period for all reported occurrences, whether or not the insured has complied with the conditions precedent to having an extended reporting period made available under the ISO-CGL claims-made forms.
The wording of notice of circumstance provisions usually states that the extended reporting period begins on the date the insurer was notified of the occurrence, not at the end of the policy period. This means that, if the insured reports the occurrence promptly or immediately as required by the policy and this turns out to be in the middle of the policy period, the extended reporting period begins at that time. This could lead to a gap in coverage when the extended reporting period provided by the primary form begins at the end of the policy period.
This potential coverage gap might encourage insureds to withhold notice until just prior to the end of the policy period. However, withholding notice could lead to a loss of coverage. Insurers have the right to require compliance with reporting requirements obligating the insured to report an occurrence immediately or promptly. Also, a delay in reporting may result in legal complications if the insurer has been prejudiced by the delay.
The 1986 and later versions of the ISO-CGL claims-made forms provide separate aggregate limits that apply to extended reporting periods. In contrast, only a few claims-made umbrella and excess forms provide a separate aggregate limit for extended reporting period coverage. If the excess policy limits were reduced during the policy period, this difference between primary and excess coverage could result in a loss being entirely covered by the primary extended reporting period but only partially covered by the excess layer of coverage. When primary coverage is not provided by the standard ISO-CGL form, other differences between primary and excess coverage also may exist.
The terms of each type of extended reporting period offered by the insurer should be reviewed before coverage is purchased. Any necessary modifications to make the provisions of primary and excess coverage concurrent will be easier to accomplish during coverage negotiations.
It is also important for the insured to be aware of the potential cost of any ERPs that are available. The ERP cost varies considerably between insurers, and may range from as little as 75 percent of annual premium to 200 percent of annual premium or more. The cost is of particular concern when an extended reporting period is limited to three years or less and does not include a separate aggregate limit.
Effect of Claims-Made Features on Primary and Excess Coverage
The following scenarios illustrate how the various claims-made policy features previously discussed affect the application of both primary and excess coverage.
In this example, the insured would retain the loss. The injury took place after the claims-made policy was cancelled. The extended reporting period will not provide coverage because the injury occurred following cancellation of the policy period from which the extended reporting period extends. The extended reporting period does not extend the policy period (i.e., the time during which the injury may occur), only the period during which the claim can be presented to the insurer.
Here, again, the insured would retain the loss. There is no extended reporting period coverage and the occurrence policy that follows the claims-made coverage is not activated by an occurrence that took place during the claims-made policy period.
In this example, the claims-made renewal policy provides coverage because the retroactive date of the first claims-made policy period has not been advanced.
Here the occurrence policy pays because it was in effect at the time of the injury.
Under the ISO-CGL claims-made forms, and because this occurrence was reported during the first claims-made policy period, the basic five-year extended reporting period would apply. This loss would be covered by the extended reporting period applicable to the claims-made policy shown to be in effect when notice of the occurrence was given.
Here the claims-made extended reporting period would provide coverage subject to the remaining aggregate limits of the claims-made policy from which the extended reporting period (tail) extends. It is preferable for the extended reporting period to provide for its own separate aggregate limits. However, few claims-made policies contain a reinstatement-of-limits provision.
A change in retroactive date can also create a problem if underlying aggregate limits also change. In this example, the occurrence took place in 2014 when primary policy limits were $500,000. In 2016, primary limits were increased to $1,000,000 and the retroactive date for primary (only) coverage was advanced to January 1, 2015. The claim for the 2014 occurrence was made in 2017.
The 2015 primary policy will not be triggered by the claim because the occurrence upon which it is based took place prior to the retroactive date in effect for the 2017 primary policy period (January 1, 2017). The insured must rely on an extended reporting period for primary coverage.
The 2017 excess claims-made policy would respond because the claim was made during that policy period and because the occurrence took place after that policy's January 1, 2014 retroactive date. However, the 2017 claims-made excess policy only applies excess of $1,000,000 in primary coverage.
The primary limits in effect when the occurrence took place in 2014 were $500,000. That same policy limit would apply to the extended reporting period (tail) that extends from the 2014/15 policy period. (The limit could even be less if the primary aggregate limits had been reduced by other claims and if the extended reporting period did not provide separate aggregate limits.)
This scenario results in a coverage gap of at least $500,000. The insured would be required to pay this amount to meet the underlying limit of $1,000,000 necessary to trigger the excess coverage.
In this scenario, the insurance program consists of occurrence primary coverage in 2015 and claims-made primary coverage thereafter. The retroactive date for primary coverage is January 1, 2016—the inception of claims-made coverage. All excess coverage is on a claims-made basis, with a retroactive date of January 1, 2015. Assume that an occurrence took place in 2015 and the claim is made in 2017.
The 2017 claims-made primary policy would not respond because the occurrence took place prior to the January 1, 2016 retroactive date in effect for primary coverage. The 2015 occurrence policy, however, would respond, regardless of when the claim is made. The 2017 claims-made excess policy would respond because the occurrence took place after the January 1, 2015 retroactive date in effect for excess coverage.
However, the 2015 primary policy limit was $500,000. The 2017 claims-made excess policy applies excess of the $1,000,000 primary limits in effect when the claim is made. Therefore, the primary occurrence policy in effect at the time of the occurrence pays $500,000 and the insured must pay $500,000 to satisfy the $1,000,000 primary limits necessary to trigger the 2017 excess policy. The net result is a $500,000 gap in coverage.
Defense Cost Issues
One of the more significant issues concerning claims-made coverage is the extent to which umbrella and excess insurers may be required to share defense and other legal costs with primary insurers. For a discussion of defense coverage under the 1986 and later ISO-CGL claims-made forms, see the Underlying Coverage section of FC&S Umbrella. Only about half of the claims-made umbrella and excess forms we have reviewed pay defense costs in addition to policy limits.
Most claims-made umbrella policies are silent on whether they will provide a defense when allegations are groundless, false or fraudulent. Unless the policies contain specific wording stating that such allegations are covered, the insured may have to pay for the defense of such claims.
Drop-Down Coverage
Most claims-made umbrella forms provide drop-down coverage. However, the wording of the drop-down provisions is sometimes ambiguous on the issue of which policy terms control when the umbrella does drop down. As is the case with occurrence policies, it is preferred that the umbrella applies on the same terms as primary coverage when the drop-down feature is activated.
Claim and Occurrence Information
The 1986 and later versions of the ISO-CGL claims-made forms contain a provision requiring the insurer to provide the insured with claim and occurrence information relating to the policy in effect and any prior general liability claims-made coverage issued to the insured by that insurer during the previous three years. This information is intended to help the insured determine future coverage needs under a claims-made program. This information is also useful in tracking paid and reserve losses when monitoring the aggregate coverage limits remaining in a policy period.
Few umbrella and excess forms contain a similar provision. Insureds should therefore keep well-documented records of the loss information they are provided by insurers as well as all pertinent correspondence with the insurer. Such information may be needed at some future date.
Pollution Coverage
Changes in the scope of the ISO-CGL's pollution exclusion since the 1986 forms were introduced are discussed in the Underlying Coverage section of FC&S Umbrella. Some or all of those changes may be incorporated in recent claims-made umbrella policies. However, the wording of the pollution exclusions found in many of the early claims-made umbrella and excess forms developed in response to the ISO-CGL is discussed below.
While many umbrella and excess insurers initially expressed an intent to include an absolute pollution exclusion in their policy form, few actually did so. The wording of the pollution exclusion in most early claims-made umbrella and excess forms does not exclude all pollution liability. For example, some of the forms contain wording that provides coverage for losses arising out of alleged or threatened pollution. As a result, these forms may cover expenses incurred for relocation or other costs incurred before a pollution spill causes any actual damage.
Some forms contain wording that limits application of the pollution exclusion as it relates to cleanup costs. Many of these forms exclude only the cost of government-ordered cleanup. The logic behind this limited wording is alleged to be that coverage may not apply anyway to losses incurred as a result of a voluntary cleanup because there is no legal obligation compelling such action.
Another important exception to the pollution exclusion found in many early claims-made umbrella and excess forms applies as respects pollution caused by a product failure. Some policy forms not exclude coverage for this type of pollution-related loss.
Some early umbrella and excess forms contain other exceptions to the pollution exclusion. For example, some policies follow-form with the primary policy regarding the ownership, maintenance or use of automobiles. Other forms may cover products liability, personal injury or property damage resulting from pollution if the insured becomes aware of the pollution within a specified period of time and reports it to the insurer within an additional specified time period. In addition, unlike the ISO-CGL claims-made forms, some early umbrella and excess claims-made policies do not provide coverage for pollution resulting from a "hostile fire."
Arbitration Clauses
Some claims-made umbrella and excess forms contain a provision requiring arbitration if coverage under the policy is contested. Arbitration ordinarily means a proceeding voluntarily undertaken by parties who want a dispute resolved on the merits of the case by an impartial decision maker whose decision the parties agree to accept as final and binding. Arbitration usually involves a procedure that is supposed to be quicker and more economical than formal litigation and bear equally on both the insured and the insurer. In practice, however, the process often favors the insurer and can still prove expensive.
It should be noted that when coverage disputes are submitted for arbitration, the arbitrators may not have to follow the traditional rule of construing ambiguities in favor of the insured. The arbitrator may choose or be free to ignore the doctrine of the insured's reasonable expectation of coverage. This doctrine has been adopted by the court systems in several states to protect insurance buyers with limited insurance knowledge. When the doctrine is applied, the insured may be able to recover loss—even though a policy unambiguously excludes coverage—if the insured's expectations of coverage are found to be objectively reasonable.
By agreeing to arbitrate, either voluntarily or through a policy requirement to do so, the insured gives up a valuable right: the opportunity to seek a judicial resolution of the dispute as guaranteed by the Seventh Amendment right of due process. In most cases, arbitration does not allow appeal, there is no discovery process and arbitrators usually lack the resources and time to conduct any meaningful case research. An arbitrator's decision is not generally reviewable for errors of fact or of law even though such error may result in substantial injustice to the insured.
Some arbitration clauses specify the forum and site of the arbitration proceeding. For example, the policy may require the arbitration to be conducted under American Arbitration Association guidelines in the State of New York and for any interpretation of policy wording to be in accordance with New York law. In some policies, the arbitration may be required to take place outside the United States, such as in London, England. Such requirements can present severe logistical problems that limit the insured's ability to even raise a dispute. Insureds should be alert to wording that specifies the location and governing law as respects required arbitration and have such wording removed whenever possible.
Aggregate Limits of Liability
Most general liability and umbrella insurance policies impose a limitation on the amount payable by the insurer for all claims arising out of occurrences or offenses covered by the policy. This limit is generally referred to as the policy's aggregate limit of liability.
The 1986 and subsequent versions of the ISO CGL form impose separate aggregate limits of liability. A general aggregate limit limits the amount payable for all bodily injury, property damage, and personal and advertising injury claims that arise out of the insured's premises and operations exposures. A separate products and completed operations aggregate limits applies to all bodily injury and property damage claims that arise out of the products and completed operations hazard.
The ISO CGL's general aggregate limit applies to all claims for bodily injury, property damage, and personal and advertising injury that arise out of the occurrences or offenses for which the policy provides coverage, except for claims involving bodily injury or property damage that arise out of the products and completed operations. Including all claims other than those resulting from the products and completed operations hazard within a single aggregate limit can be a strong inducement for buying umbrella insurance. For example, a large bodily injury claim could reduce or exhaust the general aggregate limit, thereby leaving the insured with little or no coverage for subsequent bodily injury, property damage, and personal and advertising injury claims. This is one of the main reasons insureds purchase umbrella liability coverage.
The general aggregate limit can also create a problem for insureds with operations or projects at more than one location. Such insureds must sometimes warrant to landlords, project owners, or other parties that a specified limit of insurance is available for their locations or projects. And, a major loss at one location could reduce or exhaust the general aggregate limit, thus impairing the liability insurance protection as respects other locations. (Note that many insurers offer endorsements that provide for the aggregate limit to apply on a per location or per project basis. The ISO's CG 25 04 and CG 25 03 respectively are examples.)
The products and completed operations aggregate limit in the ISO CGL forms limits the amount payable under the policy for bodily injury and property damage claims arising out of the products and completed operations hazard. Personal and advertising injury claims are not subject to the products and completed operations aggregate limit. As with the general aggregate limit, the products and completed operations aggregate limit is reduced and can be exhausted by payment of claims during the policy period.
When it comes to umbrella aggregate limits, most umbrella insurers place an annual aggregate limit on the amount payable for all claims covered by the policy. These aggregate limits are usually found within the limits of liability provisions, the definition of ultimate net loss, or the noncumulation of liability condition. As is the case with underlying general liability coverage, some insurers will endorse the umbrella to provide for the aggregate limits to apply on a per location or per project basis. Umbrella policies vary in how the aggregate limit provisions apply; the following are examples.
Aggregate Limits Similar to ISO CGL Aggregate Limits. In many umbrella policies released in response to the ISO CGL forms, the aggregate limits apply in the same manner as they apply in the CGL forms; namely, the umbrella provides a general aggregate coverage limit and a separate products and completed operations aggregate coverage limit. This allows the umbrella's aggregate provisions to be compatible with underlying coverage provided by the 1986 and subsequent CGL forms from ISO. Incidentally, under these types of umbrellas, auto liability claims are not usually subject to an aggregate limit.
Aggregate Limit Applies to All Coverages. A few older umbrella policies impose a basket aggregate limit that is applicable to all coverages under the policy. This type of aggregate limit is restrictive because coverage can be exhausted more quickly than is the case when coverage is subject to two or more separate aggregate limits. In some umbrellas, basket aggregate limits can be reduced or exhausted by the payment of defense costs and/or auto liability claims.
Aggregate Limits Apply Separately to Various Coverages. In some umbrella policies, separate aggregate limits apply to various coverages under the policy. An example of this is in a recent Crum & Forster policy wherein the policy declares that there are aggregate limits for damages for bodily injury and property damage, aggregate limits for damages included in the products and completed operations hazard, limits for damages arising out of personal and advertising injury, limits for damages arising out of injury by disease to employees, and even separate aggregate limits for damages covered in the underlying insurance to which no underlying aggregate limit applies.
Now, while these provisions may be preferable to the basket aggregate, they are more restrictive than would be the case if no aggregate limit applied to such claims. The provisions are favorable in that a separate aggregate limit applies to personal and advertising injury claims, especially since in the ISO CGL forms, and in many umbrellas, personal and advertising injury claims are subject to the same general aggregate limit as are claims for bodily injury and property damage.
Aggregate Limits Apply in the Same Manner as Underlying Coverage. In some umbrella policies, the aggregate limits apply in the same manner as they apply in underlying policies. If underlying coverage is subject to an aggregate limit, the umbrella follows form, regardless of how the underlying aggregate applies. This approach is common in excess liability policies.
When it comes to excess umbrella coverage aggregate limits, the aggregate limit provisions should apply in the same manner as in the first layer umbrella policy. However, while most excess umbrella liability policies state that they are following form, differences in the wording of aggregate limits provisions can significantly affect the total amount payable by such policies.
An example of an excess policy following form aggregate provisions is as follows: to the extent that the aggregate limits of liability of the immediately underlying policy apply separately to various operations, projects, locations, hazards, or types of injury, the aggregate limits of liability of this policy likewise apply separately.
Language like this offers the insured great flexibility in designing an umbrella program. Almost any arrangement of underlying aggregates would be compatible with an excess umbrella policy containing this wording.
Some excess umbrellas require a specific pattern of underlying aggregate limits. First layer umbrellas that have separate aggregate limits for products and completed operations and for occupational disease claims would conform to this required pattern.
General liability and umbrella policy aggregate limits usually apply on an annual basis, including any remaining period of less than one year. Thus, if the policy is extended for less than a year past the original expiration date, the original aggregate limits apply for the full term of the policy. If the policy is written for a period of two or more years, or is renewed annually, the aggregate limits usually apply on an annual basis.
Because of variations in the aggregate limit provisions of umbrella or excess policies, it is important for insureds to carefully review such provisions in light of the aggregate limit provisions of underlying coverage. When the umbrella or excess policy contains aggregate limit provisions different from or less favorable than those of underlying coverage, an attempt should be made to modify the umbrella or excess policy by endorsement.