How Does an Umbrella Policy Keep Me Dry from all the Rain?
An Umbrella Policy protects against catastrophic liability claims. Umbrella limits are typically available in $1,000,000 increments and can exceed up to $100,000,000. Most policies pay the ultimate net loss (total amount above the underlying, primary limit) for which the insured is legally obligated to pay subject to the self-insured retention (amount the insured must pay before the umbrella policy responds), similar to a deductible.
A typical commercial umbrella liability policy offers features such as worldwide coverage; personal injury coverage; blanket contractual liability protection (for both written and oral agreements); care, custody, and control coverage; non-owned aircraft liability; watercraft liability; advertisers liability; liquor law liability; excess liability; and an extension of protection to additional insureds.
Umbrella liability insurance indemnifies the insured for loss above the total applicable limits of liability stated in the schedule of underlying primary insurance policies. The umbrella liability policy is typically a “following form,” meaning that it tracks with the provisions of the underlying insurance. For losses that are not covered by underlying insurance, the umbrella policy generally does not apply.
Concerning any occurrence not covered by underlying insurance, or damage that is not covered by underlying insurance but that results from an occurrence covered by underlying insurance, the umbrella policy indemnifies the insured for its ultimate net loss. The loss must exceed the insured’s self-insured retention limit ($10,000 or $25,000, for example). It must involve damages that the insured is legally obligated to pay because of liability imposed by law or assumed by the insured under contract. Further, the loss must involve personal injury, property damage, or advertising injury (all as defined in the Definitions section of the policy) caused by an eligible occurrence.
When a loss that is eligible for umbrella coverage is either not covered or only partially covered by underlying insurance (including incidents where no other insurance exists), the umbrella insurer has the right and duty to defend any suit against the insured. It is also permitted to investigate any loss and settle any claim or suit as it chooses. In case an insurer is prevented from defending an insured, the insurer will reimburse any defense costs and expenses. However, the expenses must be incurred with the insurer’s written consent. This last provision allows the insurer to exercise some control over its loss exposures.
Besides the named insured, other parties that gain insured status under an umbrella liability policy are any person or organization that a named insured agrees to protect under a written contract. The policy also protects an insured business’ executive officers, regular employees, directors, and stockholders, at least for losses occurring while these individuals are acting within the scope of their duties. Note that protection for additional insureds does not apply when a loss involves motorized vehicles, watercraft, or aircraft.
Like many other policies, a commercial umbrella policy defines several terms to express how coverage applies clearly. Some defined terms are advertising injury; completed operations; hired aircraft, hired automobile, and hired watercraft; immediate underlying insurance; named insured’s products; non-owned aircraft, automobile, and watercraft; occurrence and personal injury.
Maintaining Underlying Insurance policies
The umbrella liability policy has a critical requirement. It holds the insured accountable for maintaining the policies listed in the schedule of underlying insurance. They must be kept in force, without alteration of terms and conditions, during the term of the umbrella liability policy. The one notable exception is for the reduction or exhaustion of any underlying aggregate liability limits that are caused by response to a covered loss.