Umbrella and Excess Five Key Issues q The

Umbrella and Excess – Five Key Issues q. The webinar will begin shortly. q. There is no audio at this time. q. This presentation is being recorded for your viewing pleasure at a future date. q 100% Participation in Polling Questions is required to receive credit for this class. Even if you do not intend to receive credit, please participate in the polls. q. The attendance and proctor forms are available under ‘Materials’ in the Webinar’s Console to the right. q. The Power. Point presentation is also available under ‘Materials’. q. You will receive the course number for your state near the end of class. q. Use the ‘chat’ window for questions on the content. Insurance Community University 1

Welcome to your Insurance Community University Audio • All of you are currently on mute – Un-mute your own system – Telephone Option • Select Telephone on your screen • Dial in the PIN number so that your number becomes active – Microphone and/or Speaker Option • You can use this option if you have a headset that you use with your computer Insurance Community University 2

Participation & Chat Window • You will receive information from the monitor via the ‘Chat’ window. – Please locate window in the control panel • Q & A is welcomed during the presentation and at the end of the presentation • You will find the question box on your control panel – Write your question in that box – and send it to the presenter/organizer • The presenter will take those • questions in the order submitted Insurance Community University 3

DOI Requirements • When you see a slide with the hand up symbol, touch the “hand” icon on your control panel – Click ONCE only • If you do not raise your hand, the monitor will be in contact with you in the chat box • If you are in a group, the designated proctor is responsible to make certain you are all in attendance at all times = Hand is down Insurance Community University 4

Polling • Throughout the class we will be conducting periodic polls • We need 100% participation on the polls • The polls are intended to check participation but also to create discussion topics throughout the presentation Insurance Community University 5

Forms To Complete for CE • After class ends – Return attendance form – Proctors – return your form to email address • Email address is in chat window or in email sent to you today Insurance Community University 6

DOI Requirements • We will file your hours with the DOI after the completion of this webinar and we have received the attendance form. • You have 48 hours to return the form • You will be sent a Certificate of Attendance/Completion by email. Please retain this for your records for five years. Insurance Community University 7

Internet Disruption • If the presenter looses internet connection STAY ON THE LINE • The administrators will communicate with you Insurance Community University

Internet Failure • If the internet fails and all participants are kicked off line by Go To Training or other source then the seminar will be terminated • You will receive instructions by email as to how we will proceed • This is a precautionary notice, only Insurance Community University 9

Test YOUR Knowledge • After class you will receive a quiz flash on today’s topic Insurance Community University 10

Your Instructor Today Looking For Coverage! Al Parizo AFIS ACSR Insurance Community University 11

Disclaimer Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. This instructional material provided by Insight Insurance Consulting and the Insurance Community Center is intended as a general guideline and any interpretations provided by Insight, Insurance Community or presenters do not modify or revise insurance policy language. When ISO language is included in the materials, all ISO content is protected by the ISO copyright. All parties to this presentation and creation of materials assume neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Copyright 2010 – 2013 All Rights Reserved www. insurancecommunitycenter. com Insurance Community University 12

In the Drink A deck bar collapse in Miami with 35 injuries. Is XS Liability a good idea? Insurance Community University 13

Course Objectives 1. Purpose and function of the Umbrella and Excess Liability Forms Follow form – what is it really? 2. 3. 4. 5. Duty to defend – both forms Notice of loss to underlying Maintenance of underlying Changes in underlying and effect on coverage Insurance Community University 14

History • Why do we care about the historical development? – To understand certain concepts that have carried forward into today’s forms Insurance Community University 15

Development of Excess Coverage Cuthbert Heath, one of the founders of the British company, Excess Liability Insurance Company, Limited, in 1894 formed the Excess Insurance Company which with a capital of £ 5, 000 fully paid up was used as a backing for two of my names, every risk being reinsured with it. Insurance Community University 16

Development of Excess Coverage The Excess reinsured the coverages underwritten by the Heath syndicates at Lloyd's for many years, and was still participating on excess and umbrella coverages placed in London in the 1960 s. Insurance Community University 17

History of Liability, Excess and Umbrella Insurance In 1906 Heath created the first excess of loss cover for the Hartford Guy Carpenter helped to create market for excess of loss reinsurance in the US during the late 1920 s • Created concept of “burning cost” for reinsurance pricing These reinsurance plans were the foundation on which high liability limits grew Insurance Community University 18

Expansion of Liability Coverage Lines By 1915 other forms of liability insurance included the following. • Manufacturers public liability • Contractors public liability • General liability (later renamed owners, landlords, and tenants liability) • Owners contingent and contractors contingent • Vessels employers and public liability • Automobile liability • Physicians and surgeons liability Insurance Community University 19

Expansion of Excess Markets Other markets responding in the 1920 s • Employers Reinsurance Corporation • American Reinsurance Company • General Reinsurance Corporation Insurance Community University 20

Expansion of Excess Markets Coverage was written on an enumerated hazard basis – no “blanket” form of catastrophe coverage • 1934 –INA created one of the first American blanket catastrophe coverage Insurance Community University 21

Coverage Changes Market finally emerged for two types of catastrophe coverage • Straight excess following form contracts • Responded to accidents • Stand-alone blanket catastrophe liability policies and coverage was placed at $1 million amounts • Excess of an SIR ($25, 000) or underlying (or both) • Responded to occurrences Insurance Community University 22

Coverage Changes Both straight excess and stand lone catastrophe coverage were scheduled hazard contracts No duty to defend Insurance Community University 23

Coverage Development More comprehensive form developed in the 1930 s • Became basic concept for coverage • Legal liability for injury or damage unless specifically excluded • Draft form of coverage first available in late 1939 • All locations and business activities Insurance Community University 24

Coverage Development Several catastrophic losses created discussion about need for higher limits • Coconut Grove nightclub fire in Boston in 1942 • Circus tent fire in Hartford in 1944 • Texas City, TX explosion in 1947 The first $1, 000 award was documented in 1961 Insurance Community University 25

Coverage Development Blanket excess policies above underlying insurance and an SIR were more widely known by the late 1940 s Excess policies often required that underlying insurance limits be reinstated if exhausted by claims Some losses could involve years of loss would make reinstatement impossible Insurance Community University 26

Umbrella Coverage Structure • Much broader than the Excess Liability coverage • Developed the concept of separate duty to defend • Developed theory of “drop down” to act as primary coverage for a loss covered in the “Umbrella” but not covered in the primary Insurance Community University 27

The Growth of Umbrellas • US insurers began offering umbrella coverage – Indemnity Insurance Company of North America (INA) 6/1957 – Continental Casualty Company (CNA) 1958 – Employers Surplus Lines Insurance Company 1959 – The Travelers Insurance Company 9/1959 – American Re, Employer’s Re, Gen Re, Employers Mutual of Wausau 1960 – Chubb (Federal) and Aetna Casualty 1963 – Rest of the market by 1970 Insurance Community University 28

The Growth of Umbrellas • By 1970 U. S. umbrella market issued new versions after the introduction of the 1966 and 1973 CGL policy forms – Cohesiveness of coverage – Fewer gaps – Limits from $5, 000 to $25, 000 – Aggregate limits on the CGL introduced in the 80’s make XS/Umbrellas more critical Insurance Community University 29

Terminology Today What’s In A Name? Insurance Community University 30

Polling Question #1 31 Insurance Community University

Excess Liability Used to increase coverage limits over primary • Excess carrier uses their own coverage form • Requires underlying insurance to be maintained Coverage in Excess policies • Will never be greater than underlying • May be more narrow than underlying Insurance Community University 32

Follow Form Excess Liability Excess liability coverage form • Follows the underlying coverage form(s) for majority of coverage provisions. • Policy often contains differing exclusion and definition wording Requires underlying insurance to be maintained A true follow form policy mirrors exactly the underlying policies Insurance Community University 33

Typical Follow Form Language “Except to the extent the insuring agreements, terms, definitions, conditions and exclusions of this policy differ, the coverage provided by this policy shall follow the insuring agreements, definitions, conditions and exclusions of the first underlying insurance policy as shown in the schedule of underlying policies. ” Insurance Community University 34

Follow Form • NEVER use the term follow form unless you really mean it – Policy should be two pages long – Ignore the terminology when the wholesaler says it is a follow form excess • Get a copy of the policy Insurance Community University 35

Stand Alone Excess Liability Does not require underlying insurance policies Will be written excess of a specified retention Insurance Community University This retained amount can be insured or not 36

Umbrella The policy has a drop—provision in the event of reduction of underlying insurance This type of policy should contain at least one enhanced area of coverage that is not found in the underlying policy(ies) Insurance Community University This type of policy should also contain a duty to defend the insured 37

Combination Form Today many • Two sections of coverage policies • One side more or less follows combine the underlying (Excess) the • The other side provides attributes of broadened coverage in a much more restrictive fashion Excess than the earlier Umbrella Liability and forms Umbrella Insurance Community University 38

Excess Umbrella This policy should follow the terms and conditions of the underlying umbrella Used when additional limits are needed than is available with the company providing the umbrella Insurance Community University 39

Self-Insured Retention (SIR) Total amount insured is obligated to pay • Excess Liability: not used • Stand Alone Excess: SIR becomes the “Primary Layer” • Umbrella: Applies ONLY when underlying does not cover loss but Umbrella does Who pays first – insured or insurer? Defense costs included or first dollar defense Insurance Community University 40

Structuring Umbrella/Excess Layers Buffer Layer • The purchase of additional limits bringing the primary limits to the level required by the Umbrella/Excess Form Excess Layer • Additional limits of liability purchased “on top of” the existing Umbrella/Excess Form to reach a desired limit Quota Share (Participation) • Multiple carriers share the same layer of coverage on an agreed upon percentage of the loss Insurance Community University 41

Polling Question #2 42 Insurance Community University

Duty to Defend and/or Pay Damages What’s the difference ? Insurance Community University 43

Pay On Behalf The carrier assumes the obligation to pay on the insureds behalf all sums the insured is obligated to pay The insured has no responsibility to pay out any sums other than SIRs under the policy provisions Most policies are pay on behalf of contracts Insurance Community University 44

Indemnify Pays defense/damages when insured becomes legally obligated to pay • Unless insurer voluntarily takes control – insured funds defense • Policy should specify indemnification process and payment schedule Insurance Community University 45

Defense • Duty to defend – Typically included in the Umbrella – Typically NOT included in the Excess Liability form • Always check this – never assume it is automatic – Do NOT rely on what anyone says – get a copy of the policy Insurance Community University 46

Specific Coverage Concerns Vertical Integration Insurance Community University 47

Insured • Named Insured(s) match underlying – May include prior entities, subsidiaries, etc. – If this is the case, will the policy agree to drop down to primary for defense and damage payment for these insured’s without applying the SIR? – On Personal XS, is the Trust or LLC accounted for if that is how the underlying ownership is structured? Insurance Community University 48

Insured • All other insureds – same as underlying • Additional coverage for subsidiaries or companies under the insured's management or obligated by contract to insure Insurance Community University 49

Automatic Additional Insured • If blanket additional insured on primary – is that acceptable to Excess or Umbrella – Discuss with insured the possible dilution of limits and necessity for higher limits • Some policies require notification when adding additional insured’s to any underlying policy • Some provide AI status as long as the underlying reflects the change – This is not always desireable Insurance Community University 50

Polling Question #3 51 Insurance Community University

Coverage Trigger Primary coverage trigger (claims-made, claims-made and reported or occurrence) Next layer should follow that language Insurance Community University 52

Coverage Trigger • Notice of loss or underlying reduction – Does the umbrella/excess policy state that notice to any underlying carrier is automatic notice to them? No – Could the insured impair their coverage due to failure to notify timely? Yes – When is the insured obligated to notify the insurance company of a claim, event or occurrence? As soon as practicable Insurance Community University 53

What Does This Mean? “The Limits of Insurance of this policy shall not apply in excess of any reduced or exhausted underlying aggregate limit of liability to the extent that such reduction or exhaustion is the result of any injury, damage, expense, cost, loss, liability, or legal obligation which is not covered by this policy. ” Insurance Community University 54

Maintenance of Underlying All Excess and Liability policies (except Stand Alone Excess) require maintenance of underlying Insurance Community University 55

Sample Wording “The Limits of Insurance of this policy shall not apply in excess of any reduced or exhausted underlying aggregate limit of liability to the extent that such reduction or exhaustion is the result of any injury, damage, expense, cost, loss, liability, or legal obligation which is not covered by this policy. ” Insurance Community University 56

Maintenance of Underlying • Example: – Tenant starts a fire in multi-occupied building • CGL pays – Medical Payments of $5, 000 to 100 people – Fire damage to premises due to lease $300, 000 • 10 people file a claim for BI / PD and it goes to the next layer of coverage – what happens now? Insurance Community University 57

Covered in U/L but Excluded by XS • Med pay, not covered by XS • Fire Damage Legal, not covered by XS • 3 d party PD Claims XS of primary, covered. Insurance Community University 58

Structuring an Umbrella/Excess Liability Program #1 #2 #3 Building Blocks Insurance Community University 59

Umbrella / Excess Underlying Requirements Typically requires the insured to carry at least one primary coverage line These coverage lines are submitted to the excess liability carrier on the application and will have required limits of insurance Insurance Community University The underlying policies are sometimes referred to as the “burning layer” 60

Underlying Insurance Requirements The underlying coverage must be exhausted either by the “occurrence” limit or the aggregate or both before the next layer is accessed for payment of either defense or damages This concept dates back to the late 1920 s and was used to define the pricing of the policies Insurance Community University 61

Concurrency Any liability policy with an aggregate limit and your umbrella or excess policy(ies) should have the same inception and expiration dates Insurance Community University 62

Sample Concurrency Language: “It is a condition of this policy that the policies referred to in attached “Schedule of Underlying Insurance” shall be maintained in full effect during the policy period without reduction of coverage or limits except for any reduction in the aggregate limits contained therein solely by payment of claims in respect to accidents and/or occurrences occurring during the period of this policy. Failure of the named insured to comply with the foregoing shall not invalidate the policy but the underwriters will be liable to the same extent as they would have been had the named insured complied with the said condition. ” Insurance Community University 63

Non Currency • XS effective 5/1/2013 • GL eff. 1/1/2013 • GL claim 2/1/2013 reduced aggregate by $250, 000 • XS requires $1, 000 underlying. • Possible $250, 000 gap? Insurance Community University 64

Solutions For A Concurrency Problem • How do you fix this situation? – Non-concurrency Endorsement (Best) – Reinstate aggregate (Next best) – Cancel and rewrite the underlying primary policy (Not a good solution) Insurance Community University 65

Non-Concurrency Endorsement “In the event of reduction or exhaustion of the aggregate limit or limits designated in the underlying policy or policies solely by payment of losses in respect to accidents or occurrences during the period of such underlying policy or policies, it is hereby understood and agreed that such insurance as is afforded by this policy shall apply in excess of the reduced underlying insurance… Insurance Community University 66

Single Policy $5, 000 Umbrella OR Excess Liability Policy $1, 000 Underlying (Primary) Policy Insurance Community University 67

Additional Layers This policy should follow the terms and conditions of the underlying umbrella Used when additional limits are needed than is available with the company providing the umbrella ALWAYS review underlying schedule on all layers Insurance Community University 68

$5, 000 Excess of $20, 000 $10, 000 Excess of $10, 000 $9 , 000 Excess OR Umbrella Layer Primary CGL (underlying) BAP (underlying) $1, 000/ Occurrence and Aggregate Limits $1, 000 / Per Accident - $100, 000 Accident Disease - $100, 000 / person Disease - $500, 000 aggregate Insurance Community University Employers Liability (underlying) 69

Defense and Damages • Defense costs may be included in the limit of insurance as opposed to outside the limit • Defense costs may be included in the selfinsured retention • Punitive damages – Most favorable jurisdiction? – Include triple damages, exemplary damages – Specifically excluded Insurance Community University 70

Liability Perils • Personal Injury definition may include any or all of the following: – Mental anguish – Mental injury – Discrimination – Emotional distress – Humiliation • Invasion of privacy suits by employees may be included Insurance Community University 71

Territory • Excess Liability often follows terms of underlying • Umbrella often worldwide – Is carrier admitted in countries where insured is operating? Insurance Community University 72

Pollution • Often absolute – Hostile fire – Products – Completed Operations – Equipment breakdown in a building – Follow form on Covered Pollution Cost or Expense for auto Insurance Community University 73

Miscellaneous Coverage Concerns • ERISA / EBL – Better check the language • UM / UIM most often not included • Action-Over Exclusion • Fellow employee – No exclusion – Follows the underlying Insurance Community University 74

Miscellaneous Coverage Concerns • Broad liquor legal exclusion • Non-owned watercraft and aircraft – Watercraft in excess of 26 ft. – Aircraft chartered with a crew Insurance Community University 75

Miscellaneous Coverage Concerns • • Non-contributory language Waiver of subrogation language Notice / knowledge of loss Pre-existing damage exclusion – added by endorsement Insurance Community University 76

Polling Question #4 77 Insurance Community University

Fast Food Account Rounding • Can I supersize that order? Always offer higher limits. • Would you like fries with that? Always offer valuable additional coverage. In this case an XS/Umbrella quote. • Account rounding is not only an effective revenue producer but also good E&O risk management. Insurance Community University 78

Who Needs An Umbrella? • All insureds – There isn’t any insured/entity that is not susceptible to a high loss, judgment/award against them in today’s legal climate. – The award is based on the injured party’s worth, not necessarily the insured’s. – You don’t have to be a millionaire to be sued like one! Insurance Community University 79

Business had only $1, 000 GL Insurance Community University

Who Needs An Umbrella? • Quoting an Umbrella good defensive move from an Agents Errors & Omission point of view. • We offer value added service and offering additional coverages/policies is an important aspect of this. • The insured needs to sign off on quote. Insurance Community University 81

Polling Question #5 82 Insurance Community University

What Limits of Liability • Always quote existing limit and higher options • Quota share - negotiate lead carrier • Considerations: – Current and future assets of insured. • This is only ONE measurement not the sole consideration. Insurance Community University 83

What Limits of Liability • Exposure to loss - frequency/severity/both – High public visibility as a company – Involved with children or products for children – Liquid assets – Any intention to go public - 1 -2 years Insurance Community University 84

U/W Considerations • High primary limits – $1, 000/$2, 000 – BAP – higher limits if Excess/Umbrella has absolute pollution exclusion • Broad underlying coverages Insurance Community University 85

U/W Considerations • Financially sound primary carrier • Risk characteristics of insured and classification – Loss control, location, & hazards – Continuous loss exposure – contractors, manufacturers, wholesalers and retailers Insurance Community University 86

U/W Considerations Loss History Competition Underlying manual premiums Flat annual premium based on underlying, not subject to audit • Business relationship between the underwriter and the agent • • Insurance Community University 87

Underlying Coverages Information • • Carrier(s) and policy number Financial stability of all insurers Expiration dates Limits of liability Insurance Community University 88

Summary • Always offer increased limits to every client – Put it in writing – Client needs to reject either by signature or sending an email • Always read the coverage form and ask questions about wording you don’t understand Insurance Community University 89

Upcoming Classes Upcoming University/Paid CE FREE to University Members Classes $50. 00/charge for non university members 6/20 Real Estate Leases Issues and Concerns 7/9 Insight on Insurance Proposals and Submissions 7/11 Equipment Breakdown/Spoilage/Off Premises Upcoming Community Classes FREE to University Members $25. 00/charge for non university members 6/25 MAP 21 – Statutory Exemptions to the Federal Motor Carrier Safety Regulations Join the University TODAY. www. insurancecommunitycenter. com Click Join University at the top of the bar www. Insurance. Community. University. com. 90