What to Look for When Buying an Umbrella

Red umbrella through raindrops
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Choosing an umbrella liability policy can be tricky. For one thing, there is no standard policy, so one umbrella can vary significantly from another. Secondly, the differences between policies can be subtle. This article will highlight some characteristics to look for when evaluating an umbrella or comparing one to another.

Excess Versus Umbrella Coverage

Many umbrella policies provide a combination of excess liability and umbrella coverage.

Excess coverage provides extra limits when a loss exceeds the limits provided by your primary liability policy. Umbrella coverage applies to losses that aren't covered by primary insurance.

Some so-called umbrellas are really excess policies in disguise. They simply mirror the coverage afforded by the basic policies. When shopping for an umbrella, look for a policy that affords broader coverage than your primary policies. Your agent or broker can help you determine which umbrella is right for you.

Insuring Agreement

The insuring agreement is the basis of an umbrella. It is a logical place to begin when reviewing a policy. It consists of a broad statement outlining the coverage provided. There are three key features to look for in the insuring agreement.

The first is a statement that the insurer will "pay on behalf." This means the insurer will pay damages upfront rather than providing reimbursement.

Avoid any umbrella that begins with the phrase "we will indemnify you."  This means that your insurer will reimburse you for expenses only after you have paid them out of your pocket.

Secondly, the umbrella should have the same coverage trigger (occurrence or claims-made) as your primary general liability policy.

If the primary liability policy applies on an occurrence basis, the umbrella should apply on an occurrence basis as well. Likewise, you should purchase a claims-made umbrella if your primary general liability policy is claims-made.

Thirdly, check to see whether the umbrella includes a self-insured retention (SIR). A SIR is a dollar amount (such as $10,000) that you must pay out of pocket for each claim that is covered by the umbrella but not by your primary insurance. If possible, choose a policy without a SIR.

Who's Covered?

An umbrella policy should cover all of the people and entities described in the "who is an insured" section of your general liability and commercial auto liability policies. Ideally, it will provide broader coverage than your basic policies.

One important feature to look for is automatic coverage for additional insureds. This eliminates the need to add individual parties to your umbrella via endorsements. Some policies cover specific types of additional insureds such as landlords or vendors. Others cover all parties included as additional insureds under your primary policies. Some umbrellas limit coverage to parties that are required to be covered as additional insureds under the terms of a written contract.

Defense

The defense section of the policy should state that the insurer will pay defense costs in addition to (not within) the policy limit. This is important since the cost of defending a claim can be substantial. If these costs reduce your limit of insurance, you may have little or no coverage left to pay damages.

Some umbrellas don't clearly state whether defense costs are paid in addition to the limit. In this case, look for the term ultimate net loss. The insuring agreement might state that the insurer will pay ultimate net loss on behalf of the insured. If the policy contains this term, look up its meaning in the Definitions section. Be sure that ultimate net loss does not include defense costs.

Exclusions

If you have purchased employers liability and auto liability insurance, your umbrella should include these coverages as well.

Make sure they aren't excluded.

When evaluating an umbrella quote, be sure to ask what endorsements and exclusions the insurer will add to the policy. Note that an umbrella may exclude some losses that are covered by a primary policy. For instance, most umbrellas exclude property damage to property in your custody or control, including damage to premises you rent. Likewise, most umbrella exclude obligations imposed on you under an uninsured motorist or no-fault auto law.

Conditions

Many umbrellas contain a provision in the Conditions section entitled Maintenance of Underlying Insurance. This clause typically requires you to maintain all primary policies that were in force when you purchased the umbrella. If you cancel or non-renew a primary policy, you must immediately notify your umbrella insurer.

Finally, the coverage territory in an umbrella should be broader than that in your basic liability  policies. Most umbrellas cover occurrences and accidents that take place anywhere in the world.