Umbrella Policy Endorsements:
Do They Say What They Mean and Mean What They Say?
THE RHA REVIEW
By Marilyn L. Schultz
Primary liability policies are written using ISO-drafted endorsements. Most insurance companies use these endorsements, and consequently these endorsements are frequently tested in court and already have an established history of interpretations and rulings. The endorsements have been modified through the years, and the reasons for these modifications have been documented and are available to the public.
Umbrella-policy endorsements, on the other hand, are designed to modify the individual policy terms and conditions on a risk-by-risk basis. Each insurance company drafts its own endorsements for each policy. The endorsements are not widely tested by the courts, so there is no history of interpretations and rulings. The endorsements are frequently used on a one-off basis and may never be used again.
Umbrella policies are complex contracts that provide insurance coverage for many kinds of liability excess of many primary policies or self-insured retentions. Modifying endorsements may be equally complex and may require the undivided attention of all interested parties to the insurance contract. Too often, the undivided-attention part of this equation doesn’t happen, and the resulting endorsement may or may not accomplish the intent of the policyholder or the insurance company. The worst part of this scenario is that neither party to the contract may realize that the endorsement doesn’t match the intent.
Needless to say, more care needs to be given to umbrella endorsement drafting;
- By the client who can tell the agent or broker what kind of liabilities his business has and what his particular business needs to have covered by an insurance policy,
- By the agent or broker who has hopefully made an analysis of the client needs, and
- By the insurance company that is responding to these individual insurance needs.
IT’S IMPORTANT THAT THE ENTIRE CAST OF CHARACTERS MENTIONED ABOVE KNOWS WHAT PROBLEMS NEED TO BE SOLVED.
The following group of examples may help to identify some particular situations which need attention, clarity and communication:
A. WATERCRAFT COVERAGE
Primary and umbrella policies both cover watercraft liability, depending upon the size of the boat. The maximum size is stated in the policies. Both policies can be endorsed to increase the maximum size. Sometimes a separate primary watercraft policy is purchased instead. If such a policy is purchased, it will provide coverage which is more expansive than the coverage provided by the usual GL primary policy.
Let’s assume that the umbrella carrier was told to endorse the policy to cover a larger watercraft but no one mentioned that a separate primary watercraft policy was in place, and no further questions were asked. The umbrella underwriter issued a typical “follow form” watercraft endorsement, which follows form the primary wording (which would state the size and description of the watercraft). Possible problems which could arise from this situation:
- The umbrella policy has not been amended to show the new watercraft size.
- The umbrella policy has not been amended to either agree to or exclude variances in policy wording (such as territory or pollution, for instance).
- Could this situation end up with a claims hassle? You bet!
B. “FOLLOW FORM” ENDORSEMENTS USED FREQUENTLY BY UMBRELLA CARRIERS
“FOLLOW FORM” endorsements are used frequently by umbrella carriers as a generalized method of trying to be everything to everyone in a simplified way. Unfortunately, this method may end up not working out very well.
The follow form endorsement usually says something like this:
“This policy excludes liability arising out of ____________. However, if the underlying policy provides coverage for ____________, this policy will also provide coverage, but our coverage will be no broader than the coverage provided by the underlying policy.”
- Does anyone know what the underlying wording says? It helps if both the policy wordings are very similar. The best way to do that is to match endorsement wording as nearly as possible.
- Does the umbrella policy normally provide the coverage given by the primary policy? If not, the parties need to agree that certain coverages will or will not be provided.
- Do the parties have the same coverage intention? Does the coverage provided solve the original problem?
C. NEW KINDS OF LIABILITY COVERAGE, SUCH AS DISPARAGEMENT OR OTHER ONE-OFF COVERAGE
The primary policy may be silent regarding the requested new coverage, or it may have excluded the coverage or given limited coverage. The umbrella underwriter needs to be especially diligent in this situation and have a thorough understanding of what is needed and how to provide it.
Items to be specifically addressed in the endorsement:
- A definition of the coverage provided
- The amount of coverage provided
- A policyholder retention (if any)
- Any other applicable terms and conditions
WHY DOES ANY OF THIS MATTER?
All parties in the insurance transaction need to agree on the content of the contract when the contract is written. There is no substitute for clarity.
The policyholder is trying to buy predictability and peace of mind.
The insurance company is expecting to pay claims (or not) based on the estimated probabilities and possibilities.
Having to spend untold amounts of time and money in settling a claim and going to court upsets these expectations.