When initially thinking about umbrella coverage as it relates to generating errors and omissions claims, most would probably believe the main issue is the lack of an umbrella. In other words, a customer has a significant loss only to find out that he or she didn’t have an umbrella to provide added protection. The matter then focuses on the agent and why he or she didn’t recommend an umbrella policy in the first place.
While this issue still occurs, it’s probably not with the frequency of some other issues. The most prevalent issues center on “gaps” between the actual underlying limit and the required limit per the carrier’s underwriting guidelines.
Proper Underlying Limits
The following claim clearly shows the problems that can develop when there is a gap between the actual underlying limits and those specifically required.
This claim arises out of allegations that the agency left a $250,000 gap in coverage between the primary auto and the umbrella coverage. The claimant had personal auto coverage with liability limits of 250/500 and a $5 million personal umbrella. The umbrella was written with a different carrier than the underlying coverage and was subject to an underlying bodily injury limit of $500,000.
The son of the agency’s client sustained serious injuries when he was involved in an automobile accident while using his father’s vehicle. The underlying carrier afforded defense and indemnification protection for the agency’s client subject to the underlying $250,000 bodily injury limit.
The umbrella carrier advised that its policy would not be triggered for any judgment, settlement or verdict rendered between the $250,000 actual underlying bodily injury limit and the $500,000 required limit mandated under the excess policy.
The agency was sued for negligence for the $250,000 shortfall. The producer acknowledged that the agency failed to comply with the umbrella carrier’s underlying insurance requirements.
How can an agency avoid claims like this and E&O claims involving umbrellas in general?
Here are some suggestions:
- Have a common effective date for the umbrella and the various underlying coverages.
- Write the umbrella with the same carrier as the underlying coverages, at least the auto and homeowners.
- Be aware of the underlying limits required by the umbrella carriers you use. There is a good chance there will not be a consistent approach among carriers. Carriers can modify the required underlying limits, too, so keep up with any changes.
- Don’t delay if you must increase the limits when writing a new or renewal umbrella. Order the change immediately.
- Review the umbrella policy to make sure it resembles what was requested once the policy is received. This is also a great time to review the actual underlying limits “just one more time” to verify that they meet the required limits. If not, get the proper underlying limits in place.
- Note any differences on the required underlying limits and advise the customer accordingly if your agency is moving the umbrella to another carrier.
Item No. 2 above suggests having all of the underlying coverages with the same carrier, at least the auto and homeowners. While this helps the situation, there is an additional scenario generating some E&O activity. It involves claims handling and, more specifically, when to put the umbrella carrier on notice.
Suppose you have an insured that has his or her auto, homeowners and umbrella policies with your agency and all of these coverages are with the same carrier. The insured was involved in an auto accident, and there are some injuries. Your agency filed an auto claim but not an umbrella claim because the injuries did not appear to be significant. Yet, now the injuries have become much worse than originally thought, and it appears the underlying limits will not be sufficient to pay the full amount of the claim.
Do you believe that because the auto and umbrella coverages are with the same carrier, that the carrier’s umbrella claims division is essentially “officially on notice” if the underlying claim develops adversely? Perhaps you may be thinking (or hoping) that the auto claims person will advise his or her umbrella counterpart.
Since it is probably best not to count on either of the above two scenarios taking place, what is the potential when you now put the umbrella carrier on notice?
Depending on the degree of the time lapse, the umbrella carrier could take a tough position and deny it for “late reporting.”
The E&O carrier would probably argue that the primary carrier is in the best position since it has all of the specific claim knowledge, although it is difficult to know how successful it will be.
The best approach is for the agency to take a more active role and to automatically put the umbrella carrier on official notice, especially when bodily injuries are part of the claim.
Hopefully, most of your agency customers have umbrella coverage. However, as noted earlier, this definitely does not mean that your E&O exposure has been completely addressed.