SPECIAL REPORT: Commercial Umbrella

February 5, 2006

It seems that every risk today has a big exposure, regardless of size or industry type. Some popular litigation targets include product liability, personal injury claims, false advertising and, most frequently, commercial auto.

Consumer products, contractors and businesses with large customer populations-including hotels and theatres-also have significant exposure. Another risky area: private small enterprises. They have as much, if not more, to lose from a large claim since they have a smaller asset base.

All of this has increased demand for commercial umbrellas as more insurance buyers seek umbrella/excess casualty insurance to protect against low frequency/high severity incidents.

Take, for example, something as common as a slip and fall, the second highest cause of workplace injury. The injury severity can range from a bruise to paralysis of the head of a household who was the primary source of income for a family of four. Another unforeseen, but potentially catastrophic, scenario: a pick-up truck owned by a plumber slams into a bus causing multiple deaths and disfiguring injuries.

Question is how much

A company not properly insured against these or other unforeseen scenarios could face financial ruin. So, the question all commercial business owners should ask is not should they buy umbrella coverage, but what level of liability limits should they buy and from what carrier.

Even with the increased overall interest in purchasing umbrella insurance, companies that have experienced significant losses are the ones that buy the most umbrella insurance. They are more aware of the risks and understand their liability. The companies or industries that have not yet had a large loss are the ones that don’t buy the right limits and are often underinsured.

Companies should re-evaluate their exposures and adjust their limits to better reflect today’s claims environment. Ten years ago, $1 million was an unusual claim. Today, $5 million or even $50 million might not be enough.

Evaluating exposure

When evaluating exposure, a company should be aware of current awards and loss trends as well the future liability climate. It helps to ask, “In the past five years, how many companies in my industry have faced litigation and what initiated the litigation?”

Producers who want to secure umbrella cover should keep in mind the following when submitting a new or renewal umbrella policy:

• Check that the application is fully completed and signed before submitting.

• Provide a loss history outline that goes back at least five years.

• Possess and articulate a solid understanding of the company’s exposures.

• Include all product brochures, the latest annual report and 10K plan details.

• Describe in detail the locations of all operations and provide information on their sprinkler, alarm and fire systems.

• Detail the quality controls and procedures to minimize exposure to catastrophic loss.

• Outline a complete description of all underlying programs: coverage, carriers, limits purchased, etc.

Umbrella underwriters

When evaluating risk, underwriters ask, “What is the worst thing that can happen?” They also inquire how the insured might mitigate those exposures. Using the Internet, underwriters examine the exposures present for both the specific company and the overall industry. They take a close look at the company Web site to review the description of products/services and the representations made. Are the product representations outrageous or inflated? Is the language full of hyperbole and boasts?

Another area of underwriter scrutiny is management. Well-managed companies are more likely to reinvest in their company, have the best-maintained auto fleets and property and hire the best people. They are also more likely to have a good name to protect and, therefore, implement policies that lower the risk of something going wrong. Still, even well-managed companies have losses. To ensure proper asset cover, companies should seek guidance from their brokers to get the best level of protection today.

David Cohen is chief underwriting officer of Global Casualty for Liberty International Underwriters. He can be reached at david.cohen@libertyiu.com.

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