Personal Umbrella Coverage Guide, 2nd Edition

Diane Richardson

• Publisher: The National Underwriter Company
• Year: 2016
• ISBN:
  9781941627778
• Topic: Business
• Subtopic: Insurance
• Index: Business

This insightful and practical two volume resource was envisioned and written by nationally renowned expert Barry Zalma, and it thoroughly explains how to identify construction defects and how to insure, investigate, prosecute, and defend cases that result from construction defect claims. Construction Defects Coverage Guide was designed to help property owners, developers, builders, contractors, subcontractors, insurers, and lenders, as well as their risk managers and lawyers rapidly resolve construction defect claims when they arise and avoid construction litigation. If litigation becomes necessary it will help the prosecution or defense of construction defect suits effectively. This new resource addresses a wide range of topics associated with the escalating and potentially expensive problem of construction defects claims, helping you to: • Identify the potential exposures throughout the entire construction process • Successfully manage the risks • Acquire the correct construction defect insurance • Underwrite against construction defect claims • Understand exactly how insurers decide whether to insure • Confront and minimize losses caused by construction defects • Decide when to pursue litigation or alternative dispute resolution Included among the many topics expertly handled in the Construction Defects Coverage Guide, you'll find: • Bad faith • Key construction contract clauses • Construction defect policies • Insurance and underwriting • Liability insurance • Common defects • Plans and specifications • Property inspection • Structure • Construction defect suits • Tort defenses • Evaluation and settlement • Alternative Dispute Resolution • Trial

Chapter 1

An Umbrella Overview

Why an Umbrella?

Auto and homeowners policies provide adequate liability protection for many people. Why, therefore, would anyone purchase an umbrella liability policy? The primary reason is to protect personal assets. Umbrellas provide an extra layer of liability coverage beyond that offered by homeowners, renters, personal auto, or stand alone personal liability policies.

Think of a young couple starting out. Both work and their combined income is good. However, being prudent, they drive older cars and save their money to purchase a home. A child enters the picture; then another. Both parents continue to work.

Because the family’s income level rises, they are able to afford new vehicles and enjoy an increasingly affluent lifestyle. Since the family lives close to a large body of water, it seems reasonable to purchase a 22 foot, 150 HP inboard-out drive. (Note: see ISO homeowners liability exclusion B.2.c; AAIS exclusion 8.a.3; and MSO incidental watercraft liability coverage.) The whole family enjoys a day on the water. A condo at their favorite winter vacation spot is the next purchase. It will pay for itself since they intend to rent it out during the time they don’t use it themselves. (Is separate coverage in order? If yes, do they have it?)

The condo is near a large winter resort area, so naturally two snowmobiles (his ‘n hers) are the next purchases. They decide to allow anyone renting the condo to have access to the snowmobiles. (Refer to ISO exclusion A.2.d; AAIS 7.a.4; and MSO incidental land vehicle coverage 7.B.)

In the meantime, the children are growing up. The oldest, a boy, has gotten his drivers’ license, and his parents have purchased a car, a four-door sedan, for him to drive to school and to his after-school job. After two years, the next child, a girl, begins to drive and her parents purchase a car for her as well.

However, she is not the safe, careful driver her brother is. She likes nothing better than to pile several of her friends in the car and cruise around. A favorite activity is to text her friends in the back seat while driving—after all, she has one hand on the wheel! She loses control of the car, and it plows into an oncoming car. A passenger in the other vehicle is killed, and two of the daughter’s friends are critically injured. One recovers, but one will be paralyzed for life from the waist down.

The family’s auto policy has limits for bodily injury of $100,000 per person and $300,000 per accident; and $100,000 property damage limits. The policy pays its limits, and then bows out of the picture. Homeowners liability does not apply in circumstances such as these. But the fact that the auto policy has maxed out its limits does not stop a lawsuit from the estate of the passenger in the oncoming vehicle and friendship does not prevent a suit from the paralyzed friend’s parents. After all, the family has assets (home, condo, boat, vehicles, etc.) that can be attached.

A bleak picture? Never happen?

If it seems melodramatic, consider the picture without the daughter’s accident. What about the condo with the snowmobiles? What happens if someone runs the snowmobile into a tree, seriously injuring himself, and sues the owner for negligence? The condo owner should have known the renter didn’t know how to drive a snowmobile! Or perhaps one day the son takes a few of his buddies out on the boat. As they playfully wrestle to see who can take over the wheel, the boat goes out of control and plows into a marina, totaling a Donzi 38 (2016 list price $350,000) and seriously damaging a pontoon boat, which just happens to have a family on-board. The family’s boat owners policy has $100/300 BI and $100,000 property damage limits.

Having a personal umbrella in place might have helped alleviate some of the financial loss, as well as contribute toward defense costs.

If an imaginary scenario does not convince you of the need for an umbrella, consider this. Although the number of deaths of thirteen through nineteen-year-olds in auto accidents has decreased since 1975, the number of fatalities of drivers and passengers age thirteen through nineteen accounts for 56 percent of all drivers and passengers. Males age twenty through twenty-four accounted for 13.6 per 100,000; females 5.1. We cannot, however, view statistics for young drivers without taking a look at statistics for older drivers. Drivers over age seventy account for 1 percent of fatalities; this number sharply increases from age eighty-five up. Although the elderly drive fewer miles, age makes any injury—broken bones, for example—more severe¹. This is not to say, necessarily, that older drivers cause more accidents—they don’t—but if they are driving with friends in their age group any accident will result in more severe injuries.

With the youthful operator, it is the parents’ assets that must be protected; with the elderly driver, it is their own.

Sometimes an umbrella policy can involve itself in unforeseen ways. As of this writing, several states require that uninsured/underinsured motorist coverage be offered on an umbrella policy. Among them are: Arizona, Kansas, Louisiana, Nevada, Alaska, West Virginia, Wisconsin, North Carolina, and Ohio. New Hampshire revised statutes 259:61 and 264:15 indicate the coverage must be offered, but in the case of United Services Auto Association v. Wilkinson, 569 A.2d 749 (New Hampshire 1989), the court held, with one dissention, that that had not been the intent of the legislature.

Note, though, that because a state does not require the coverage to be offered, it is not an indication that purchasing it is not a good idea. For just a few extra dollars, the policyholder can purchase an extra million (or whatever limits are selected according to the insurer’s manual) of uninsured/underinsured motorist coverage.

In the case of Nationwide Mutual Insurance Co. v. Chivington et al., 595 N.E.2d 1002 (Ohio 1991), the appellate court held that the insured’s personal umbrella policy’s uninsured/underinsured motorist coverage must contribute when the insured’s parents were killed in an auto accident. Brenton Chivington, who lived with his parents, had both his own auto policy and a personal umbrella policy. When his parents were killed, the negligent driver’s policy paid $200,000. The parents’ policy, which had limits of $300,000 in uninsured/underinsured coverage, paid $100,000. The son therefore turned to his own auto policy, which provided $500,000 in uninsured/underinsured motorist coverage, and to his umbrella, which provided $1 million in uninsured/underinsured coverage. Since he had already received $300,000, his auto policy tendered $200,000; the umbrella the remaining $500,000 for a total of $1 million. (Note that uninsured/underinsured motorist coverage accrues not only for the benefit of an insured who is physically injured in an accident, but also for the benefit of someone entitled to receive damages from the person causing the bodily injury to the insured. The insured thus has a derivative claim. See the personal auto policy [PAP] Part C.B.3., which says that “insured” means “any person for damages that person is entitled to recover because of ‘bodily injury’ to which this coverage applies sustained by a person described in 1. or 2. above.” The person described in 1. or 2. means “you or any ‘family member’,” or “any other person ‘occupying’ ‘your covered auto’.”)

In the states that require that uninsured/underinsured motorist coverage be offered on an umbrella, this case makes a strong selling point for the parents of young children to purchase an umbrella.

What Is an Umbrella?

An umbrella policy provides worldwide liability coverage over and above that provided by underlying policies. For most personal lines clients, these underlying policies will be auto and homeowners. The liability coverage may be excess, or it may be “drop down”. Think of a collapsed folding umbrella. When the umbrella begins to open, the shaft lengthens. That is the excess portion; the part of the umbrella that provides liability coverage over that which is already in place.

But an umbrella can provide more coverage than an excess form. As the umbrella opens, the cloth stretches over the spokes in a kind of inverted scallop pattern, protecting a much greater area than that protected by just the umbrella shaft. This broader area of coverage, that protects even where there is no underlying coverage, is often referred to as “drop down,” because it drops down to protect where no underlying coverage exists. It is this “drop down” feature that distinguishes a true umbrella from an excess policy.

For example, if an insured’s auto policy has limits of $250,000/$500,000 bodily injury and $250,000 property damage, when added to a $1 million umbrella the insured now has limits of $1,250,000/$ 1,500,000/$ 1,250,000. If the insured has $100,000 personal liability coverage on his or her homeowners, then, with the umbrella, there is a total of $1,100,000 in coverage. For covered occurrences not afforded coverage by the underlying policies (homeowners policies commonly do not provide personal injury coverage unless it is added by endorsement; umbrella policies include this coverage as a matter of course) the umbrella provides $1 million or whatever limit is selected, subject to the retained limit (discussed below).

What Do Umbrellas Have In Common?

Lack of State Regulation

As of this writing, few states specifically regulate (with the exception of requiring that uninsured/underinsured motorist coverage be offered) personal umbrellas. Two states are Texas and New York. Texas requires ten days’ notice of cancellation for nonpayment of premium, change in operations resulting in a hazard, or when continuation would place the insurer in violation of the Texas insurance code; otherwise forty-five days’ notice is required. New York regulates “personal lines insurance,” such as homeowners and umbrellas, as well as auto insurance. An insurer may cancel upon giving at least forty-five days’ notice. Cancellation reasons include nonpayment of premium, conviction of a crime increasing the hazard insured against, discovery or fraud or material misrepresentation, or willful or reckless acts or omissions increasing the hazard insured against. However, the state mandates a “required policy period” of three years from the date the policy is first issued or voluntarily renewed. Nonrenewal may be only for the cancellation reasons, unless the insurer no longer does business in the state.

In nonregulated states, an insurer may cancel for any reason, although, of course, the reason must be a legitimate one, such as an increase in hazard. Depending upon the insurer, generally ten days is given for nonpayment of premium; thirty days for any other reason. Notice of nonrenewal is generally thirty days.

Other states regulate personal insurance, though, which may include umbrellas. For example, in Oklahoma a liability policy cannot be retroactively annulled based on agreement between insured and insurer. In both Oregon and Washington, credit scores may not be used as sole reasons to decline to issue policies.

Umbrellas are perceived as nonessential insurance, unlike auto insurance, which is tied to state-mandated financial responsibility laws, or homeowners insurance, which is tied to lending institutions’ requirements. Perhaps because of this, state regulators have been hesitant to become involved. Also, until recently each insurer developed its own form. In 1998 Insurance Services Office (ISO) developed a personal umbrella policy, followed in 2000 by the American Association of Insurance Services (AAIS); however, many insurers continue to use their own forms. Therefore, the coverages and exclusions found in personal umbrellas vary from insurer to insurer.

There are, however, some common elements in umbrellas. All contain definitions, an insuring agreement, coverages (and exclusions), miscellaneous conditions, the duty to defend, and the requirement to maintain underlying insurance. The first four common elements will be discussed in later chapters.

Duty to Defend

Often the cost of defending against a suit or claim can represent a significant expense. Umbrella policies provide defense coverage that is in addition to the limit of liability. The umbrella insurer frequently has the right to join in a defense with an underlying insurance carrier if it appears the umbrella coverage will be triggered, and sometimes will take over a defense if the underlying policy limits have been exhausted.

When a claim is outside the scope of the insurance policy’s coverage, the insurer has no duty to defend. However, the duty to defend is broader than the duty to indemnify. So, if any allegations can be brought within the scope of the coverage, then the insurer owes the duty. As an appellate court stated, applying Missouri law, “An insurer’s duty to defend exists when the petition in the underlying action states some grounds of liability covered by its insurance policy. Therefore, we must compare ‘the language of the insurance contract and the allegations of the petition in the action brought by the person injured or damaged. If the complaint alleges facts which state a claim potentially (italics added) within the policy’s coverage, there is a duty to defend.’”

In the case of Lowell K. Wood v. Safeco Insurance Company of America, 980 S.W.2d 43 (Missouri 1998), the insured owned real estate along a river in Missouri. He sold the property to another; following the sale, the property flooded twice. The insured was sued for alleged intentional misrepresentations and negligent misrepresentation. The buyer dismissed that suit, but then filed another lawsuit alleging fraud due to intentional misrepresentations and negligent misrepresentations. This suit was dismissed with prejudice. The insured’s umbrella insurer refused to defend either suit; the insured filed a damages action against his insurer.

At trial, the insurer argued that it was not required to defend for two reasons. First, the claims were not “occurrences” as defined by the policy (“‘Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the coverage period, in ‘personal injury’ or ‘property damage…’”). Second, the claims were excluded because of the “expected or intended” acts exclusion.

The trial court found for the insurer. But on appeal, the court ruled for the insured, holding that the negligent misrepresentations were indeed an “occurrence” by definition, which resulted in the buyer’s loss of use of the property, which was within the definition of property damage. Therefore, the insurer owed a duty to defend. This case will be discussed again in connection with the definition of “occurrence” in the next chapter, because in it the court considered several other jurisdictions’ views.

Underlying Insurance Requirements

Umbrellas are designed to provide coverage over and above that provided by underlying policies, except, of course, when they respond to covered occurrences not addressed by the underlying insurance. The requirement to maintain underlying insurance is found within the conditions of any given umbrella form. Some insurers include as well the specific amounts of underlying insurance they require. These amounts vary. For example, one insurer may require auto liability limits of $100,000/$300,000 bodily injury and $100,000 property ...