If an umbrella policy is not a true umbrella policy, it may be either a following form excess liability (sometimes referred to as an “excess umbrella”) or a hybrid umbrella policy.
A following form excess liability policy merely provides higher limits over the underlying policies listed on the umbrella’s declarations page. Here’s an example:
A $1,000,000 following form excess liability policy is purchased by your client. To meet their minimum underlying homeowners personal liability requirement, they insure their home with a $300,000 limit, but no personal injury coverage applies. Should the insured be sued for $1,300,000 resulting from a personal injury claim, neither the homeowners policy, nor the excess liability policy, would pay anything.
Since the coverage provided under the excess liability policy is no broader than the underlying policy, some refer to it as a following form because it “follows” the coverage provided by the primary policy. In addition to an excess liability policy applying the same policy coverages, limitations, exclusions and other provisions that exist in the applicable underlying policies, it often has its own policy exclusions and limitations.
Hybrid umbrellas—you guessed it—contain elements of both a true umbrella and a following form excess liability policy. As a result, some of the policy coverages may be broader than the excess liability policy, while others are the same. Furthermore, the hybrid’s policy language may be the same, or narrower, than some of its underlying insurance policies.
Adding even more confusion to the topic of personal umbrella policies is the fact that sometimes additional coverages can be added by endorsement to one of the three umbrella forms. For instance, uninsured motorist (UM) coverage and/or underinsured motorist (UIM) coverage may be available if a policyholder pays the carrier’s additional premium. A caveat: be aware that endorsement coverage limits may be less than the full umbrella limit.
But wait, there’s even more to consider. Several umbrella policies contain a self-insured retention (SIR). An SIR acts as a type of deductible and must be paid out-of-pocket by a policyholder for claims that are not covered by an underlying policy but are covered under an umbrella. Such situation might arise when a claim is made for personal injury, as mentioned earlier. SIRs should not be overlooked since these can be significant, such as $10,000.
Any discussion of umbrellas must also include a word of caution about underlying policies. Should an underlying policy, such as personal liability or auto liability, not be in force at the time of an umbrella claim, or if it falls below the required minimum limit, the insured is almost always required to pay the difference. Since most insurers require minimum underlying limits of $100,000, $300,000 or even $500,000, mentioning this important umbrella requirement to your client may help them avoid a financial catastrophe.
One last point to keep in mind. It is important to never overlook the fact that courts can play a significant role in how umbrella coverages are ultimately applied after a loss occurs. Since all umbrella policies are contract, courts determine what coverages apply, how the coverages apply, the policy limits that apply, and more. And, when more than one umbrella policy applies, they may also determine the order in which the policies will make payments. This priority of payments not only impacts the insurance carriers involved, but also impacts the insured when one or more of the policies has an SIR.
A recent case involving hierarchy of payments was decided in late 2017 by the Supreme Judicial Court of Massachusetts (Great Divide Ins. Co. v. Lexington Ins. Co., 2017 WL 4969942). This case involved a personal injury claim that was covered under three different insurance policies: a primary personal liability policy, a hybrid umbrella policy and an excess liability policy. A dispute arose regarding the priority of coverage between the excess liability umbrella policy and the hybrid umbrella policy.