With few exceptions, the advisors I have spoken with believe that as long as their clients have an umbrella policy, they’re in pretty good shape relative to their property and casualty insurance. They’ll ask, “That’s right, isn’t it?” Well, it is true that having an umbrella policy in place is better than having no umbrella policy at all. But, simply having an umbrella policy should not be the end of the P&C conversation between an advisor and their clients. It is important to understand that there are significant differences between these insurance policies.

Umbrella policies vary not only from insurance company to insurance company, but different policies can exist at the same insurance carrier and at its subsidiaries. Insurance organizations such as the Insurance Service Office (ISO) and the American Association of Insurance Services (AAIS) develop umbrella policy forms, but individual insurance companies are free to use all, some or none of the policy language contained in them. The result is that there is no universal umbrella policy.

You may believe that if an insurer provides an umbrella policy for your client, they will always be protected by additional coverages. After all, it’s called umbrella protection. But you would be wrong. The word umbrella today is often a misnomer, and people often use it incorrectly without intending to. While true umbrella policies were fairly common years ago, this is no longer the case.       

Today, there are three different types of umbrella policies: “true” umbrella policies, “following form” excess liability policies and “hybrid” umbrella policies.

True umbrella policies provide not only excess coverage over underlying primary policies, but can also provide additional protection that is not included in underlying insurance policies. For  instance, relative to homeowner’s personal liability or automobile liability policies. True umbrella policies are generally stand-alone policies that contain their own definitions, coverage language, exclusions and limitations.

One example of true umbrella coverage is where “personal injury” is not included in the primary homeowners policy. Don’t confuse personal liability, which is universally contained in homeowners’ policies, with personal injury, which is seldom included in such policies. Personal injury is commonly defined as injury arising out of one or more of the following offenses:

• False arrest, detention or imprisonment;

• Malicious prosecution;

• Wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor;

• Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products; or

• An oral or written publication of material that violates a person’s right of privacy.

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. 

Here, the Massachusetts court decided that competing excess insurance policies will apply equally to provide excess coverage even if one policy is a true excess policy and the other is a hybrid policy providing either primary or excess coverage, depending on the circumstances.

But this Massachusetts court ruling is the opposite of a decision made earlier in the same year by a Federal District Court in Texas. That Texas court held that a true excess policy sat above a hybrid policy in the insurance hierarchy, and therefore would not be triggered until the hybrid policy was exhausted. Unlike the equal application of the policies under Massachusetts law, the Texas court ruled that a hybrid policy is “excess by coincidence,” and thus sits at a lower tier of coverage than the true excess policy.

So, yes, please continue to ask your clients whether or not they have a personal umbrella policy. And, yes, having any type of umbrella policy is better than having no umbrella policy. But, as a professional financial advisor, remember that things are seldom as simple as they might seem. And, as is frequently the case, the devil is in the detail. Certainly, umbrella insurance is no exception in this regard. Now, the next time you are counseling your clients you will know the types of questions to ask after they confirm that they have a personal umbrella policy.    

Kevin L. Glaser, CPCU, CIC, SCLA, ARM, AAI, AIC, ARM-P, AIS, is a nationally recognized speaker on the topics of insurance and risk management and is author of Inside the Insurance Industry (Third Edition). He is president of Risk & Insurance Services Consulting LLC.