Workshop W9
Wednesday, November 20
1:30–3:30 p.m.
ARE THERE HOLES IN YOUR UMBRELLA?
Presented by
Principal
Malecki Deimling Nielander & Associates, LLC
President
Risk Resources, Inc.
Umbrella and excess liability policies are intended to protect insureds from
catastrophic losses. For many contractors, a growing number of limitations and
exclusions have slowly chipped away at these upper layers of liability coverage, and
failure to identify potential gaps in coverage between the primary and excess layers
can be disastrous. This workshop will reveal common mistakes and oversights in filling
these gaps, describe the different approaches used by insurers in umbrella policies, and
provide strategies for plugging the holes in this vital coverage.
To print on both sides of the page, set your printer for duplex printing.
Copyright © 2013 International Risk Management
Institute, Inc.
www.IRMI.com
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Donald Malecki
Steven Coombs
Oc tob er 12th , 10:15 P.M .
A good night’s
sleep, with Blanket
coverage
IN AN
INS TANT,
B il l L e w is
m anage d his
r i sk an d got
the j o b d o ne
The hotel renovation had to be
completed in five weeks. It would
take multiple subcontractors to pull
it off, and Bill had no time to waste
on paperwork or mistakes. Thanks
to CNA’s Blanket Additional Insured
Coverage, the contractors insured
with CNA’s form could meet the
project’s insurance requirements
and start working without delay —
allowing Bill to meet his deadline, and
sleep like a baby.
When it comes to trade-specific
coverages that increase
efficiency and peace of mind …
®
we can show you more.
To learn how CNA’s contractors program can help you maximize business
efficiency, contact your independent agent or visit www.cna.com/construction.
The examples provided in this material are for
illustrative purposes only and any similarity to
actual individuals, entities, places or situations
is unintentional and purely coincidental. Please
remember that only the relevant insurance policy
can provide the actual terms, coverages, amounts,
conditions and exclusions for an insured. All products
and services may not be available in all states and may
be subject to change without notice. CNA is a registered
trademark of CNA Financial Corporation. Copyright © 2013
CNA. All rights reserved.
Steven A. Coombs
President
Risk Resources, Inc.
Mr. Coombs has 35 years of industry experience, with the last 28 years in a consulting environment. Prior to that, he was a national accounts underwriter for a large international insurance
group. Risk Resources is a risk management and commercial insurance consulting firm based in
LaGrange Park, IL. Risk Resources does not sell insurance and provides consulting services on a
fee-for-service basis. Common projects include risk management and insurance audits, insurance RFPs/proposal management, wrap-up feasibility reviews, agent/broker/administrator
selection, risk financing studies, litigation support, and testimony.
Mr. Coombs is a graduate of Western Michigan University with a bachelor of business administration degree. He also holds an M.A. from DePaul University with a concentration in Risk Management and Insurance. He has earned the Associate in Risk Management (ARM) certificate
from the Insurance Institute of America and received the Chartered Property Casualty Underwriter (CPCU) designation.
Donald S. Malecki, CPCU
Principal
Malecki Deimling Nielander & Associates, LLC
Mr. Malecki is a principal of Malecki, Deimling, Nielander & Associates, LLC, an insurance, risk,
and management consulting firm in Erlanger, Kentucky. He is also contributing author to The
Risk Report, Construction Risk Management, and Commercial Liability Insurance, all of which are
published by IRMI.
Mr. Malecki began his career over 53 years ago as a fire underwriter trainee with Fireman’s
Insurance Company of Newark, N.J., and later as supervising casualty underwriter for Continental Insurance Company. He is the author and coauthor of 15 books, including three textbooks
formerly used in the Chartered Property Casualty Underwriter (CPCU) curriculum; and The
Additional Insured Book, The Builders Risk Book, and The MCS-90 Book, all published by IRMI. He
is past president of the Cincinnati Chapter of CPCU and is an active member of the Society of
Risk Management Consultants.
Mr. Malecki graduated from Syracuse University in 1960 with a bachelor of science degree in
business administration and emphasis on insurance. He also is a veteran of the U.S. Air Force,
having served 4 years (1951–1955) and holds the Korean Service Medal.
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Workshop W9
Mr. Coombs has been involved in scores of construction projects insured by traditional practice
programs and wrap-ups, while representing owners, developers, design teams, construction
managers, and general contractors. He has extensive knowledge and experience regarding various aspects of construction insurance. He is a coauthor of The Builders Risk Book (IRMI) and
Workers Compensation Guide–Coverage and Financing (National Underwriter Company). He is
also a former President of the Society of Risk Management Consultants
Notes
4
Are There Holes In Your
Umbrella?
Presented By:
Steve Coombs, CPCU
Risk Resources
LaGrange Park, IL
Don Malecki, CPCU
Malecki Deimling Nielander
Erlanger, KY
[email protected]
[email protected]
Goals For Today
1. Better understanding of follow form, umbrella
and excess liability policies
2. Better understanding of mechanics of each
3. Identify common “holes” or “gaps”
4. Offer tips and solutions
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Full Disclosure
1. Our backgrounds: Underwriters, teachers and
consultants
2. Biases
3. Will strive for balanced approach
3
Three Types of Liability Policies
1. Primary
2. Umbrella
3. Excess
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6
Basic Functions of Umbrella and Excess
Function
Umbrella
Excess
1. Provides additional limits


2. Replaces primary upon exhaustion


3. Provides broader coverage than primary

Umbrella Diagram
Umbrella Limits
CGL
Auto
EL
SIR
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Excess Diagram
E x c e ss L i m its
CGL
A u to
EL
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Names Can Be Misleading
1. Umbrella is usually “stand alone”, but can
operate as “follow form”
2. Excess is often “follow form”, but can operate as
“stand alone”
3. Policies are non-standard; assume nothing
4. A policies function, not its name, determines its
character (Cristal v. Farmers Ins. Co. of Wash., 135 P.3d, 479,483,
Wash. Ct. App. 2006)
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Umbrella/Excess Policies: Three Types
1. Follow form
2. Stand alone
3. Hybrid/Bifurcated/A-B Format
Follow Form Policy
1. More advantageous to policyholder to the
extent terms do not deviate from primary
2. Two types:
True- few exceptions
Conditional- multiple exceptions
3. Exceptions may be driven by reinsurance and
underwriting
 Must independently analyze policy terms
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Follow Form Policy (cont.)
1. True follow form
Follows underlying form except limits
Very short, concise policy
2. Conditional follow form
Follows underlying form except as otherwise stated
Policy form length varies; may be several pages
If any conflicts with underlying, this policy prevails
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Stand Alone Policy
1. Free standing
2. Has its own insuring agreements, exclusions,
conditions, definitions, etc.
3. Not reliant on terms of primary
4. Can be umbrella or excess varieties
 Must independently analyze policy terms
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Hybrid (Bifurcated)Policy
1. Two insuring agreements (A&B)
2. Many insurers utilize hybrid policies
3. Can be advantageous to policyholder
 Must independently analyze policy terms
Hybrid (Bifurcated)Policy (cont.)
1. Two insuring agreements; may be inverted
2. Insuring Agreement A-Excess
Conditional following form
If any conflicts with underlying, this policy prevails
3. Insuring Agreement B-Umbrella
Free standing
Not reliant on terms of primary
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Questions to Ponder
Can these policies provide less coverage than the
underlying? Which provides the greatest coverage?
Follow form
Excess
Umbrella
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How/Why Do Coverage Gaps Occur?
1. Delta between construction contracts and
insurance policies
2. Non-standard nature of policies
3. Failure to follow same terms as primary
4. Reinsurance limitations/exclusions
5. Underwriting actions
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Gaps: Contract Requirements vs. Policies
1.
2.
3.
4.
5.
6.
Pure “following form”
“As broad as underlying”
Underlying policy requirements (i.e., CX/NR)
Per project aggregate limits
Primary/Non-contributory for Addl. Insureds
Waivers of subrogation
Gaps: Policy Structure
1.
2.
3.
4.
5.
6.
Declarations page
Insuring agreements
Exclusions
Definitions
Conditions
Endorsements
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Gaps: Declarations Page
1.
2.
3.
4.
5.
Named Insureds
Policy term
Stated limits of liability
Schedule of underlying insurance/retained limits
Forms schedule
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Gaps: Declarations Page (cont.)
1. Named Insureds
Only one named insured listed?
JVs/LLCs/partnerships/other
2. Policy term
Concurrency with underlying
3. Application of limits
Listed accurately?
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Gaps: Declarations Page (cont.)
4. Schedule of underlying insurance/retained
limits
Complete and accurate?
5. Forms schedule
Reconcile forms to policy
Gaps: Insuring Agreements
1.
2.
3.
4.
General approach
Coverage terms
Limits of insurance
Defense and supplementary payments
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Gaps: Insuring Agreements (cont.)
1. General approach
Policy type: Stand alone, follow form, hybrid
One vs. multiple layers
Pay on behalf vs. indemnify
Trigger: Occurrence vs. claims made vs. both
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Gaps: Insuring Agreements (cont.)
2. Coverage terms - examples
All sums; those sums; ultimate net loss; loss; suit
Named insured; insured
Occurrence
Underlying insurance; retained limit
BI/PD/PI/AI
Policy period; coverage term
Coverage territory
Insured contract
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Gaps: Insuring Agreements (cont.)
3. Limits of insurance
Loss; ultimate net loss definitions
Treatment of defense costs
Per occurrence and appropriate aggregates?
Do attachment points dovetail with underlying?
What “drop down” limitations apply?
If multi-year policy do annual limits apply?
Gaps: Insuring Agreements (cont.)
4. Defense and supplementary payments
What is insurer’s position on assuming defense?
Are defense costs covered? On what basis?
Inside or outside limits? Silent?
What constitutes “exhaustion” of underlying?
 Paid by insurer
 Paid by insurer or insured
 Legally obligated to pay
 Other
Supplementary payments-What is included?
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Gaps: Exclusions
1.
2.
3.
4.
5.
General
Broader than primary
Reinsurance or industry driven
Laser
Other limitations
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Gaps: Exclusions (cont.)
1. General
Policy type
 Follow form
 Stand alone
 Hybrid
Imbedded in policy form or specific
Pyramid effect
Be cognizant of hidden limitations
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Gaps: Exclusions (cont.)
2. Broader than primary- examples
More stringent pollution, lead, asbestos
Mold, bacteria
Professional
CIPs
EIFS
UM/UIM
Gaps: Exclusions (cont.)
3. Reinsurance or industry driven- examples
Radioactive matter
Silica
Residential
Welding
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Gaps: Exclusions (cont.)
4. Laser- examples
XCU
Cross liability
CCC- real and personal
Earth movement/subsidence
Punitive damages
Marine
Known damage
Warranty of subcontractors’ insurance
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Gaps: Exclusions (cont.)
5. Other limitations imbedded in:
Insuring agreement
Limits of liability
Defense provisions
Key definitions
Conditions
Endorsements
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Gaps: Definitions
Loss/Claim/Damages
Bodily injury
Property damage
Personal/Advertising injury
Supplementary payments
Occurrence
Insureds
Insured contracts
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Gaps: Definitions (cont.)
9. Underlying insurance
10. Policy period
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1.
2.
3.
4.
5.
6.
7.
8.
Gaps: Conditions
1.
2.
3.
4.
5.
6.
7.
8.
Cancellation/Non-renewal
Duties
Maintenance of underlying insurance
Other insurance
Separation of insureds
Subrogation
Territory
Other insurance
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Gaps: Other Insurance Condition
1. Horizontal vs. vertical exhaustion
2. Historical policy design supports horizontal
exhaustion
3. Sample other insurance clause:
This insurance is excess over any other valid and collectible insurance
whether primary, excess, contingent, or any other basis, except other
insurance written specifically to be excess of this insurance.
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Gaps: Other Insurance Condition (cont.)
4. If vertical exhaustion is desired/required the
“other insurance” clause should be amended
5. Amendments are non-standard, but generally
incorporate:
When required by written contract….
Primary/non-contributory language
Excess of scheduled underlying insurance
Avoiding and Closing Gaps: Proposed Policies
1. Inventory loss exposures
2. Coverage specifications/checklists
3. Seek follow form coverage. Some options:
True policy
Conditional policy
Endorsements- True or “broad as primary”
When all else fails, utilize FF endorsements
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Avoiding and Closing Gaps: Issued Policies
1.
2.
3.
4.
Comparison of policy to accepted proposal
Use standardized checklist (refer to handout)
Identify discrepancies
Secure correcting endorsements
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