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Understanding Umbrella Liability Insurance

I did not know, till recently, that February 10 every year is celebrated as National Umbrella Day in some parts of the world to recognize Umbrella’s importance in protecting us from Sun as well as rain. It is interesting to know that a day is dedicated to Umbrella. As Umbrella protects us from the Sun and rain, Umbrella liability insurance also offers protection in the insurance space.

What is Umbrella Liability Insurance?

This is a liability insurance policy that sits over multiple identified primary liability insurance policies like CGL, Product liability, Workmen’s Compensation Policy and Automobile insurance etc. It provides indemnification when the limits of underlying liability policies are exhausted upon payment of claims. It can also offer a drop-down feature, filling in some coverage gaps in the primary policies. Terms including pricing are therefore influenced by the features of the primary policies.

Information available in the public domain indicates that these policies are sold since 1949.

Umbrella liability insurance and Excess liability insurance policies are used interchangeably, in that they sit over the primary policies. But they are not the same – Umbrella policy can provide broader coverage than the primary policy whereas Excess insurance provides the same coverage as that of primary policy.  But here again one needs to tread with caution, as it is not always correct to conclude that all umbrella policies follow the primary policy providing the exactly same coverage. It is therefore necessary to review thoroughly the actual terms and conditions of the policy including all endorsements before buying the policy.

Why Umbrella Insurance?

*       It provides additional layer of support, should the primary policy limit get exhausted on payment of claims. The meaning of exhaustion is not as simple as it may seem. There is case law  inferring alternative meanings with regard to exhaustion of an underlying policy limit. But, when an insurer employs clear and unambiguous language in the policy document, it reduces the possibility of unintended interpretations as can be seen from the relevant excerpt in judgement in Qualcomm, Inc. v. Certain Underwriters At Lloyd’s, London which is given below.

 “Whatever merit there may be to conflicting social and economic considerations, they have nothing whatsoever to do with our interpretation of the unambiguous contractual terms.  [Citation.]  If contractual language in an insurance contract is clear and unambiguous, it governs, and we do not rewrite it ‘for any purpose.’ ”

Details of the judgement can be read here.


*  It can also provide coverage for risks for which no coverage exists under the primary policy. In this case the Self Insured Retention (SIR) comes into play. SIR is the amount which the insured bears himself before the Umbrella insurance policy responds to a loss. But as stated earlier, this wider coverage can not be presumed unless mentioned in clear terms in the policy.


*  It helps save premium.


*  Many a time, it may be a contractual requirement


*  In the event of bankruptcy of the primary insurer, at least the limit under Umbrella insurance may be available for indemnification to the insured. But, it should  be noted that such bankruptcy, insolvency or inability of the primary insurer to pay does not make it a substitute for primary policy. Given the stringent and robust insurance regulations that we have in India, Insurer impairment solutions, which are meant to address insurer insolvency situations, as insurance products are not seen as necessary at this moment.

Umbrella insurers generally warrant the following apart from compliance with other conditions:

  • Uninterrupted maintenance of the underlying insurance policies.
  • Maintenance of limits of the underlying insurance policies.
  • Renewal coverage of the underlying insurance policies not to be narrower than obtained originally.
  • No material change in the terms, conditions and endorsements of the underlying insurance policies during the period of the Umbrella policy.

Like any other insurance policy, this policy also has exclusions which need to be understood well before buying the cover.

In the Indian context, Umbrella liability insurance policy is not yet a well-known policy. Only  a few insurers have filed this product with Insurance Regulatory and development Authority of India(IRDAI). It may also be noted that the wordings of the policy or for that matter any policy cannot be changed at will, as these are governed by the Product Filing Guidelines of IRDAI. In the recent past IRDAI has taken serious note of violations in this area and imposed penalties. To that extent, the scope for bespoke policy wording is limited and it takes time. Further, for some covers like Workmen’s compensation (WC)policy, Umbrella policy is not seen as relevant, as the WC policy does not indicate a specified limit of liability but would pay for the quantum as decided as per the provisions of the Employees Compensation Act, 1923 as amended from time to time.

Umbrella policy floats over various policies providing additional shield of protection. It only complements but does not substitute other liability coverages.

Those who want to delve deeper to understand the nuances and finer points of the subject can access more information from the following links:

How Umbrella Policies Started Part 1: Early Liability Coverage

Commercial Umbrella Policy – A Few Things to Consider

Comparing Coverage: Umbrella and Excess Liability

P. Umesh
Consultant – Liability Insurance
p.umesh@liabilityinsurancepractice.com
www.liabilityinsurancepractice.com

Postscript: Since I started discussion with benefits of an Umbrella, why not remember it at the end also? Even if one has a rain coat, it helps to have an umbrella when the rain is heavy.

Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subjects covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisors regarding specific coverage and/or legal issues.