Warning about shared-limit

Overview

Before discussing our programs, we thought it important to address a dangerous product that once again has reared its ugly head in the marketplace: Shared- Umbrella Programs. There are two sub-categories of Shared-Umbrella Programs:

  1. Shared-Limit Umbrella Programs; and,
  2. Shared-Policy Umbrella Programs.

A Shared-Limit Umbrella Program is just as it sounds. One limit of insurance is shared among all the insureds in the program. In the eventuality that one insured in the program makes a claim and exhausts the limits of the program, the remainder of the insured in the program have no coverage. In the last several years, we have seen an increasing number of wholesalers in the New York, New Jersey, and Connecticut areas put together these types of programs. We believe that these programs do a terrible disservice to insureds, and should only be utilized by agents in the direst or unusual of circumstances.

A Common Expiration Date typically indicates a Shared-Limit Umbrella Program, though this is not always the case.

Shared-Policy Umbrella Programs avoid one of the dangers of Shared-Limit Umbrella Programs. In Shared-Policy program, all of the insureds in the program share one Umbrella policy, but the limits of that policy apply on a “per location” basis. This diminishes one of the dangers that accompany Shared-Policy Umbrella Programs, which is discussed below.

Like its sister, a Shared-Policy Umbrella Program will have a common expiration date.

The Mechanics of Shared-Umbrella Programs

Both Shared-Limit and Shared-Policy Umbrella Pro- grams are characterized by really nothing more than a single policy of insurance, where under the wholesaler managing the program names itself as the First Named Insured. Any insured which purchases insurance through a Shared-Umbrella Program is nothing more than an Additional Named Insured on a master policy. Consequently, new insureds in such programs do not receive their own policies. Rather, they receive Certificates of Insurance.

Unfortunately, many wholesalers who manage Shared-Umbrella Programs present their programs to retail agents in a rather disingenuous fashion; retail agents are often lead to believe that they have purchased something for their insureds which they have not. The work “snookered” springs to mind.

Shared-Umbrella Programs typically have a Common Expiration Date, as there is only one policy of insurance.  These dates tend to be in December or June.

New insureds to a Shared-Umbrella Program most often have to be prorated onto the master policy. As such, new insureds’ Umbrella coverage becomes non- concurrent with their primary General Liability insurance. This creates an “Impaired Aggregates Situation,” the dangers of which are discussed below.

The Dangers Posed By Shared-Umbrella Programs

  1. Claim By One Additional Named Insured Could Exhaust Limits Available to Everyone In Program

In a Shared-Limit Umbrella Program, if one Insured in the program makes a claim for the full policy limits, the limits on the master policy are exhausted. At this point, there is no further coverage available to any of the other insureds in the program.

Example –

Insured A purchases coverage through the Super-Duper Programs’ Umbrella Program, as does Insured B. Super Duper Programs’ Umbrella Program is a Shared-Limits program, with master policy dates running from 12/10/2000-12/10/2001. The limits offered in the program are $200,000,000. On 1/1/2001, Insured A is sued for $200,000,000, and a court awards the plaintiff $200,000,000. Super Duper Programs’ master policy pays the plaintiff $200,000,000. The day after, Insured B is sued for $1,000,000. A court awards the plaintiff, in this case, $1,000,000. Insured B makes a claim against its “$200,000,000” policy. What result?

Super Duper Programs Umbrella policy would not pay the second claim because the limits of the master policy were already exhausted by the payment of the claim made against Insured A.

If Insured A and Insured B in the example above had purchased coverage through a Shared-Policy Umbrella Program, instead of a Shared-Limit Umbrella Program, Insured B’s claim very likely would have been paid. However, Shared-Policy Umbrellas often contain a number of hidden dangers discussed in items 2, 3, and 4 below.

  1. Hidden Program Aggregate

This situation is only pertinent to a Shared-Policy Umbrella Program. Wholesalers who sell Shared-Policy Umbrella Programs will tell their retail agents “not to worry” about purchasing a Shared-Policy Umbrella, despite the fact that all of the insureds in the program share one policy, because the aggregates on the master policy apply on a “per location” basis. However, Shared-Policy Umbrella Programs often contain a Program Aggregate Endorsement limits the number of times that the aggregate of the master policy will be refreshed. For instance, the endorsement might read “The aggregates of this policy shall apply on a ‘per location’ basis; however, this policy will never pay more than two times the face amount in any given policy year.”

  1. Additional Names Insured, Not First Named Insureds

One of the dangers of being an Additional Named Insured on a single policy of insurance is that Additional Named Insureds do not obtain any of the benefits that accrue to First Named Insureds.

First Named Insureds have the right to be notified of exhaustion of the limits of a policy; Additional Named Insured do not. As such, if one insured in a Shared- Umbrella Program makes a claim which exhausts the limits of the master policy, the carrier has no duty to notify the remaining insured that the policy limits were exhausted.

Furthermore, First Named Insured have the right to receive notification if the policy is canceled for non-payment. Additional Named Insured do not. In the eventuality that a Shared-Umbrella Program is canceled for non-payment, Additional Named Insureds on the Master Policy have no right to notification.

  1. “Impaired Aggregates Situation”

An “Impaired Aggregates Situation” can result when there is a discrepancy between the inception date of an insured’s General Liability Policy and its Umbrella might create a “deductible” on the Umbrella equal to the amount of the GL claims. A case might be illustrative.

Example –

Property Owner purchases a GL policy from Reliable Insurance Company that runs 6/22/1999 to 6/22/2000. Property Owner purchases Shared-Umbrella Policy with limits of $10 Billion with a Common Expiration Date of 12/10/99 to 12/10/00. As such, Property Owners’ Umbrella coverage is prorated onto the master policy; Property Owner receives a Certificate of Umbrella Insurance for the period 6/22/99 to 12/10/99, then receives a Certificate of Umbrella Insurance for the period 12/10/99 to 12/10/00. On 6/24/99, a valid and collectible $1 MM GL claim is made against Property Owner. Reliable pays the claim. Unfortunately, on 6/25/99, a second valid and collectible GL claim in the amount of $1 MM is made against Property Owner. Again, Reliable pays the claim. Now, Property Owner’s GL policy is exhausted (both the “Per Occurrence” Limit and the Aggregate).   On 12/13/1999, a $5 MM valid and collectible GL claims is made against Property Owner. The claim is submitted to Reliable. Reliable denies the claim, appropriately. The claim is then submitted to the Umbrella carrier. What result?

All Umbrellas, unmodified, require refreshed primary aggregates when they renew. In the normal insurance arena, this is not a problem, as Umbrellas and GL policies are written concurrently. However, in a Common Expiration Date Umbrella Program, there is cause for alarm. If the aggregates of the primary policy have not been refreshed as of the renewal date of the master umbrella, then a deductible is created on the Umbrella equal to the diminution of the GL limits. In the situation above, this means that the $10 Billion Umbrella would pay $5 MM – $2 MM (diminution of GL aggregate not refreshed as of 12/10/99) = $3 MM.

The $2 MM different would generally be referred to as an “Errors & Omissions” claim. Of course, this is unacceptable.

A Good Umbrella Program

A good Umbrella Program will allow insureds within the program to obtain their own policies of insurance, which run concurrently with each insured’s underlying General Liability Policy.  No exceptions.