Umbrella Insurance
Chapter 3
When Is Umbrella Insurance Necessary?
As the last chapter stated, the legal basis for liability claims come from tort law and contractual relationships. Like all liability insurances, umbrella insurance follows certain procedures. Possible losses are the costs of defense against lawsuits alleging liability and the damages which must be paid when the defense fails.
Third-Party Forms:
The role of insurance is to prevent the losses from falling on the insured. The loss is transferred to another entity; in this case, the insurance company. Since the contract between the insured and the insurance company benefits a third party, liability insurance is often referred to as third-party forms. Most policies pay claims to the third party directly, rather than releasing the funds to the insured.
Some claims may occur due to intentional action or even criminal action on the part of the insured. In such a case, the insurance company is seldom liable, even though they may hold a contract with the insured. In fact, the responsible party may be subject to criminal proceedings as well as suit under civil law. The difference between the two has to do with offenses committed against an individual and those committed against the state. With civil claims, the offender is not prosecuted unless such prosecution is initiated by the offended party, whereas under criminal offenses, prosecution is brought about by some aspect of our society to discourage similar conduct. In this case, the aspect of society may well be the insuring company who issued the policy.
The insurance company's obligation to pay a claim would not extend to jail time or related fines from intentional acts. The insurer's obligations only extend to the insured's obligations under civil law (those proceedings initiated by the injured party). Direct bodily injuries committed intentionally by or at the direction of the insured would not be covered, but other than such intentional acts, civil liability resulting from criminal law violation would usually be covered by the policy.
General Liability Forms:
There are, of course, different types of liability forms. The general liability insurance program is similar to many fire and inland marine programs and multi-line forms (such as homeowner’s insurance). Standard policies insert appropriate forms, which outline the common provisions, conditions and definitions which would apply to all policies under the program. Special aspects are applied thereafter, as policies are applied for.
As we know, everyone is exposed to some amount of liability, no matter how careful they think they are. The law requires people to behave reasonably, under the Prudent Man rule (doing what a prudent man would do). When they do not act reasonably, they may be held legally liable to pay damages to those injured either physically or materially. Some negligence cannot be foreseen, so even a prudent man can experience liability losses.
|
Some negligence cannot be foreseen, so even a prudent man can experience liability losses. |
Liability comes from a number of different areas. Damages to a person or property can happen due to business activities, recreational activities or personal activities. Some of the largest liability claims have resulted from the policyholder entertaining guests at their home or place of business or when permitting others to use their property in some way.
Actual Claims Result from Negligence:
Actual claims come about as the result of negligence in some form. We have all heard of the salesperson who falls on a child's toy and sues the resident (whether renting or buying) for the resulting medical bills. Successful liability claims prove negligence in some way, whether by leaving a roller-skate on the sidewalk, allowing a pet dog to bite a visitor, or committing some overt action that causes harm.
Sometimes liability results not from an overt action, but the lack of action. Failing to pick up the roller-skate would be an example of this. The renter or homeowner failed to pick up the roller-skate and this lack of action caused the harm. A dog that is not fenced in and bites someone means the owner failed to take necessary action to prevent the harm that resulted. In all cases, the insured is expected to do what a prudent man would do to prevent harm to a person or property.
Liability awards often tend to be much higher than the actual dollar loss. The amount of damages awarded will depend on the preconceptions and bias of the jury. Therefore, the type of loss and the circumstances under which it occurred often affects the amount of the award. Since the general person could not pay for large liability losses, they transfer the risk to an insurance company through the policy purchased.
Primary Underlying Policies:
Umbrella insurance takes over after other policies or the self-insured person has already paid some of the losses. Typically, there are two underlying insurances, which are usually referred to as the primary policies. Those two are homeowner’s insurance and personal automobile policies. These two policies promise the insured protection of indemnification and defense.
Ř Indemnification means the insurance company pays for claims which the policyholder is legally liable for (if not legally liable, the insurance company will not pay anything) which have resulted from the policy's covered perils, to the limit of liability amounts which have been purchased. In other words, if the insured purchased $25,000 of protection per occurrence, even if the claim amount is $40,000, only the $25,000 will be paid. Coverage will usually apply for claims resulting from activities on the insured's property, as a result of the insured's actions or as a result of the actions of an insured's home employee, such as a cook, cleaning person, or babysitter.
Ř Defense means that the insurance company who issued the policy must defend or settle any covered claim or lawsuit that is brought against the insured for property damage or bodily injury. There is often inadequate coverage purchased for defense. Once the policy limit purchased has been reached, the policyholder must cover any additional legal fees themselves. Legal fees are not limited to an attorney; they can also include investigation and negotiation of claims. Because a legal defense can easily eat up the typical $100,000 of purchased coverage, suits are often settled out of court, even though the insured may not feel they are at fault.
Terms:
Coverage & Liability:
There are two terms that need to be understood in liability claims: coverage and liability. The word coverage refers to the contractual obligation of the insurance company. It is the amount the company agrees to pay to indemnify the insured for claims brought against them, which they are legally liable for. Liability refers to the legal responsibility of the policyholder to other persons for damage done to them physically or materially. This is important to understand, because a person may be liable for a claim, but not necessarily have coverage for it, under the terms of their policy.
Regarding liability and coverage, the reverse can also occur. A policyholder may have coverage for an occurrence, but not be legally liable. Why would this be an issue? Say, for example, that good, old Uncle Charlie drinks too much. While intoxicated, he falls on the road in front of his nephew's home. Charlie was not actually on the nephew’s property, but even if he were, the nephew played no part in the fall. There was no demonstrable negligence on the part of the nephew; all the negligence was with Uncle Charlie.
Legal Liability Must Exist:
Even though the nephew has no legal liability, he feels sorry for Uncle Charlie, so he turns the claim in to his insurance company. Although he has coverage under the liability terms of his policy, there is no legal liability. Therefore, the nephew's policy will not pay for Uncle Charlie's medical bills, even if the policyholder wants the policy to do so.
Sometimes a policyholder may feel responsible for damage done to another or their property. However, if no legal liability exists, the policy will not pay. Liability policies pay only when legal liability exists.
|
Liability policies pay only when legal liability exists. |
Legal responsibility also does not hinge on insurance coverage. Whether or not one is covered for a legal liability by an insurance policy has no bearing on what may be required of the individual. If legal liability exists, the individual is responsible - with or without insurance coverage.
Insureds can be found responsible for a loss, even when no apparent liability seems to be present. This is why so many cases end up in court - there is disagreement over who is liable. Usually, there are three elements that will make the determining decision: the public's attitude towards the claim, the application of the laws of negligence in any given state, and the jury's (if applicable) opinion about damage awards.
Public Opinion:
Public opinion exists on every subject. These opinions are often what laws are formed from. For example, the public thinks it is wrong for oil tankers to allow oil spills, so public opinion and law holds them responsible. This is simplistic, but basically it is how society's views become law.
Ownership & Liability:
Sometimes people assume that not owning anything removes the need for liability insurance. What they fail to see is that liability judgments do not consider personal ownership. Whether or not one owns anything substantial has nothing to do with liability lawsuits. Where negligence exists, lawsuits will follow. It is ironic that public opinion considers those with this attitude to be especially negligent. In fact, such attitudes can often weigh heavily in favor of the injured party because it is felt that lack of coverage is an element of negligent behavior.
Besides lack of liability insurance coverage, other things will also affect society's view of liability claims. Current events often trigger higher claim awards because juries are more aware of particular circumstances or views. There is no maximum monetary limit for liability losses and no person is immune from lawsuits, no matter how careful they try to be.
News Exposure:
The news exposure given large liability awards has seemed to encourage lawsuits. More claims than ever before are being filed. There has been talk of limiting the amount that attorneys can collect, even on successful claims, as a means of limiting frivolous or excessive lawsuits against others. Certainly, attorneys would fight any such legislation. With the expectation of large rewards, lawsuits are filed even when the dispute could have easily been settled between the two parties. Jury awards in the millions of dollars are now commonplace, where once it was a rarity. Defendants are finding themselves losing everything they own to large liability awards.
When judgments are brought against a party, they do not only reflect what is currently owned. They also obligate the defendant to pay from whatever resources they may have or acquire in the future. This includes income as well as assets. Many defendants find themselves forced into bankruptcy as a result of successful liability claims.
Paying for a Legal Defense:
Even if the individual feels they will be able to prove their innocence, the costs of a legal defense can be staggering. Even after winning the case, these individuals may face years of paying off legal fees and investigative fees, as well as court costs. Winning does not necessarily mean the other party will be liable for legal fees. Often, they are not.
The Law of Negligence:
It is probably easier to maintain high insurance limits, such as an umbrella policy, than to leave oneself unprotected. Certainly, no one wants to be involved in litigation involving a negligence claim, but it happens to the most careful of people. When a person fails to meet certain legal standards regarding negligence, a successful liability claim can occur.
Successful Liability Claims:
For a successful liability claim to occur, some elements must exist:
1. The defendant must have been under some legal duty to act in a certain way to prevent harm to people or property. As previously stated, this is often referred to the Prudent Man rule.
2. The defendant must have failed to exercise reasonable care. When there is a legal duty to exercise reasonable care, it must be proven that the defendant failed to do so. When an individual fails to act in a way that avoids endangering others, that person is negligent. Reasonable care is care that an ordinary prudent person would take in similar situations (the Prudent Man rule).
3. Even if reasonable care was not taken, there was no intention to cause injury to another or their property. Of course, intentional acts causing harm to persons or property bring the issue into criminal intent, which is another matter entirely.
4. For a claim to be brought, the failure to exercise reasonable care must have resulted in loss to another. That loss can be physical or material. If no loss results from the carelessness, no claim can be brought. There must be a chain of events beginning with the negligence and ending with the loss. If there is no injured party, there is no claim of liability.
Certainly, agents need to be aware of liability opportunists. There will always be those waiting for a liability claim with the possibility of high rewards. Therefore, it is the responsibility of agents to bring this to the attention of their policyholders. Changes in how liability laws have been interpreted have resulted in larger monetary claims. Individuals are also being held to higher standards of "reasonable care."
Relaxed Standards for Evidence of Negligence:
We are seeing strong evidence that judges are relaxing the standards regarding "evidence of negligence." This means that acts or omission of acts that previously were not considered negligent in some way are now. The flow of events following an act or omission of an act is now being extended to encompass more and more. As a result, negligence is more easily proven.
Daily Risks of Life:
Daily risks of life. In the past, the courts also felt that the injured party bore more responsibility than they seem to now. In the past, a defendant could maintain that the injured party bore some assumption of risk in their daily life. While that is still true to some degree, more and more courts are putting less of the risks on the injured party and more of them on the defendant.
Dual Risk Contribution:
Dual risk contribution. Many situations bear some responsibility with more than one person. In the past, courts tended to feel that the injured party was only entitled to compensation for the part of the negligence that was not their own. For example, in the past a person who had drank a couple of beers would be considered partially at fault, even if the auto accident were proven to have been the result of another driver. Today that is not necessarily the case. Unless it could be proven that the beers had contributed, the injured party may not be considered partially responsible.
Injury Avoidance:
Injury Avoidance. Some injuries to a person or property could have been avoided if the injured party had taken some precautionary steps or action (such as erecting a fence, for example). Defendants often used this tactic to avoid liability claims. Today, the courts are much less likely to accept this defense, unless the action not taken would have been taken by a prudent man in similar circumstances.
Shared Blame - Injured Party Preference:
As we know, many liability claims are not clearly one person's fault or another. Rather, blame is truly shared by more than one person. Even when this is the case, courts are still tending to favor the injured party. Often several rules could apply, and perhaps even should apply, but the judge or jury may choose to disregard some of the rules in favor of others. Often it depends upon the exact circumstances. For example, a landowner is not liable for the public sidewalk and injuries that happen because of defects in the sidewalk. On the other hand, if a person trips due to a defect in the sidewalk, but lands on a spade left in the landowner's yard, negligence may exist for the landowner. The judge could rule that the sidewalk caused the injury, or he or she could rule that the spade caused the injury.
Absolute Liability:
One person may be held strictly liable for the damages. When this happens, it is called absolute liability. This may be done regardless of actual fault. A good example of this has to do with employees of a business. It is common for the business to be held liable for the actions of their on-duty employees, even though the business itself had not sanctioned the employee's actions.
Determining Monetary Damages:
There was a time when liability claims focused on actual dollar losses. Today there are multiple ways of construing losses, with actual dollar loss being only one of them. These additional losses, which are hard to place a monetary value on, are often referred to as general or punitive damages.
Jury Awards:
Juries were not always desired for liability claims, but today they nearly always are. Juries tend to favor higher rewards than do judges. Today, a jury trial on a liability claim strikes fear in the hearts of defendants and their attorneys. There is no assurance that juries will be fair or even impartial when determining monetary damages. How each jury member feels will depend upon their life experiences and their attitudes about the people involved. Prejudices will exist based on a multiple of past experiences and personal interpretations. Juries are, after all, composed of people who have been fired from large companies, faced hard financial times, and felt injured at the hands of others. Each of these experiences will make their imprint and shape their personal views.
Insurance companies face especially hard situations when a jury is involved. People commonly feel that insurance companies have "deep pockets," as the saying goes. Most people carry various types of insurances. They often feel they pay out too much money personally, so they reason that these insurers must have lots of extra cash laying around. If the injured party evokes sympathy, it is easy for the jury members to feel that the insurance company can afford to give them a big settlement. This often happens even when the jury members do not necessarily feel the defendant was negligent. If the defendant has an insurance company to pay the loss, juries are especially apt to award large settlements.
Juries may simply want to punish a defendant whom they feel was negligent, or at the very least, unlikable. It is not unusual for people (who make up juries) to desire to punish another for an act they feel is selfish, thoughtless, or unfair. Sometimes, members of the jury simply like the feeling of power they have in the case.
Of course, we seldom really know the reasons for large settlements that seem unusually harsh or unfair. Jury members often do not say why such awards were reached, especially if they feel that stating their reasons will bring about criticism.
Payment of damages can involve multiple things, including specific damages for losses that occurred, such as medical bills; general damages, such as pain and suffering; and the dreaded punitive damages. Punitive damages are generally considered to be a statement of punishment.
Umbrella Liability Insurance:
As you can see, the need for strong liability protection certainly exists. In past times, it was hard to identify specifically who needed liability coverage beyond the normal limits. Unfortunately, consumers often mistakenly believe that their homeowner and auto policies are adequate if the simple bare minimums are included. A man who has $100,000 in liability coverage per occurrence may feel that he carries a sizable liability limit. He fails to realize how high awards have become in recent years. He fails to realize the risk involved. It is the job of the insurance agent to point this out to him for his protection and the protection of his family.
Umbrella liability insurance forms are becoming more common among the various insurance types. With the rising number of lawsuits, consumers are becoming more concerned with their personal liability risks. Umbrella liability is a contract that fills the gaps in liability protection associated with basic coverage's or self-insured retentions. Basically, they extend the insured's liability protection beyond what he or she would otherwise carry. They can be either stand-alone policies or an extension of existing policies.
Before Umbrella coverage is purchased, the consumer must typically have other insurance already in place. Those required usually consist of comprehensive general liability insurance with limits of at least $100,000/$300,000; $100,000 property damage liability insurance; automobile liability insurance; bailee liability insurance; and at least $100,000 of employers' liability insurance, if it applies. For self-insured or uninsured exposures, most insurance companies require the insured to absorb at least $25,000 on the loss before they pay. This amount may be less in some cases under some circumstances (such as small business enterprises). Of course, there are going to be wide ranges in the amount of premium charged.
Excess Coverage:
Umbrella coverage is excess coverage in three areas:
1. it provides higher limits than the other coverage's would;
2. it covers exposures not otherwise covered in other policies; and
3. it provides automatic replacement for existing coverage's which have been exhausted or reduced by losses.
Umbrella policies may be written on individuals as a separate policy. This would usually be done for individuals who are business executives experiencing liability exposures, professional people, and entertainers. Even when the policy is on an individual, they must first buy basic personal, auto, and aviation (when applicable) liability policies.
End of Chapter 3