Safe Solutions

A commercial umbrella liability policy is one of the most important forms of coverage in a roofing contractor's insurance program. In recent years, this policy has become more difficult to obtain and more expensive; however, the policy is necessary to protect your business against catastrophic liability claims and can be a requirement for bidding jobs.

A necessity

Many roofing contractors believe a commercial general liability (CGL) policy gives them enough coverage. However, you may only be able to purchase a $1 million to $2 million CGL policy. Because of the litigious nature of our society and jury verdicts that often result in multimillion dollar liability awards, companies are compelled to purchase an excess policy or umbrella liability policy.

CGL policies contain an aggregate limit provision, which means that once the limit is reached for the payment of claims, no coverage remains for the rest of the policy year.

This is where an umbrella policy is helpful. In general, an umbrella policy:

• Extends the limits of the underlying liability policies, not just the CGL
• Replaces the underlying coverage when the underlying aggregate limits of liability have been exhausted
• May provide broader coverage in some areas than underlying policies but is subject to a self-insured retention amount, an amount for which the insured is responsible
• Is triggered by covered bodily injury or property damage

There is a difference between an excess policy and umbrella policy. An excess policy provides coverage with the same terms as the primary or underlying policy but at higher limits. An example would be a $5 million excess of a $2 million underlying products liability policy. An excess policy never is broader than the underlying policy, whereas an umbrella policy can provide broad blanket excess liability coverage above a contractor's schedule of underlying policies (such as auto liability, employer liability and professional liability). An umbrella policy also may provide coverage for certain claims not covered by underlying policies. Sometimes, a specific coverage feature in an umbrella policy is more restrictive, such as the pollution exclusion being absolute, which provides narrower coverage.

Features

When an underlying policy's aggregate limit is exhausted through payment of claims, the umbrella policy becomes the primary insurance, covering defense, indemnity (money the insurer pays on your behalf for damages for which you are legally liable) and related expenses.

For claims not covered by the underlying policy but not expressly excluded in the umbrella policy, there would be no underlying coverage. You would pay a self-insured retention amount, which acts as the underlying amount. You share in the loss payment because there is no underlying coverage.

Because of the relative newness of umbrella policies, pricing and wording still are not standard. However, the American Association of Insurance Services has developed a program for this coverage with a standard policy form.

Key areas

Several areas must be addressed with regard to an umbrella policy:

• Make sure the definition of insured and notice requirement tracks with the CGL policy.
• The umbrella policy should contain the insurer's obligation to defend the insured in a suit brought by a third party in the policy terms and conditions. The duty should apply when no underlying insurer is obligated to defend and one of the underlying insurance limits has been exhausted.
• Regarding the definition of contracts and contractual liability, it is best only to rely on the definition in the primary policy.
• Be sure to maintain underlying insurance as scheduled when the umbrella policy is written. Noncompliance may leave you uninsured for the difference between the limit actually maintained, if any, and the limit that should have been maintained. A potential gap could occur if all policies do not renew on the same day.

Review

Because there are a lot of policy forms in the marketplace and rates are high, take the time to review your umbrella policy with your broker or agent to ensure you have the best possible coverage you can afford.

Leslie Kazmierowski, CPCU, is NRCA's insurance programs manager.