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E&O Tips: Writing Umbrella Coverage on a PAP

Exposure for professional liability claims involving umbrella policies can be substantial, but a few simple risk management steps can greatly reduce the chances of a professional liability claim succeeding.
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The alleged failure to properly offer and procure umbrella coverage on a personal auto policy is a growing source of professional liability claims for large agents. However, you can mitigate your exposure with basic risk management practices, which can reduce the risk of such claims being successful. 

One trend affecting agents concerns offering umbrella coverage. For example, a policyholder has an umbrella policy, but that policy does not have coverage for uninsured/underinsured motorist exposure. The policyholder is then in a car accident and suffers a catastrophic injury, such as paralysis. The at-fault driver has low liability limits or no liability insurance, leaving the policyholder with inadequate means to recover damages commensurate with their injuries.

Not surprisingly, the policyholder often blames their insurance agent for failing to procure such coverage. Without documentation, it can become a swearing match between the agent and customer as to whether the proper coverage was ever discussed, offered or recommended.

There is often a large amount of money at stake, which can lead to sizeable claims. In today's environment, many jurors look sympathetically upon the policyholder and regard the work of the insurance professional with great skepticism. But simple documentation can greatly reduce the chances of an errors & omissions claim succeeding. To do so, agents must:

1) Check for signatures. Always make sure the insured's signature is on the application. You should also verify the insured's signature is on all renewal applications. Applications and renewals are often sent over the internet and not in paper form.

2) Print hard copies. Simply printing the application, having the insured sign it and keeping a copy for your records can go a long way in successfully defending against a professional liability claim. This practice provides evidence that the insured was aware of the coverages and limits they applied for.

3) Document discussions. Any time you and the insured talk about modifying UM/UIM coverage on an umbrella policy, either in person or on the phone, document it to the insured in writing. The summary should include an estimate of what it would cost to add UM/UIM to the policy.

Documenting your efforts with these three simple steps can be powerful evidence that the insured was offered proper coverage and chose not to purchase it. This documentation could well be the difference between a defense verdict in favor of the agent and a very substantial jury verdict in favor of the insured.

Another problematic issue with the procurement of an umbrella policy occurs when the customer obtains the primary auto coverage from a different agent and carrier. This often arises when the insured adds a boat, motorcycle or additional auto for a young driver. The umbrella policy often requires a certain level of primary auto limits before it attaches.

For example, the insured originally obtains both the primary auto policy and umbrella policy from your agency. The terms and conditions of the umbrella policy require primary policy limits of $500,000, which is what the insured purchases. Next, the insured purchases $50,000 in coverage for his new motorcycle through another agency. Then, the insured is badly injured in a motorcycle accident. There is a gap of $450,000 between the primary motorcycle policy limits and the amount at which the umbrella policy attaches.

Here are three steps to reduce your professional liability exposure in this example:

Step 1: Require the insured to provide you with a copy of the current primary auto policy before the umbrella policy is obtained.

Step 2: Review the primary policy limits and make sure it complies with the requirements and attachment point of the umbrella policy. If it does not, inform the insured and document your discussion.

Step 3: If the umbrella policy you obtain requires the primary policies it covers to be specifically listed, you need to flag this file for every renewal. Too often, insureds move primary coverage to another carrier but fail to report the changes to the umbrella carrier, thereby negating the umbrella coverage over the changed policies.

Exposure for professional liability claims involving umbrella policies can be substantial, especially in terms of the amount of money at risk. The good news is that a few simple risk management steps can greatly help to reduce the chances of success of a professional liability claim made against the agent.

The most crucial step is to make sure appropriate documentation is obtained and reviewed for each policy year while confirming any rejections of offers to procure additional coverage. This documentation can mean the difference between a successful and unsuccessful defense.

Brian Butcher is a vice president, claims expert with Swiss Re Corporate Solutions and teleworks out of the office in Kansas City, Missouri. Insurance products underwritten by Westport Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions.

This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re") and/or its subsidiaries and/or management and/or shareholders.