Added protection against catastrophic lawsuits
Sports and recreation organizations purchase Umbrella/Excess Liability insurance to protect against catastrophic lawsuits that exceed the liability limits of underlying policies such as General Liability, Business Auto, and Employers Liability (Coverage Part 2 under Worker’s Compensation). Umbrella/Excess policies can provide additional peace of mind and should be considered as part of a comprehensive insurance program. At a minimum, sports and recreation organizations should at least get a quote for an Umbrella/Excess Liability policy just to find out the cost.
In the past, Umbrella Liability policies provided broader coverages than Excess Liability policies. Today, however, most Umbrella Liability forms are watered down to provide only slightly broader coverages than Excess Liability forms. The important thing to remember is that there is usually only a slight difference between Umbrella Liability and Excess Liability with regard to the true protection provided.
As an example of how an Umbrella/Excess Liability policy increases the limits of an underlying policy, assume that a sports or recreation organization carries an Umbrella/Excess Liability policy with a limit of $1 million. Also assume that the same organization carries a General Liability policy with an Each Occurrence Limit of $1 million and a Business Auto policy with an Auto Liability limit of $1 million. In this example, the total limits of coverage to respond to a claim would be $2 million for General Liability type claims and $2 million for Auto Liability type claims.
3 Main Purposes of a True Umbrella Liability Policy
- Increase Limits of Coverage. An Umbrella provides additional limits of coverage over and above the underlying General Liability, Auto Liability, and Employers Liability policies. Before this excess coverage is provided, the insured must maintain the underlying policies at a certain limit of liability to coordinate with the Umbrella policy requirements. The most common underlying limit requirements are as follows:
- General Liability: $1 million Each Occurrence; $2 million General Aggregate; $2 million Products /Completed Operations Aggregate; $1 million Personal/Advertising Injury
- Business Auto Liability: $1 million per claim
- Employers Liability: $500,000 Each Accident; $500,000 Disease – Policy Limit; $500,000 Disease – Each Employee
Coverage can be customized to increase the limits of all or just one of the above underlying policies. For example, some organizations may choose to only purchase an Umbrella/Excess Liability policy to increase the limits of their General Liability policy.
- Drop-down Coverage: This feature is provided in case an underlying policy’s aggregate limits are exhausted. In such a circumstance, an Umbrella policy will drop down and pay for covered liability on a primary basis. For example, assume that an underlying General Liability policy has an Each Occurrence limit of $1 million and a General Aggregate limit of $1 million. During the policy year, the General Liability policy pays a $1 million claim and then has another claim of $500,000. The Umbrella policy will drop down to pay the $500,000 claim.
- Broader Coverage: The Umbrella offers broader coverage for certain liability risks that are not covered by the underlying policies. This usually occurs when the Umbrella policy has fewer or narrower exclusions than the underlying policy. For example, a General Liability policy may exclude liability arising from non-owned watercraft 26’ or more in length, whereas an Umbrella policy may exclude liability for non-owned watercraft 51’ feet or more in length. Therefore, an Umbrella Liability policy may pick up a claim arising out of a non-owned watercraft between 26’ and 51’ in length. The broader coverage feature is usually subject to a self-insured retention, which is similar to a deductible. Self-insured retentions are typically $10,000 and must be paid out of pocket before the broader coverage feature will respond.
A true Umbrella Liability policy provides coverages under 1, 2 and 3 above, whereas an Excess Liability policy only provides coverages under 1 and 2.
Both Umbrella and Excess Liability Policies May Provide Narrower Coverage Than Underlying Policies
In the context of sports and recreation organizations, it’s common for Umbrella and Excess policies to have exclusions that are not found on the underlying General Liability policy. The most common examples of such exclusions include Non-owned and Hired Auto Liability (if endorsed onto General Liability), Sex Abuse and Molestation and Brain Injury/Concussion. However, the Umbrella or Excess Liability carrier may provide a buy-back for these common exclusions.
Limits and Pricing
Umbrella/Excess Liability policies may be purchased in increments of $1 million. Each increment is subject to a minimum premium ranging from $500 to $2,500 depending on the carrier. The actual premium may be higher than the minimum premium depending on the loss exposures. The most common premium basis for exposures to loss includes number of participants, number of teams, payroll of employees, revenues, number of vehicles, etc. Umbrella/Excess Liability quotes are often expressed as a percentage of the underlying premiums. For example, some policies are priced at a rate of approximately 20% of underlying premiums for the first layer of $1 million. Further discounts may be applied to each additional layer of $1 million due to the decreasing probability of a claim breaching the additional limits.
How High A Limit Is Needed?
There is no definitive way to answer this question. Factors to be considered include the value of the assets at risk, exposure units creating the risk (ex: the greater the number of participants, the greater the chance of a catastrophic injury and resulting claim), recent court cases, limits carried by peer organizations of similar size, affordability, and the particular severity risks that are faced by a sports or recreation organization (ex: transportation of participants, sex abuse/molestation).