By Ken Hager, COO

Do You Have Enough “Sleep Insurance”?

I am often asked what is the proper insurance limit a company should purchase: $1,000,000? $5,000,000? $10,000,000? Or perhaps no umbrella at all? What do you think a proper limit should be? There is no easy way to answer that question, and one size definitely doesn’t fit all. Think about this question, pick a number, and write it down now before you read the rest of this article. To help you make that very personal decision, I thought it appropriate to discuss what an umbrella is and what it isn’t and share some unusual claims that we have experienced through our umbrella program.

An umbrella in simplest terms refers to additional limits (known as excess limits) of liability insurance to protect you from catastrophic claims. An umbrella will typically afford you higher liability limits over your primary liability policies, also known as your underlying schedule. It is important that you review all of your liability policies, which may include general liability, automobile liability, foreign liability, professional liability, directors and officers’ liability, employer’s liability, employment practices liability, and perhaps liquor liability depending on your business exposures. A general rule of thumb is when purchasing an umbrella, you list any and all primary liability policies on the “underlying schedule.” If you have a policy, say directors and officers, and it isn’t listed on the umbrella liability schedule, then you will find yourself with a gap or no additional liability limits than the primary policy.

Why is this important? As I explain to my clients, an umbrella policy is basically “sleep insurance,” peace of mind knowing that in the event of a catastrophe, you have enough dollars to pay against any claims rendered. Most people understand that a bad auto accident can eat through a million dollars of automobile limits pretty quickly, especially if there are fatalities. Many of the claims we see are due to this very issue and is one of the driving (pardon the pun) forces of claims against a business. But if, for example, you are a community association and have a board of directors, you have an exposure that needs to be listed on the umbrella liability schedule for the umbrella policy to be effective. If you have purchased any of the types of liability previously mentioned, then you have already recognized the fact that your company has a real exposure that could affect you at any time.

Let me give you some atypical umbrella claims—real examples that we’ve paid out on behalf of our insureds—to help you get a better feel for what types of exposures may face your company that you probably never gave a second thought to:

• Building blew up due to alleged gas leak. Three fatalities. Removal of an oil tank while digging for a replacement gas line caused an explosion. Suit brought against property manager, building owner, PSE&G and contractor. Our insured building owner was found liable for$1.65 million. Underlying policy paid for defense costs and primary limit of $1,000,000; umbrella policy for building owner paid $650,000.
• Claimant dove into pool and was severely injured. After the incident, local inspectors deemed the pool was indeed unsafe and violated code. Pool was closed. Umbrella paid $1,187,000.
• Claimant was walking down stairs of insured’s building when railing came off of wall. At the time of the incident, claimant was found to be legally intoxicated from tests taken at hospital. Claimant suffered a broken ankle and leg. Jury found in favor of claimant and was awarded $2.3 million; umbrella paid $1.3 million.
• Claimant dove into pool and sustained a fractured neck. Allegations of improper depth markings, improper lighting and lack of signage. Our insured was found liable for $3,900,000, of which the underlying policy paid out$1,000,000 and umbrella paid out $2,900,000.
• Two children in an apartment building were taken to the hospital with alleged mercury poisoning. Insured hired a contractor to replace all of the old thermostats in the building, which had mercury switches. However, instead of following the law with proper disposal methods, contractor placed the thermostats in the dumpsters while the children were outside playing. One of the children got severe mercury poisoning and recovered; the other 13-year-old child suffered permanent physical and mental impairment and will be impaired for life. Building owner’s share of liability was $5,000,000, of which umbrella paid out $4,000,000.
• Unit owner was burglarized and subsequently shot during the burglary. Allegations of inadequate security, failure to provide safe premises and improper lighting. Claimant awarded $5.2 million, of which the umbrella picked up $4.2 million.
• Boy on bike struck and killed by vehicle on sidewalk at entrance to association. Father was seriously injured as well. The allegation was obstruction of view and failure to maintain/regulate entrance landscaping and signage at entrance to association. Hedges at entrance way were twice the height allowed by code; stop sign was shorter than required by code. Jury verdict of $12 million, of which association was found 30 percent at fault, property manager 60 percent, and driver of the vehicle 10 percent. Due to the fact that the property manager was listed as an additional named insured on the association policy, umbrella paid $11,870,000.

These are just a handful of what we call atypical claims that most people wouldn’t contemplate when deciding on whether or not to purchase an umbrella and, if so, for what dollar amount. Unfortunately, we have multiple claims for inadequate security, obstruction-of-view claims, quadriplegic pool accidents, trip-and-falls and other atypical as well as typical claims. As a result, we always recommend that clients price out limits and purchase the highest affordable limit that they can budget for. Our umbrella program that we manage nationwide can offer from $1,000,000 to $100,000,000 in limits at very reasonable prices.

Now please take a look at the number you wrote down when you started to read this article and compare it to the number currently in your head. Is it the same? We hope that your company never faces tragedies like the ones outlined here, but we recommend you prepare yourself adequately just in case. Do you have enough “sleep insurance”?