An important feature of an umbrella policy is the schedule of underlying insurance. This schedule is usually located near the front of the policy. It is a listing of the primary policy or policies over which the umbrella or excess policy provides excess coverage. The schedule can be included in the declarations page or attached as a policy endorsement.
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The schedule of underlying insurance will list such information as
the name of the underlying insurer;
the type of coverage provided by the underlying insurer, e.g.,
o general liability,
o commercial auto liability, and
o employers liability;
underlying policy numbers;
underlying policy limits, including
o each occurrence,
o personal/advertising injury, and
o aggregate limit(s); and
self insured retentions applicable to the underlying policies.
The schedule of underlying insurance contains critical information regarding the primary policies. If any of this information is incorrect or missing, coverage gaps may occur.
An umbrella insurer issues an umbrella policy on the condition that the insured has obtained and will maintain the required limits of underlying coverage. This is typically specified in the “maintenance of underlying insurance” provisions. Such provisions typically state that the insured will maintain the coverages and limits that exist on the policy inception date throughout the policy period. If the insured does not comply with these requirements, modern umbrellas contain provisions saying the umbrella will apply as if the underlying insurance had been maintained. Suppose, for example, that the insured was required to maintain at least $1 million in primary liability insurance. If, to save premiums, the insured reduces its primary policy limit to just $100,000, the umbrella policy will continue paying losses above $1 million as if the full amount of the underlying limit had been maintained. This means the insured suffers a $900,000 coverage gap and must pay all damages between the reduced limit and the original attachment point of the umbrella.
Without a provision saying the excess or umbrella policy will apply as if the underlying insurance had been fully maintained, the excess insurer would be subject to increased risks if any of the underlying limits are lower than the limits that the insured warranted. In such instances, the automatic drop down provisions may make an affected excess or umbrella insurer liable for loss that these underlying policies would no longer cover. However, since the insurer’s premium was predicated on the
existence of a specific amount of underlying coverage, it would be inequitable for the excess or umbrella insurer to bear such loss.
An insured that fails to purchase the required limits of underlying insurance is doing itself a
disservice. It is putting its insurance program at risk. The umbrella insurer is requiring a certain
amount of underlying insurance based on statistical information. The insured may lack this
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