Coordinating Persons Insured in Primary and Excess Liability Policies
Richard Rudolph | February 1, 2001
Coordination of an umbrella or excess liability policy with an underlying liability policy is a bit more complex than just obtaining a concurrent policy term and a correct schedule of underlying insurance. All too often, we assume that the umbrella/excess policy will follow the form of the underlying coverage, and we fail to pay adequate attention to exactly how coverage follows the various insureds from the underlying coverage into the umbrella/excess coverage.
There are three important points to review when coordinating an underlying liability policy and the umbrella/excess policy: who are the named insureds; how are additional insureds handled; and how does any "insured-versus-insured" wording read.
Past/Unnamed Entities
The named insured wording in the standard liability policy is broad and can be made even more so through a comprehensive schedule of entities or through the so-called omnibus named insured wording. An example would be "ABC Company and its subsidiaries, divisions, and affiliated or associated entities, as currently exist, as existed in the past, or as hereinafter constituted," or some similar wording to the same effect
The standard liability policy also contains an exception to coverage for past entities and unnamed partnerships or joint ventures. It is always prudent to remove any past entity exclusion or exception when a past entity is to be covered in the underlying liability coverage. However, it is hazardous to use the "omnibus" named insured wording alone without modifying the standard unnamed partnership/joint venture exclusionary wording. It is reasonable to assume the coverage exception would still apply because the "unnamed" partnership or joint venture included in the "omnibus" wording is not named specifically in the named insured wording. That difficulty can easily be solved by specifically naming all partnerships and joint ventures as part of the "omnibus" named insured. An example of such wording would be "ABC Company, Inc., CBA Partners, a general partnership, and their subsidiaries, divisions, etc."
This good work and attention to detail becomes wasted, though, when we assume that the umbrella/excess policy insured wording follows the form of the underlying liability policy and the umbrella/excess policy is not examined for exclusionary or exception language which would bar coverage for unnamed entities (past entities, partnerships, or joint ventures). If the umbrella/excess policy simply identifies the named insured as the "lead" or first named insured on the underlying liability policy, any past entity or any partnership or joint venture remains unnamed on the umbrella/excess policy, and the exclusionary or exception wording would be activated.
Thus, care must be taken in assuring that the full named insured wording provided on the underlying liability policy is also duplicated on the umbrella/excess policy. Further, any exclusionary wording or coverage exceptions must be removed or restricted so as to not apply to the full named insured wording, creating a contradiction between named entities and specific exclusions or exception language for those types of entities. While the issue of conflicting policy terms would likely be resolved in favor of the insured, reaching that solution will probably require litigation and will delay any settlements.
Changes in Underlying Coverage
A second problem arises when we assume that the umbrella/excess policy provides following-form coverage for any additional insureds added to the underlying policy after that policy's inception date (including entities added by means of "automatic" or "blanket" additional insured endorsements to the underlying policy). A few umbrella/excess policies carry a provision rendering the policy void if the underlying coverage has been changed. While this provision protects the underwriter from post-policy issuance reductions in underlying coverage, it can be used against an insured by an underwriter who maintains the simple endorsement of an additional insured is a change in underlying coverage that serves to void the umbrella/excess policy. Most insurers do not hold that draconian interpretation, but the time to find out is not after the claim has occurred.
This problem can easily be avoided by requesting that the underwriter remove the provision for changes in underlying coverage (probably not very likely) or provide an endorsement stating that the endorsement of an additional insured on the underlying policy does not constitute a change in underlying coverage for purposes of the change in underlying coverage provision.
"Insured-versus-Insured" Exclusions
Lastly, some umbrella/excess liability policies have an "insured-versus-insured" endorsement. This provision protects the underwriter from financing an internal squabble between related entities. However, with the addition of outside or third-party entities as additional insureds, it may serve to reduce or eliminate coverage when a loss occurs which happens to involve the named insured and one of the additional insureds.
For example, Company B is performing work for Company A at their office site, and Company A requires Company B provide them with additional insured status. Across town, well away from the site, a vehicle owned by Company B negligently strikes a vehicle owned by Company A. When Company A files a claim against Company B, the umbrella/excess insurer denies coverage because Company A is an insured, citing the "insured-versus-insured" exclusion. Clearly, such a denial does not conform with the underwriting purpose behind most "insured-versus-insured" exclusions, but some of these exclusions are worded broadly enough to support denials of this kind.
If the umbrella/excess policy contains "insured-versus-insured" wording, this difficulty can be solved by requesting the wording be amended to read "named insured-versus-named insured." Since additional insureds are not "named" insureds according to the "Who Is an Insured" provision, this modification of the "insured-versus-insured" wording maintains the intent of the exclusion and protects the parties appropriately.
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