How Umbrella Policies Started Part 2: the First Umbrella Forms

Broad Form Excess Liability

Lloyd's of London is known to have insured U.S. organizations on a broad, blanket form of excess liability insurance from at least 1934. The "official" standard following form of excess public liability wording was known as the "TP" form, which was approved by Lloyd's Nonmarine and Fire Underwriters Association (NMA) by 1938. The alternative type of coverage that was written excess of a self-insured retention (SIR) or underlying insurance (or a combination of the two) came to be known as "blanket catastrophe excess liability."

While some underwriters at Lloyd's preferred coverage that applied only to accidental losses, there were other underwriters willing to extend blanket coverage to legal liabilities of the assured without relying on the word "accident" to trigger the coverage. Both types of coverage were offered and appear to have been purchased by a variety of large U.S. companies. The "TP" excess contracts generally applied to accidental losses only, while the Broad Form contracts generally were applicable to occurrences.

The contrast with U.S. liability forms was dramatic. Because of the conservatism of regulators such as the National Association of Insurance Commissioners (NAIC) and insurers' National Bureau of Casualty Underwriters (NBCU), separate policies had to be purchased for each hazard (or type of liability risk) a business wished to insure. Sometimes there also were separate liability policies for each location at which the insured conducted operations.

Each policy was a "schedule" contract, meaning that it insured only the risks (operation or location) described in the exposure schedule in the policy declarations. The scope of coverage in these policies was changed little from the coverages that had been available in 1915, and they continued to apply only to bodily injury. Insurance companies licensed to write "accident" insurance issued the policies. When property damage liability coverage was introduced, it was often written for identical hazards but on separate policies from the bodily injury coverage.

The problem of determining how many policies a business needed to purchase was further complicated by the need for higher limits. If a primary insurer could not provide the amount of excess coverage a business required in a single contract, the insured might be required to purchase separate excess policies over each of the primary policies. This was especially common in automobile insurance, because of the number of insurers that reportedly would not offer more than the minimum financial responsibility limits of coverage. It is easy to imagine how coverage for a particular hazard required at a single location could be overlooked. Even worse was the problem of purchasing coverage for the wrong hazard at a location, when coverage would have been available if the insured or the agent had correctly identified the exposures.

The blanket catastrophe excess liability policy marketed at Lloyd's solved the problem of overlooking a location or inadvertently not buying an essential type of insurance. Basically, it covered all of the "assured's" legal liability exposures on a broad "occurrence" basis, with only a few exclusions. It was an indemnity policy, subject to an SIR of at least $25,000 per accident, or the limits of any other underlying insurance available to the assured.

There was no primary duty to defend, because of the SIR, excess, and indemnity nature of the contract. This was a minor point, since legal expenses were only a small part of total claims costs until the 1970s.

Emergence of CGL Coverage

In the 1930s some forward-thinkers in the U.S. insurance industry began to realize how needlessly complex primary liability insurance had become. A blanket, or comprehensive, form of liability insurance was needed that would cover all primary liability exposures for an insured organization's locations and business activities under a single policy.

The leading proponent and spokesman for the blanket liability form of coverage was insurance lawyer E.W. Sawyer, who was hired as the attorney for the National Bureau of Casualty Underwriters (NBCU) in 1939. He was a prolific writer and speaker, and it was rare for a month to pass without seeing an article about or by him in one of the insurance trade journals. He began advocating the creation of a standard blanket or comprehensive liability coverage form in the mid-1930s.

The basic concept of the blanket liability coverage form was simple: Provide coverage for the insured's legal liability for injury or damage except as specifically excluded. After several years of discussion and development, the draft coverage form was introduced for trial on the Pacific Coast in late 1939. The NBCU released the form for use nationwide in January 1941 under the label of "comprehensive general liability (CGL)" insurance.

The first CGL insurance policy form only provided automatic coverage for bodily injury liability. Property damage liability coverage was optional. It would be some time before CGL forms automatically included property damage liability. Covered injuries or damage had to be caused by an accident during the policy period.

Although the standard CGL forms only covered injuries or damage "caused by accident," large companies and sophisticated insurance brokers often requested endorsement of the CGL policy to substitute "occurrence" for "accident" as the coverage trigger. This became particularly common in the 1950s. Although there was usually little underwriting resistance to the request for occurrence bodily injury coverage, there was less willingness to grant the request for property damage liability.

NBCU, which later became Insurance Rating Bureau (IRB) and then Insurance Services Office, Inc. (ISO), issued subsequent major revisions to the CGL policy forms in 1943, 1955, 1966, 1973, and 1986. The 1966 version of the CGL insurance form was the first standard primary coverage form that applied to occurrences instead of accidents.

The coverage changes in each of the revisions, especially in the wording of exclusions, are extremely important because of their relationship to the scope of coverage provided in stand-alone excess and umbrella forms. Although we will not discuss the differences in these forms here, we will need to refer to differences between the wording of some standard CGL terms and umbrella policies in later articles in this series.

By the 1950s, businesses most often purchased CGL policies instead of the older forms of schedule hazard policies. Since the late 1960s or early 1970s, schedule liability policies have most often been used to carve out more hazardous risks from CGL policies, to price and insure them separately in specialty markets. There is no logical or economic reason why a business should seek or prefer schedule liability policies if CGL coverage is available.

Post-War Catastrophe Concept Changes

Before World War II, the concept of a "catastrophe" was limited by imagination, limited amounts of historical damage awards, and other social factors. While events (usually lumped under the label of "accidents") involving multiple deaths were not uncommon, most organizations did not perceive a need for insurance that would provide coverage.

The most frequent multiple-death events involving potential public liability in the years before World War II were fires, elevator drops, and railroad accidents. Floods, storms, earthquakes, and similar acts of God were not subjects of public liability insurance.

After World War II, many brokers and insurance buyers began to recognize that hazards in chemical manufacturing and other industries could easily exhaust primary aggregate limits. The massive Texas City, Texas, explosion of August 1947, which caused 570 deaths, resulted in much published commentary on this problem.

During the war years, hundreds died in fires at the Coconut Grove nightclub in Boston (1942) and the circus tent fire in Hartford (1944), further illustrating the range of potentially catastrophic exposures that existed. After the first individual liability award of more than $1 million, around 1961, it became obvious that virtually all businesses (and many individuals) needed higher limits than they had purchased in the past.

Blanket excess policies above underlying insurance and an SIR were more widely known by the late 1940s. Although available sources do not indicate that there were many more markets for the coverage, insurers that provided the coverage were increasing the volume of this business as well as the available limits.

Excess policies often required that underlying insurance limits be reinstated if exhausted by claims. However, as occurrence coverage became more widely used by large companies, insureds, brokers, and underwriters all recognized that it was possible for covered occurrences to take years to be recognized and exhausted. If this happened, it would not be possible to go back to a primary insurer after expiration of the policy and reinstate primary aggregate limits. The solution developed for this problem was that excess liability policies should be able to "drop down" to afford coverage after exhaustion of primary aggregate limits.

No policy then existed that could solve all of the following problems.

• Extend primary coverage limits up to provide high limits of catastrophe liability insurance, over most common forms of underlying insurance.
• Extend coverage out to encompass primary self-insured or uninsured risks.
• Drop down to replace primary coverage, if primary limits were exhausted.

The first two problems had been addressed for many years by the broad form excess liability forms available from Lloyd's and other insurers. No form yet addressed the third problem in the late 1940s.

Introduction of the First Umbrellas by Lloyd's

Lloyd's of London faced many restrictions to selling insurance in the United States after World War II, especially in New York, which was one of the most important insurance centers for American companies. The London market could only provide insurance to American companies that American insurers either would not or could not provide. Broad excess liability coverage, in effect an orphan in the American market, was ideally suited to the need at Lloyd's of providing an unconventional coverage for the American market.

In the late 1940s, Walter Smith was a senior vice president in charge of the casualty department at Marsh & McLennan's New York office. He is believed to have been instrumental in perceiving the need for adding "drop down" coverage to the broad form excess liability policies that Marsh was involved in placing at Lloyd's for its largest clients. George Bardes, a coverage technician who worked for Smith, also reportedly worked on solving the problem of how the existing excess forms should be modified to provide "drop down" coverage.

Although there were a number of capable Lloyd's brokers who placed broad form excess coverage in the 1940s, Marsh worked to develop special relationships for its clients to differentiate itself from other U.S. brokers. One of the specialists they worked with during the 1940s was the George H. Forster Company in Montreal (a retail broker), which had relationships with Lloyd's broker Price Forbes through its Canadian correspondent office, Lukis Stewart Company (acting as a wholesale broker). Lukis Stewart eventually purchased the Forster Company around 1946, and thereafter operated Forster as a division of Lukis Stewart. Guy de Repentigney, Ernest Shannon, and James E. Fraas were the key individuals at Lukis Stewart/Forster who provided the link between Marsh in New York and Price Forbes in London.

Although there are a number of senior brokers at Price Forbes who may have worked on the emerging umbrella policy form, the key men responsible for finalizing details of the coverage and negotiating its terms with underwriters at Lloyd's were most likely Victor Hannaford and Philip G. Spooner. Although we do not know all of the Lloyd's underwriters who participated on early umbrella placements, two of the most prominent leaders who have been mentioned as having substantial lines are Eric Squire of C.E. Heath and Julian Huxtable of the Sturge Syndicate.

The first of the new "broad form third-party excess liability" coverage forms was quoted in 1948 for Gulf Oil Company, which already purchased broad form excess coverage from Lloyd's under the then-common coverage form. Although Gulf did not accept the new form in 1948, it was accepted in 1949. Gulf Oil thus became the holder of the first known Lloyd's umbrella policy, effective June 1, 1949.

Rapid communication with London was conducted by transatlantic cable at that time, and the charges applied per word. Although the coverage was initially called "broad form third-party excess liability," eventually it was shortened to "umbrella," because it was an easier, less costly shorthand term to use in cables.

Details about the placement were known to only a few people at the time. Marsh personnel must have realized that the new form, broader than any other form of liability coverage then available in the world, was a huge competitive advantage in placing insurance for its largest clients. By offering the coverage selectively and keeping quiet about the details, Marsh effectively had an "exclusive" on the umbrella coverage form. This advantage for Marsh lasted until about 1955 or 1956.

One of the ways Marsh and Price Forbes are believed to have held their exclusive advantage over umbrellas in the early 1950s is through the use of one or more "line slips" with their leading underwriters, giving Price Forbes umbrella placement authority for specified types of risks. Since the "following" underwriters at Lloyd's relied on the lead underwriter to set the rate, only a few lead excess liability underwriters specializing in North American risks controlled the market for the coverage.

Even though there is no known written agreement, Price Forbes had exclusive control of the umbrella market (as distinguished from other excess liability forms then in use), as the underwriters apparently did not entertain umbrella submissions from other Lloyd's brokers. Access to Price Forbes in London for these placements was exclusively through their business affiliates in Montreal, the Forster division of Lukis, Stewart (the Price Forbes branch correspondent), and they in turn only accepted umbrella submissions from Marsh & McLennan in New York.

Although having an exclusive market for the broadest liability coverage in the world would excite any broker who still draws breath, it did not result in a flood of umbrella submissions by Marsh clients. Growth of the business was slow at first. Only 1 umbrella policy was issued in both 1949 and 1950, followed by 11 in 1951, and 29 in 1952. By 1956, 141 policies were issued, the first year in which more than 100 clients received umbrella coverage.

The exclusive arrangement appears to have ended at some point between 1955 and early 1957. Other large U.S. insurance brokers with connections to Lloyd's learned about the form and persuaded the underwriters that they should be able to offer it to their clients, through their own customary Lloyd's brokerage relationships. In addition, a copy of the "Price Forbes form" made its way to some American markets, who decided to introduce their own umbrella policies in 1957.

U.S. Competition to Lloyd's Umbrellas

From 1948 until approximately 1956, the Marsh/Forster/Lukis Stewart/Price Forbes/Lloyd's market was virtually the only source for umbrella coverage. No U.S. insurers offered the coverage, as far as anyone knows today (although some U.S. insurers did offer "traditional" forms of excess liability coverage). However, from 1957 on, U.S. insurers began offering umbrella coverage, one-by-one, in response to competitive pressure from insurance buyers and the need to compete with other admitted insurers. This pressure increased as knowledge of the scope of umbrella coverage became more widely known.

The entrance of U.S. insurers into competition with Lloyd's for umbrella business, as well as the concurrent liberalization of state surplus lines laws during the 1950s, helped to open up the London market for umbrellas. U.S. competitors nevertheless recognized that Price Forbes had played a key role in creating the coverage. When U.S. insurers obtained a Lloyd's umbrella policy as a model on which to design their own umbrella forms, they referred to it as the "Price Forbes form."

The first U.S. companies to begin offering umbrellas included the Indemnity Insurance Company of North America (INA), in June 1957; Continental Casualty Company (CNA), in 1958; Employers Surplus Lines Insurance Company, in January 1959; and The Travelers Insurance Company, in September 1959. In 1960 American Reinsurance Company, Employer's Reinsurance Company, Employers Mutual of Wausau, and General Reinsurance Corporation also were reported to be markets for umbrella coverage.

In 1963 the only additional markets listed in published sources now available were Federal Insurance Company (Chubb) and Aetna Casualty. A sales brochure published by The Home in 1968 stated that Home introduced its Manuscript Excess Liability Policy (the name Home applied to its umbrella form) in 1961.

During the remainder of the 1960s, U.S. admitted insurers rapidly developed umbrella capacity with the assistance of professional reinsurers. The reinsurers often provided policy forms and standard endorsements for an insurer and accepted 90 percent or more of umbrella risks from ceding companies through facultative placements, in effect acting as the umbrella underwriting department for some ceding company clients.

These methods helped to increase competition and the volume of umbrella premiums, and also helped U.S. businesses obtain a valuable new form of coverage. By 1970 nearly all of the largest U.S. insurers were offering umbrella coverage, and there were many more markets available through surplus lines brokers. By the end of the 1960s, it was not uncommon for umbrellas with limits of $5 million to $10 million to be issued.

Many casualty programs were arranged with a lead umbrella and one or more excess umbrella layers, to obtain the capacity required for higher limits of liability coverage. In some placements during the 1970s, single policies were issued with limits of $20 million or more, and even higher limits were available in the early 1980s.

Contraction of Umbrella Coverage: The LRD Forms

Concurrent with the development of U.S. competition in the umbrella market, it is ironic that Lloyd's underwriters began questioning whether the form of coverage they offered was too broad. Early Lloyd's umbrellas contained no exclusion for damage to property owned by others in the insured's care, custody, or control, so many first-party property claims were being covered. Coverage applied to a wide variety of personal injury claims, including patent infringement, since the Price Forbes form did not limit the coverage to a specific list of injuries. Many early umbrellas also provided fidelity coverage.

Underwriters were distressed by their losses, and key underwriters advised Price Forbes that they would no longer lead slips for placement of umbrellas after December 31, 1959. A committee that included both Lloyd's brokers and underwriters was formed to study the development of a new London umbrella form. Leslie Dew, a former following underwriter who had become head underwriter for the W. Minnis syndicate during the 1950s, consented to lead the slip for the new form for the Minnis and R.J. Merrett syndicates, if he could have a hand in drafting a replacement for the earlier Price Forbes form.

The committee formed in late 1959 to develop the 1960 Lloyd's umbrella form included Leslie Dew, Eric Squire of C.E. Heath, Henry Jeary of Ward & Faber, and Victor Hannaford of Price Forbes. The first draft of a new umbrella form was released in January 1960 for circulation in the London market. Brokers also circulated it selectively to U.S. insurers, since Lloyd's did not want to be completely shut out of the umbrella market by having a form that was far more restrictive than the current offerings from U.S. insurers.

What came to be known as the "LRD 1-60" form was quite restrictive, compared with the earlier Price Forbes form on which the first U.S. entrants to the umbrella business modeled their coverage. After considering comments from a variety of sources, Dew changed some of the terms in the form and agreed to a revised umbrella form, which was issued to be effective retroactively to January 1, 1960, for all Lloyd's umbrella placements. This became known as the "LRD 6-60" form, and remained in use by Lloyd's until 1970, when a new Lloyd's umbrella was introduced.

Many U.S. insurers entering the umbrella market during the 1960s used the LRD 6-60 form as their model. As a result, many terms and conditions that appeared in the LRD form are worded almost identically in American umbrellas from this period. Some U.S. insurers simply copied the form and did not even change the British usage of the terms "assured" (instead of "insured") and "underwriters" (instead of "the company").

The Market after 1970

By 1970 the U.S. umbrella market was maturing and provided a competitive alternative to Lloyd's for umbrella coverage. Many American companies issued new versions of their umbrella forms after the introduction of the 1966 and 1973 CGL policy forms, with exclusions and other terms that more closely matched the wording of primary policies serving as underlying coverage. This provided a more concurrent coverage program, less likely to create inconsistencies or gaps in coverage for the insured.

Lloyd's continued to provide a market for umbrella coverage after 1970, and served as the anchoring first-layer umbrella for many large U.S. companies. However, as higher limits became necessary, Lloyd's underwriters began moving their participation to higher excess layers to avoid exposure to U.S. litigation in the lowest umbrella layers. The underlying limit threshold for participation by Lloyd's in umbrella programs increased over time, from $3 million, then $5 million, and later to $10 million of underlying coverage or self-insurance.

Many American insurers increased their capacity during the 1970s, through higher retentions and the use of reinsurance. Large insurers often issued umbrellas with limits of $5 million to as high as $25 million on one policy, heavily reinsured. There were hundreds of sources for coverage by the end of the 1970s. Virtually all of the large, multiline insurance groups wrote umbrellas, and many smaller, regional insurers did so as well. Non-admitted casualty insurers also provided a market for umbrella coverage through surplus lines brokers and underwriting managers.

Coverage terms in these older policy forms continue to be litigated today. Asbestos and environmental pollution litigation in the 1970s and 1980s caused all of the parties to early excess and umbrella policies—insurers, insureds, and brokers—to scour their archives for records of the coverage they purchased, often going back to the 1930s and even earlier. The ongoing litigation over liability coverage terms provides a rich source of instruction about the significance of policy wording.

Coming Up

In future articles, we will report on the varieties of umbrella and excess forms in use today as well as in the past, on the importance of specific policy terms, market conditions, and other information we hope you will find useful in improving the practice of risk management.