With juries awarding multi-million dollar verdicts, primary liability insurance policies don’t always cover the entire cost. That’s when umbrella liability, also known as excess liability, can help.
“Experienced business professionals understand that the litigious nature of our society combined with monumental liability judgments can be financially devastating to their organization,” says Peter Bern, CEO of Leverity Insurance Group.
“You can find several examples of those types of verdicts, and many companies don’t have liability limits that cover the entire loss. It’s not unusual for individuals or companies to be sued for more than $1 million. To assist with the financial burden of a claim, many business owners purchase umbrella insurance in addition to their primary liability insurance policies,” he says.
Smart Business spoke with Bern about how umbrella insurance works and why companies and individuals might want to consider coverage.
Why not increase existing coverage rather than purchase umbrella liability?
Primary liability contracts typically have limits of $1 million per occurrence, and $2 million total for a policy year. Some policies are available with double those limits, but that’s usually as high as they will go. Most liability policies have an aggregate limit that, once exhausted, will not cover any other damages or legal expenses.
How do umbrella policies work?
They sit on top of primary liability policies and apply to claims where the aggregate limit of the underlying policy has been met, so there are not enough funds available in the policy to cover the entire claim. For instance, if your liability policy has a $1 million limit and a loss is incurred for $1.5 million, the primary liability policy will cover the first $1 million and the umbrella policy will cover the remaining $500,000.
Are there particular exposures in which companies and individuals should consider an umbrella policy?
For the most part, umbrellas cover large, severe events that can cause exponential damages. Without coverage, these events — as few and far between as they may seem — would be financially devastating to many companies.
The umbrella extends the limits of a company’s commercial liability, business auto, employer’s liability, professional liability, environmental liability and management liability policies, to name a few. If your product, service or operating environment is particularly hazardous, or the limits of your underlying policies won’t cover the worst of your possible losses, an umbrella policy is a must.
With respect to personal insurance, an umbrella policy will sit over your personal auto and home liability exposures. For example, if you have teenage children driving, what if someone gets hurt and you don’t have enough insurance? Chances are your limits are $100,000 per person and $300,000 per accident. If you get sued for $2 million and are found negligent, the insurance company will pay up to your $300,000 limit at the most. The balance is due from you. Do you have an extra $1.7 million lying around? Without an umbrella, your personal assets and future earnings are at risk and, in the worst-case scenario, can push you into personal bankruptcy. Can you afford this exposure?
Is there a way to figure out how much coverage you need?
There are a number of factors to consider, including how much risk tolerance you have, the severity of your exposure, the amount of assets you stand to lose and how much you are willing to pay in premiums. The umbrella market is often erratic and requires the guidance of a trusted insurance adviser to find competitive premiums that address your specific risk categories. ●
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Companies can be held liable if they breach their fiduciary duties in managing employee benefit programs such as pensions, profit sharing, health care and 401(k) plans.
This risk remains even if you hire a third party to manage your plans.
“A lot of companies have hired these outside consultants to manage 401(k) and other pension plans in an attempt to mitigate exposure. In reality, they still have liability because they chose the consultant,” says Peter Bern, CEO of Leverity Insurance Group.
Smart Business spoke with Bern about what fiduciary liability insurance covers and how it fits with other business insurance policies.
Who is considered a fiduciary?
A fiduciary is the individual responsible for controlling the management of employee benefit plans, investment of funds, and controlling or disposing of plan assets. That includes consulting firms, attorneys, accountants and other entities that service pension plans.
A fiduciary is required to:
- Act solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them.
- Carry out their duties prudently.
- Follow plan documents.
- Diversify plan investments.
- Ensure plan expenses are reasonable.
The Department of Labor (DOL) was concerned about plan expenses in the 2012 issuance of a final regulation under the Employee Retirement Income Security Act of 1974 (ERISA). Workers lost significant amounts of retirement savings after the 2008 financial crisis, and the DOL sought to make fiduciaries more accountable for controlling fees and selecting appropriate investment options.
Companies can limit liability by giving plan participants control over investments in their accounts. However, they must be given a broad range of investment options and sufficient information to make informed decisions.
What is the company’s responsibility in hiring a third party to manage plans?
It’s important to have a documented process by which you rate and select a third-party service provider. Survey a number of potential providers, asking the same information and providing the same requirements. That will enable a meaningful comparison and give a sound basis for reaching your decision.
Whether you’re selecting the investments yourself or utilizing a third party, it’s important to provide employees with a sufficient number of options.
Does an ERISA bond protect you from liability?
An ERISA bond or employee dishonesty policy with ERISA compliance only protects you from theft, not from mismanagement of funds, programs, pensions or health plans — all of the major exposures that exist.
Business owners also might think they’re protected under directors and officers (D&O) insurance, but there are certain exclusions in those policies concerning fiduciary liability. D&O, employment practices and fiduciary liability insurance are often secured as an insurance package because if someone perceives that the business didn’t perform as well as it should and was mismanaged, you could potentially seek damages on the D&O and/or fiduciary line of coverage.
Of these aforementioned product lines, fiduciary liability insurance is the least expensive, and most cost-effective. Another line of coverage that should be secured in your insurance portfolio is employee benefit liability, which specifically protects benefits managers from mistakes and omissions made in the administration of various employee programs. These typically involve minor issues about proper filing and enrollment, but do not provide coverage against any problems related to investing.
In summary, some of the responsibilities of a fiduciary are vague — what does monitoring investments mean? Also, sudden swings in a turbulent stock market can bring risks to even the best of fiduciaries. Fiduciary liability insurance can help defend the reputation of the company and its management team.
Peter Bern is the CEO of Leverity Insurance Group. Reach him at (216) 861-2727 or firstname.lastname@example.org.
Insights Business Insurance is brought to you by Leverity Insurance Group