Umbrellas and Follow Form Coverage
Umbrella and excess policies raise the coverage limits for your underlying liability policy. Some use “follow form” language. What does that mean? Do you need it? Here’s what you need to know about umbrellas, excess liability and follow form coverage.
The purpose of an umbrella policy is to protect a business from catastrophic loss. It is generally written over your commercial liability, commercial auto and employers’ liability policies, providing higher limits for all three policies. An umbrella policy often provides coverage for risks not covered in the primary policy.
The beauty of an umbrella is that it “drops down” to provide additional coverage above the underlying policy’s limits. For example, a small manufacturer might buy a $2 million general liability (GL) policy and a $1 million auto policy. An additional $3 million umbrella would cover GL losses above $2 million and auto liability losses above $1 million.
Although they perform a similar function, an excess policy has one significant difference from an umbrella policy. An excess policy provides an excess layer of protection for a single policy, whereas an umbrella can provide coverage over more than one liability policy. In the manufacturer’s example, the company could buy two excess policies — one for GL and one for auto — to avoid having gaps in coverage.
What Is “Follow Form”?
Follow form coverage is an endorsement in an umbrella or excess policy that indicates coverage will have the same terms and conditions as the underlying liability policy.
Follow form language can provide peace of mind by eliminating gaps in coverage between the primary liability policy and the umbrella. However, this language tends to narrow your umbrella or excess coverage — restricting it to just the coverage provided by the primary policy.
In comparison, a stand-alone umbrella does not restrict coverage. It also does not rely on the language of the primary policy to determine whether there is coverage. The insurance company will make an independent assessment of whether coverage applies, increasing the chance that coverage could be denied.
A “broad as primary” endorsement is a variation on follow form coverage that allows the umbrella to follow the primary form, but without excluding any of the umbrella’s extra coverages. In other words, it prevents any exclusions in the primary liability policy from applying to the umbrella. Businesses that require proof of insurance from vendors sometimes request a “broad as primary” umbrella.
So, which approach is better? That depends on your organization’s unique risk factors. To make that decision, you will need to understand policy exclusions and conditions in your primary, umbrella and excess policies, along with the value of any extra coverage provided by an umbrella.
We work with our clients to evaluate their overall insurance program to make sure they have appropriate coverage that minimizes the risk of gaps. If you would like to discuss your insurance portfolio, please give us a call.
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