Umbrella Insurance

By Frank Thompson on Feb 02 in Umbrella Policy.

The Bridge Over Troubled Water In the early 1970s, Simon and Garfunkel recorded a song called Bridge Over Troubled Water. The song speaks about the tough times that happen in life and the need for a way to get over the rough spots.

Tough times come to the propane marketer when there is a major accident or incident and suddenly the marketer is faced with a need for a “bridge over troubled water.” The troubled times that result from a major accident are par­tially eased by the use of the additional cover­age provided by an umbrella.
Typically, a general liability policy provides $1 million per occurrence for either bodily injury or property damage for which you are legally liable. Coverage is for events that occur on your premises or for bodily injury or prop­erty damage which resulted from a product that you sold or the completed operation that your company installed or provided and released for its intended use.

Propane marketers that have propane dis­pensers on their premises and invite the general public to come in and have their propane bot­tles filled are a good example of why premises liability is needed. The bottle that leaves the propane marketers’ facility becomes a product. Several years ago, one of our marketers filled a 100 lb. cylinder and the customer laid the bottle down in the pickup bed. Miles away, the heat from the exhaust pipe under the pickup bed caused the bottle to vent, causing an explosion that completely destroyed the pickup. Fortunately, the driver and passenger were not hurt. This is an example of a product loss.

Combined Single Limit Auto Liability pro­vides $1 million to be used in the event of an auto accident for third party bodily injury and property damage. But what happens when the accident or in­cident occurs and the loss is in excess of the $1 million that your general liability or auto policy provides? First and foremost is an umbrella policy that increases the limit of liability of your general liability and auto policy. Umbrella limits can be purchased in increments of $1 million over and above your underlying general liability and auto liability coverage. The mar­keter that purchases a $1 million umbrella then has $2 million available to pay for a general liability claim or auto claim.

Umbrella coverage is required by Federal Transportation Statute for propane marketers that own propane transport trucks or have bob­tails with 3,500 gallon capacity. However, there are no statutes which dictate any umbrella cover­age for the marketer that only has bobtails. So what is the best course of action for the marketer that is not required to carry an umbrella? Today’s courts foster the notion that propane claims should be treated with absolute liability, virtually taking away any defenses. Ju­ries continue to look to the propane marketers as the deep pockets for the injured. Society be­lieves that the public is not responsible for their actions. Thus the propane marketer will need to consider higher limits of liability to protect the ownership and assets of their company. In considering whether or not to buy an umbrella for your business, consider the follow­ing scenario. The sun wasn’t quite up as your driver of bobtail #4 drove up the highway to his first delivery. The traffic coming towards him had their headlights on but several had already turned them off. The driver signaled a left hand turn, glanced behind him, and then ahead he saw the lights of the oncoming car and judged that he had adequate time and space and then began his left turn. Without warning his vehicle was hit by an oncoming car that did not have their headlights on. Your phone rings and it’s your driver sob­bing into the phone. All three passengers in the car are dead. Within two weeks you are served with a wrongful death lawsuit, asking for $6 million dollars. Your driver would later be found to be largely at fault for the accident The insurance company hands you a check for $1 million which was your underlying automobile coverage and tells you to defend yourself and use the money the best you can to settle the claim. The plaintiff’s attorney takes the case before a judge and jury and gets a $5 million wrongful death judgment. The plaintiff’s attorney then marches into your office with a couple of accounting people and begins looking through your books to see if they can pierce your company’s corporate veil. The judge was lenient when shown that you had used your company as your alter ego and there was little separation between the company’s assets and the personal assets. Having the company buy the cabin in the pines and the ski boat for “use with vendors or super customers” sure made a lot of sense, but doesn’t seem like such a great idea when those items are seized to be sold to reduce the $5 mil­lion owed to the grieving husband.

The worst part was having all the hard work that you put into building your company evaporate before your eyes as your company is sold and all the proceeds go to the plaintiff. The need for an umbrella should now be evi­dent to every marketer, but for many cost and not the additional coverage is the determining factor. Some propane marketers with large truck fleets have approached us with the idea that they should form a separate corporation or a LLC and put their transports in one company and the second company would contain the bobtails and service trucks along with their fixed assets for their retail operation. They then would only carry the required umbrella coverage over the transports excluding the bobtails and service vehicles and their retail propane operation. However, there are several serious flaws in this line of thinking. First and foremost, while the auto exposure is significant so is the need to carry higher limits over one’s retail propane operation as both the auto and the general liability exposures have the potential for a catastrophic accident. Secondly, because the law does not require one to carry $5 million limits on bobtails and service trucks does not mean that the smaller -vehicles will not be involved in a horrific ac­cident that could bring additional liability to your company in excess of the $1 million un­derlying auto policy. Thirdly, when one forms separate entities for their auto exposure and another company for the retail propane operations, a severe ac­cident by one of the entities without the pre­mium of the other entity might cause the loss ratio to go so high that the one entity may not be able to find or afford insurance. However, if Transport LLC and Retail Propane LLC had been combined the total pre­mium would have been $200,000 and the entire package loss ratio would have only been 60 percent this then would have made the renewal process much easier and less costly. Many propane marketers hesitate to buy umbrella coverage because of the additional expense. They believe that if they are involved in a serious accident and have $1 million of coverage that their coverage will satisfy the plaintiff’s attorney and the courts. That could not be farther from the truth. Lack of insurance does not alleviate liability.

Business owners are shocked to learn that in serious injury cases where the insurance lim­it is low ($1 million), the insurance company in reviewing the claim, will see that the claim will exceed the policy limits. At that point the insurance company will normally tender to you or to the court the entire policy limit. With the insurance company’s payment of the policy limit, their responsibility to your company is satisfied. This leaves you and your company to defend yourself by paying your attorneys fees and to settle with the plaintiff’s attorneys as best you can. When you make the decision to purchase an umbrella for your business. Consider the following:

• The umbrella should be a true umbrella form. If you have the coverage in your general liability policy and auto policy, the umbrella should provide the same coverage.
• Your agent should list your workers com­pensation policy as one of the underlying policies. This usually requires that the limit of Coverage B (Employers Liabil­ity) of the workers compensation policy be increased from 500/500/500,000 to l,000/1,000/1,000,000.
• An umbrella is different than an excess policy. Typically an excess policy is written solely to provide higher limits of liability over the auto or general liability and does not provide the broader coverage that a true umbrella provides.

The $64,000 question we are often asked is “how much umbrella should I carry?” The answer? Carry enough umbrella to raise your limits ofliability to $1 more than what you will get sued for. Another answer is to carry um­brella limits sufficient to cover .the net worth of your company. Conclusion: The package policy which insures your property, general liability and auto with an umbrella are still the propane market­er’s best and safest buy. Betting a lifetime of hard work building your company along with all the assets that you have accumulated against the probability that a major accident will never occur is not prudent. One insurance company advertises “life comes at you fast” which really sums up the need for an umbrella.

Frank Thompson

Frank B. Thompson is a chartered property and casualty underwriter based in Phoenix. He is the owner of PT Risk Management, an independent insurance company specializing in writing propane and petroleum risk policies throughout the U.S.