You've worked with some of your personal lines customers for so long that you know the answer before you even ask the question: Would you like to purchase a personal umbrella? “No. I don't want to pay for an umbrella," they reply.

In fact, some of you have heard that answer so often you don't even ask anymore. However, that's a mistake—and a serious one. But it's only part of the story.

In the past five years, we've seen more than a hundred errors & omissions claims against personal lines agents and brokers involving umbrella and excess coverages. If that doesn't give you pause, consider that the claims also come in a variety of shapes and sizes. 

When you separate these claims by the step in the insurance sales process at which they occurred, it's no surprise the most common mistake is at the recommendation phase, where an agent or broker fails to recommend that their customer should purchase an umbrella policy. While this is the most common step for a mistake to occur, only 22% of all umbrella and excess personal lines E&O claims fall into this category.

Not far behind are risk assessment errors (16%), claims-related errors (12%), policy renewal errors (9%), policy issuance errors (8%), policy replacement errors (8%) and policy change errors (6%). Clearly, there are many ways that insurance professionals can and do fumble umbrellas.

In one recent case, a boat owner had purchased a $3 million umbrella for several years. Sadly, the boyfriend of the owner's daughter jumped off the moving boat, sustained a serious head injury and spent three years in a coma before succumbing to his injuries. However, just when the umbrella was needed the most, it was learned that the wholesale broker on the policy had sent the renewal to the wrong address, which meant coverage had lapsed.

Here are four other claims examples involving serious injuries sustained in auto accidents:

Example 1: The customer had a $5 million umbrella in place, but it did not include uninsured motorist/underinsured motorist coverage. In fact, it had never included UM/UIM, and the application signed by the customer did not acknowledge this fact. Nonetheless, a sympathetic jury was told that the agency's website recommended including UM/UIM on umbrellas, but there was no testimony that the same recommendation was given directly to the plaintiff's customers. The jury awarded damages plus interest in excess of $2 million.

Example 2: A skilled attorney, who was struck on his bicycle by an underinsured motorist, had a $1 million primary policy with UM/UIM coverage as well as a $5 million umbrella that did not include UM/UIM coverage. Needless to say, the attorney took the position post-accident that the umbrella was supposed to have covered UM/UIM because the $1 million primary policy was not enough.

Example 3: A married couple that had home, auto and umbrella policies divorced. The husband directed the agency to remove his ex-wife from his umbrella policy, which was not disclosed to her before she struck a pedestrian in a crosswalk. The accident caused $200,000 in medical bills alone. Total damages were $900,000, which surpassed her existing limits.

Example 4: In an increasingly common scenario, an agent wrote an umbrella policy over its customer's home and auto policies. But when the couple switched their auto coverage to a carrier that advertises heavily on television—no agent was involved—it escaped the agent's notice that the umbrella required that the underlying carriers be named on the umbrella policy, the vehicles be scheduled, and that there is no gap between the underlying policy limits and the umbrella's attachment point. The umbrella carrier sought and obtained summary judgment based on a gap in coverage resulting in a $700,000 loss for the agency after it argued all three points, any one of which can create a significant E&O exposure for your agency.

These are not isolated cases, and the consistent thread that runs through all of them is that they're expensive. When the starting place for our analysis is that the injury is so severe that the customer's primary layer is not enough to resolve the claim, you can bet on the E&O price tag being high. In fact, in many of these cases, there is an umbrella in place but even that extra $1 million is not enough to settle the claim.

This should tell you that your agency processes need to take into account more than just how to offer umbrellas and document rejections. Regular attention must be paid to keeping the underlying coverages in place without any gaps, offering higher umbrella limits from time to time, especially with affluent customers, and recommending that the customer pay to include UM/UIM coverage as part of their umbrella. Otherwise, you may be talking about the adequacy of your E&O limits.

Matthew Davis recently retired as senior vice president and head of FinPro NA Claims with Swiss Re Corporate Solutions working out of the Kansas City, Missouri, office. Insurance products underwritten by Swiss Re Corporate Solutions America Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions. 

This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re") and/or its subsidiaries and/or management and/or shareholders.