Umbrella Excess over Municipal Risk Pool


Umbrella Provides a Unique and Special Coverage

It is a rare and useful occurrence when an appellate court applies the clear and unambiguous language of an insurance policy. When an insured buys an umbrella policy the insured knows that it only comes into effect and only owes defense or indemnity to the insured after any underlying insurance is exhausted. In Illinois Mun. League Risk Management Ass’n v. State Farm, — N.E.3d —-  2016 IL App (1st) 143336 (Feb. 2, 2016) the insured primary protection was provided by a Municipal Risk Pool that paid a claim and then sought to get its money back from an umbrella policy issued by State Farm.

The trial court found enforceable a clause in the umbrella policy that made its coverage apply only after exhaustion of the limits of all applicable “insurance and self insurance.” The self-insurance pool appeals, arguing that the umbrella policy should count as primary insurance because the self-insurance pool uses public funds.


State Farm Fire & Casualty Company issued an insurance policy to Roel Valle, who worked as the city clerk for the Village of Lynwood. Lynwood belonged to the Illinois Municipal League Risk Management Association (Association), a municipal risk-pooling organization.

On February 4, 2011, a car owned by Lynwood and driven by Valle collided with a car driven by Manuel Little. Little sued Valle and Lynwood. Valle and Lynwood notified the Association and State Farm about the lawsuit. The Association invited State Farm to participate in the defense of the lawsuit and settlement negotiations. On August 16, 2011, the Association agreed to pay Little and his passengers a total settlement amount of $5,822,500 for a release of all their claims against Valle and Lynwood. State Farm did not contribute to the settlement amount. The Association, as subrogee of Valle and Lynwood, then filed the lawsuit at issue alleging that State Farm breached its contract by failing to contribute its policy limits to the settlement.

State Farm’s insurance policy, titled “Personal Liability Umbrella Policy,” required Valle to purchase automobile liability insurance and other forms of primary insurance. The policy states, “Other Insurance. The coverage provided by this policy is excess over all other insurance and self insurance.”

The Association’s contract with Lynwood provided that the Association would pay up to a limit of $8 million. The contract required Lynwood to notify the Association of any occurrence, and the contract established the Association’s right and duty to defend Lynwood. The contract did not require Lynwood or its employees to purchase any underlying insurance to make its coverages come into effect.

The Association admitted that the contract expressly covered the liability of Lynwood and “any other person while using an ‘owned automobile’ * * * with the permission of [Lynwood],” but not “the owner of a ‘non-owned automobile.’ “ The Association also admitted that Valle, as an employee of Lynwood permitted to drive Lynwood’s automobile, qualified as a person covered under the Association’s contract with Lynwood.

The trial court found that the Association, by contract, agreed to pay the liability of Lynwood and Valle, up to the contract limits of $8 million, and State Farm’s umbrella policy provided coverage for the accident only if the liability exceeded $8 million. Because the Association settled the lawsuit for less than $8 million, the trial court held that State Farm owed the Association nothing.


First, an umbrella policy, in contrast to a primary policy that contains an other insurance clause, has been recognized as providing unique and special coverage. Umbrella or catastrophe coverage has been defined as a needed form of coverage which picks up, above the limits of all other contracts, such as automobile and homeowners coverages, to give the security and peace of mind so necessary today where jury verdicts, or court awards, may be very substantial, to discharge the unexpected, but potentially bankrupting, judgment.

The two policies cannot be considered on the same level nor can the general rules regarding excess and escape clauses be applied. Umbrella policies remain excess over and above all other applicable forms of contract, except as to the specific risks upon which it may elect to carry the primary burden. Umbrella coverages, almost without dispute, are regarded as true excess over and above any type of primary coverage, excess provisions arising in regular policies in any manner, or escape clauses.

State Farm issued an umbrella liability policy to Valle. The Association provided primary coverage to Lynwood. Thus, if we treat the Association’s contract with Lynwood as an insurance policy, the umbrella policy would provide coverage only if Valle’s liability exceeded the limits of the Association’s coverage.

But the Association’s contract is not an insurance policy. Municipalities in Illinois that participate in such risk-management pools do not waive municipal immunities from liability. The Association’s contract with Lynwood qualifies as a kind of “pooled self-insurance. The Illinois appellate court concluded that the umbrella policy was available to provide insurance coverage only when the loss exceeded available limits of insurance and self-insurance, including pooled self-insurance.

State Farm’s umbrella policy is unambiguous. The policy makes the insurance “excess over all other insurance and self insurance.” Because the Association provides coverage for the accident here under the contract for pooled self-insurance, the appellate court found that the Association provided coverage for the losses up to $8 million, and State Farm’s policy would cover losses in excess of that amount. Because the Association settled the claims for less than $8 million, State Farm did not owe the Association any reimbursement for the loss.


The unique nature of the umbrella policy only provides coverage that fits within the promises made by the policy. Since the policy promises to provide defense and indemnity after the underlying insurance or self-insurance is exhausted. The pool tried to avoid its contractual obligations by seeking to impose the loss it incurred on State Farm even though it did not exhaust its limits.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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