What is an Umbrella Insurance Policy? Why Might You Need it?

Insurance is used to protect your assets. If something happens and you are sued and found to be at fault, it can get expensive. Once your underlying liability coverage exhausts its limits, you are personally responsible for any remaining balance, unless you have umbrella coverage.

For example, your liability policy has a $900,000 limit, but you are sued and are hit with a $1.5 million judgment. Your first liability policy will pay out the $900,000 and, instead of you being personally responsible for the rest, your umbrella insurance pays it for you, up to the limit.

Due to the fact that umbrella coverage typically piggy backs onto an underlying policy before it has to pay anything out, the risk for a company of such coverage is smaller than it is for the underlying policy. What this means for you is that umbrella policies are not excessively expensive, and they can provide much higher limits of coverage than normal policies.

What is Umbrella Insurance?

Umbrella insurance is liability insurance that typically provides significantly higher limits than your auto or homeowners insurance can provide. The term umbrella is a bit of a misnomer, because it implies that all types of claims are covered under the “umbrella”, and this isn’t the case. The policy does, however, cover many types of claims, as well as the price of a defense attorney when needed.

One way to view umbrella coverage is as a supplement to your current renters, homeowners, and auto insurance policies. It is in place to protect your assets if something happens that creates a liability for you above and beyond your other coverage.

Is Umbrella Insurance the Same as Excess Liability Insurance?

In laymen insurance discussions, the terms are sometimes interchanged, but the reality is that they are two different insurances.

They do have similarities including:

  • Higher limits than typical liability coverage
  • Supplementing underlying policies

The difference is in how they supplement.

An umbrella insurance policy covers a wide range of possible scenarios – whereas excess liability coverage must be attached to a specific type of coverage and will only pay if that is the area of liability.

For example, if you have attached your excess liability coverage to your employee liability policy, it will only pay a claim that relates to that coverage. If it is actually attached to your general liability coverage and the claim arises from an employee being injured on the job, the excess coverage will not kick in.

This means you will need to purchase a separate excess insurance policy for each area of liability.

Umbrella insurance does not have the one policy coverage restrictions. This coverage applies across the board as applicable. It makes no difference if the liability is from an employee injury, a dog bite on the premises, or the need for a defense attorney when you are sued, the same umbrella policy can cover it all.

Who is Umbrella Insurance for?

While insurance clients come in many forms, the typical policy holder of an umbrella liability coverage policy has something to lose. Whether you own a house, have a large savings account, a quickly growing business, or other assets, if you have something to lose, an umbrella policy might interest you.

Most companies require you to purchase a minimum of $1 million in coverage. If you don't have a million in assets, you might not need the coverage. However, umbrella coverage is inexpensive, therefore, you might decide that protecting the assets you do have is worth the cost.There are also activities that will make you more likely to be targeted with a suit.

Examples include:

  • Celebrity status
  • Company owner – with perceived deep pockets
  • Politicians
  • Overall above average asset-value
  • Some type of trainer - personal trainer, equestrian trainer, driving instructor, skydiving trainer, etc.)
  • Professional - i.e. physician, attorney, mental health therapist

Regardless of your actual net worth, there is a perception about the above list that the people who belong to it have lots of money. An umbrella policy can help protect the assets you do have, even if this perception is inflated.

How Does it Work?

How the policy works is fairly straightforward. If a covered event happens and you are sued for damages and lose, the umbrella policy comes into play. First your regular liability insurance will pay the judgment, up to the policy limits. If the policy limits fall short of the judgment, then your umbrella coverage takes over where the first policy stopped and pays out the balance.

For example, as a result of being sued, you are ordered to pay $2 million. Your underlying liability coverage has a $500,000 limit. Your umbrella policy will pay the $1.5 million balance, assuming you have more than the minimum $1M coverage.

NOTE: Umbrella policies also have limits, but they are much higher than the typical auto, homeowners, or renters insurance caps.

What Does it Cover?

A personal umbrella insurance policy only covers two things – liability and legal defense costs. Liability is a broad term that incorporates many scenarios. If you are found to be at fault for personal injury, property damage, or bodily injury, through your actions or negligence, or the actions of someone under your control such as an employee or your minor child – the umbrella can cover it (Once the underlying policy has exhausted all funds).

NOTE: Umbrella insurance also covers events that your underlying coverage excludes.

In short – umbrella insurance covers:

  • Landlord liabilities
  • Bodily injury
  • Property damage
  • Personal injury

A few examples of what is covered include:

The cost of legal defense in court. If you are being sued and you decide to seek legal counsel and have representation in court, your umbrella policy will fund the legal costs, up to the policy limit. If the case goes to a court trial, the costs can reach into the hundreds of thousands of dollars. Therefore, having umbrella coverage in this scenario can be very useful.

If someone becomes intoxicated at your holiday party, or backyard cook-out and, on the drive home, gets into an accident, you could be held liable. This and other scenarios put you in the position of being indirectly liable. Most underlying policies will not cover claims of indirect liability, but your umbrella policy will.

If you press charges on another person and that person sues you for false arrest, you will need your umbrella policy. Almost universally, typical policies do not cover these claims and, if you are found to be at fault, the judgment amount could be high. Slander is like false arrest in that your underlying policy will decline to defend you or pay your legal fees. Your umbrella policy, however, can step up as needed.

Animal bites can be brutal. Whether your dog, cat, pet rat, or ferret took a chunk out of the neighbor’s hand, you might end up sued. Being bitten is a bodily injury. Not only could you have to pay medical bills, but also wages from lost time at work and even pain/suffering from the emotional trauma of being bitten by your pet.

Events at and around your home can also fall under an umbrella policy. Your daughter's little friend falls out of the tree in your yard and breaks her arm, the neighbor slips and falls on your boat dock, your staircase railing fails and a guest falls down the stairs – all of these are feasible events, and all put you at risk for being sued.

NOTE: The majority of these types of claims will be paid out by the underlying homeowners coverage, but in a case in which they refuse, or the judgment is higher than the policy limit, your umbrella coverage will handle the rest.

Pain and suffering are the suits you read about in which the plaintiff is awarded millions of dollars. Because an umbrella insurance will not usually write a policy for less than a million, having such coverage can protect you from a pain and suffering law suit.

What Doesn’t it Cover?

While umbrella insurance covers liability, it won't cover physical damage to property or property loss. If someone steals all your jewelry out of the place you stashed it in the car, it won't be covered. Perhaps you accidentally put a hole through your living room wall, or your child drove through that same wall while learning to drive – not covered by the umbrella.

The umbrella's purpose is to protect you in the case of large liability judgments, not to pay for non-liability damage.

Here are some events that are not covered by umbrella insurance:

  • Business loss
  • Oral contracts
  • Written contracts
  • Criminal acts (intentional or by omission)
  • Personal belongings

Why Might You Need Umbrella Insurance?

If you are the owner of a non-profit organization or a business owner, you might find that buying an umbrella policy makes sense. As the owner of one of these entities, you have employees or volunteers working under your name. You cannot be everywhere at all times, and one of your people could make a mistake that causes you to be held liable.

Examples include:

  • An employee or volunteer being accused of inappropriate comments or actions toward someone
  • An injury occurring either to the employee/volunteer or a client who holds you responsible
  • If you are a professional such as an attorney, contractor, or doctor, a client, unhappy with an outcome, could sue you for damages

Buying Umbrella Insurance

There are several levels of umbrella insurance available. The smallest possible coverage is a $1 million limit, and the levels go up from there, in most cases capping at $10 million.

You cannot get an umbrella policy without first having an underlying policy. Umbrella insurance is considered a supplemental or secondary coverage policy. Because it will not pay until other policies have been exhausted, it is a requirement to have those already in place including auto, boat, homeowners, or renters policies if applicable.

What Information Will Be Needed?

To purchase an umbrella policy, you will need to provide evidence of underlying coverage including the policy numbers, deductibles, and coverage limits for all policies. In addition, you will need to provide any exclusions, or amendments to each policy. If you have pets, the agent will need a list of the type and breed of each one. You will also need to give information about your business if you are a business owner. Any past claims paid out on your behalf in recent years should also be disclosed to the agent.

How Much Umbrella Insurance do you Need?

In deciding how much umbrella insurance to buy, focus on not only today's assets, but also on possible future assets. If you have a career, figure in salary increases for the next 5-10 years. Be sure to include inventory if you own a business. In addition, leave some wiggle room for things that can come up during a suit, like legal costs and travel.

Once you have an idea of the worth of current tangible and intangible assets, you can choose the size of policy you want to buy. They are sold in increments of $1 million. The smallest amount you can buy is $1 million and the largest is usually $10 million.

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