If you lose a lawsuit that results in a judgment amount larger than what your insurance policy covers, the remainder will have to be paid out of pocket. Would you have to dip into savings, retirement accounts, your home’s equity or money set aside for college tuition?
A personal umbrella insurance policy is designed to protect you from such over-the-top financial losses.
The low-cost policy that may save the day
Umbrella insurance is a kind of personal liability insurance that takes over when the liability limit on your standard homeowners, auto or other personal insurance policies is maxed out. An umbrella policy also extends liability coverage if you have a renter’s or condo owner’s policy.
Umbrella policies will not make payments to cover losses to your own property or possessions. Instead, this blanket-like policy provides any additional payment needed (up to the umbrella policy's limit) when you are found at fault for someone else’s injury or death, or damage to their possessions. Most policies also provide coverage worldwide, with the exception of some foreign homeownership and vehicles titled in other countries.
Ultimately, an umbrella policy is an attractive stopgap option. Premiums are typically much less expensive than the standard primary policies an umbrella policy supports. This is because the umbrella serves as a payment backup; it typically doesn’t come into play with average claims, only very large ones.
A personal umbrella policy protects you as well as your dependents living in your household and those specifically listed on your auto or other personal property policies. In addition, umbrella policies will cover some liability claims that are excluded from most primary policies, including libel, slander, false imprisonment, malicious prosecution, wrongful death, invasion of privacy, and other specific hazards related to nonowned or rented vehicles. Your insurance professional can detail what’s covered and what's excluded on any policies you consider.
The order of payment
Let’s consider a few scenarios based on the assumption that you have:
- A homeowners policy that includes up to $300,000 in liability protection
- An auto policy with $250,000 in liability coverage
- An umbrella policy with a $1 million limit
If you are held accountable for a $250,000 settlement due to an injury suffered on your property, your homeowners policy would cover the entire amount, and the umbrella policy wouldn’t come into play.
However, if you faced a $1.1 million settlement from a multicar accident caused by your teenager, your auto policy would cover the first $250,000, and the umbrella policy would pay the remaining $850,000.
As a third scenario, if you were to cause an auto accident while on vacation overseas, your umbrella policy could help cover the excess medical or repair costs of others involved in the accident. These expenses aren’t addressed by your rental insurance.
An umbrella policy is not a substitute for adequate limits on your primary policies. If you have low limits of coverage on your underlying insurance, your umbrella policy premium will go up to account for this.
In addition, most insurers require minimum liability limits before they will issue an umbrella policy. Minimum liability limits are usually about $250,000 for auto policies and $300,000 for homeowners policies, but they vary by state. Most umbrella policies start at $1 million of coverage and go up from there.
The best plan is to purchase the appropriate level of homeowners, auto or other insurance that provides the most comprehensive coverage for your particular situation at an amount suitable to your income and assets. After that, you can rely on an umbrella policy to safeguard against catastrophic events.
Talk to your insurance agent about how an umbrella can support all the policies you carry, such as boaters or watercraft insurance, coverage for rental or vacation properties you own and any home business insurance you may have. You may find important exclusions.
When shopping for insurance, many individuals purchase all policies from the same company. However, this isn’t a requirement. Your agent can help you compare the offerings of multiple insurers since it can be complicated to review differences between umbrella policies. They can vary dramatically.
A spreadsheet can prove useful for tracking each umbrella policy’s scope of coverage, which is usually defined in broad terms and accompanied by a list of exclusions. There may also be “endorsements,” or additional coverage options, available.
Talk to your agent about your family’s risks, such as a teenage or elderly driver, a swimming pool, a trampoline, a hot tub, a dog that may be listed as a “restricted” breed, etc. Make sure the policy you choose either specifically mentions each risk as being covered or does not list it as an excluded peril.
Be sure to review your primary policy as well so you understand the full scope of protection available. In some instances, an umbrella policy is the only way to protect against a liability that is excluded from most standard policies.
With a little added protection from a personal umbrella insurance policy, you can enjoy everyday life with more peace of mind. Want to hear more about how umbrella insurance would apply for you? Contact us!
Blue Ridge Risk Partners is a top 75 independent insurance agency in the United States. With 22 offices and counting throughout Maryland, Pennsylvania, and West Virginia and access to hundreds of carriers, we are able to meet your unique insurance needs.