Liability lawsuits are unpredictable these days. Juries are increasingly giving outsized awards to plaintiffs. Just about any accident can become prey to unscrupulous and even manufactured claims of serious injury. While homeowners and personal auto insurance offer liability protection, they usually aren’t designed to handle a big claim, such as permanent disability.
If you lose a lawsuit that results in a judgment amount larger than what your insurance policy covers, you will have to pay the remainder 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 can 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. It takes over when the liability limit on your standard homeowners insurance, auto insurance or another personal insurance policy 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 cover losses to your own property or possessions. Instead, they provide 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 umbrella policies also cover you worldwide, with the exception of some foreign homeownership and vehicles titled in other countries.
Ultimately, an umbrella policy is an attractive stopgap option. Umbrella premiums are typically much lower than those of the standard primary policies the umbrella supports. This is because the umbrella is 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 the 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 may be excluded from your primary policies, including libel, slander, false imprisonment, malicious prosecution, wrongful death, invasion of privacy, and hazards related to non-owned 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 with $300,000 in liability protection
- An auto policy with $250,000 in liability coverage
- An umbrella policy with a $1 million limit
Say your neighbor suffers an injury on your property and you have a $250,000 settlement. Your homeowners policy would cover the entire amount, and the umbrella policy wouldn’t come into play. Now, imagine your teenager causes a multicar accident with a $1.1 million settlement. Your auto policy would cover the first $250,000, and the umbrella policy would pay the remaining $850,000. As a third scenario, say you cause an auto accident while on vacation overseas. Your umbrella policy would help cover the excess medical or repair costs of others involved in the accident. Your rental insurance wouldn’t address these expenses.
An umbrella policy is not a substitute for adequate limits on your primary policies. If you have low coverage limits 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 in coverage and go up from there.
The best plan is to purchase the appropriate level of homeowners, auto or other insurance. This will provide the most comprehensive coverage for your 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 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.
Review your primary policy 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. To learn more or discuss your specific needs, send us an inquiry. Let us help protect you, your family and your property.