For many of us, the various types of insurance choices we are faced with can be confusing. Some may look at umbrella insurance as being a “nice to have,” but frivolous. In today’s litigious society, an umbrella policy may provide an extra layer of liability coverage that can be the difference between having to pay out of pocket for a legal judgement against you versus having the insurance company make some or all of the payment.
Here is a guide to umbrella insurance to help you understand this type of coverage and decide if an umbrella policy is right for you.
What is umbrella insurance?
Umbrella insurance offers additional liability coverage over and above the policy limits offered by homeowner’s insurance, auto insurance, watercraft policies and others. Umbrella insurance is extra liability insurance that covers liabilities arising from injuries or property damage you may have caused, against some types of lawsuits and other types of personal liability situations.
Some consider an umbrella policy to be “asset protection insurance.” In other words, an umbrella policy can help protect your assets in the event that you are successfully sued in connection with personal injuries or property damage that you or a family member caused, or other types of covered liabilities.
What does umbrella Insurance cover?
Umbrella insurance provides coverage to you and to members of your immediate household against a variety of liabilities that can arise from damage caused to the property of others, as well as injuries to others that you may have caused or otherwise be held liable for. This coverage kicks in when the amount of the loss exceeds the limits in place on homeowners, auto or other conventional coverages.
Additionally, depending upon the terms of the policy, it may cover liability arising from situations involving defamation, libel, landlord liability, false imprisonment and some others.
Examples of these additional uses for umbrella insurance have involved many well-known celebrities and public figures over the years. Famous defendants including Bill Cosby, O.J. Simpson, former president Bill Clinton and former baseball star Roger Clemens have all invoked clauses in their umbrella policies to combat lawsuits related to defamation. In the cases of Cosby and Clinton, the issue arose all or in part out of sexual harassment allegations made against them.
Some examples of the more conventional uses of umbrella coverage might include:
Bodily injury to others
An umbrella policy will cover injuries to others for which you are liable over and above the limits of an automobile, homeowner’s or other type of policy. This type of liability could occur in a number of situations including:
- You are deemed at fault in an automobile accident that causes serious injuries to others.
- If your dog causes serious injuries to someone visiting your property.
- A guest in your home falls and injures themselves.
- Your child’s friend injures themself while playing with your child on your property.
Property damage
If you are deemed to be at fault in an automobile accident, an umbrella policy will cover damage to the automobiles of others involved in the accident over and above the liability limits of your regular automobile policy. Your policy could also cover damage to the property of others via your liability arising from the accident, for example if you caused another car to run into a store front.
Property damage can arise from a variety of situations. For example, your child could inadvertently cause major damage to property at their school for which you could end up being responsible.
Liability as a landlord
If you own a rental property there are a number of potential sources of liability that you could face. This liability could be connected with incidents involving visitors to the property or through activities of your tenants.
- Your tenant’s dog attacks a visitor and bites them, causing serious injuries to the visitor.
- A delivery person trips on the property’s sidewalk while delivering a package to one of the tenants and injures themselves.
- A tenant’s visitor injures themself while visiting due to an uneven step or perhaps uneven concrete. You could be sued as the owner of the property if they are seriously injured.
Other situations covered by umbrella insurance
As discussed above, there are some other non-property damage and non-personal injury situations that are commonly covered by an umbrella insurance policy. If you are sued for items such as those listed below you are likely covered, depending upon the terms of your policy.
- Slander which is something that is said that is false and causes damage to another person’s reputation.
- Libel is similar to slander, only in this case the statement was made in writing.
- If you falsely detain, arrest, or imprison another person.
- If you pursue legal action against another person that is ultimately deemed to be malicious prosecution.
What isn’t covered by umbrella insurance?
As with any type of insurance coverage that you might be considering, it’s equally important that you understand what’s not covered. Some items not covered by an umbrella policy include:
- Injuries to you or damage to your personal property resulting from an accident.
- If you cause damage to another person’s property or injure them while committing a criminal act.
- Any type of liability that you assume under a contractual relationship.
- Injuries or property damage resulting from a business that you own or are involved with.
Who should consider umbrella insurance?
There is no legal requirement regarding the purchase of an umbrella policy. However, this type of coverage can be beneficial to a wide range of people in a variety of situations. Purchasing an umbrella policy might make sense if you:
- Are a homeowner
- Have significant assets or wealth that you want to protect
- Travel outside of the U.S.
- Have items on your property that could be considered as hazards. Examples of these types of items include a swimming pool, a trampoline, firearms or even a dog. In the case of dogs, policies may limit the breeds covered so be sure to check with your insurance company here.
- You own rental property.
- Your household includes a new, inexperienced driver.
- You coach youth sports or other types of youth activities.
- You host parties or get-togethers in your home.
- You serve on the board of a nonprofit organization.
- You post reviews of local businesses or other products online.
- You participate in sports where you could cause an injury to others. Examples include hunting, skiing, surfing, soccer, rugby and a host of others.
- You are a public figure.
Umbrella insurance can benefit a wide range of people who might not think they are exposed to large amounts of potential liability that could be financially crippling to them.
How to purchase umbrella insurance
Most major insurance companies offer umbrella policies. In some cases, the company may require that you hold your homeowner’s, renter’s or auto policy with them in order to be eligible to purchase an umbrella policy through them.
The insurance company may also require that you carry a minimum level of insurance on these other policies held with the company before they will write an umbrella policy over and above your other coverage. For example, your auto policy might require a minimum of $300,000 of bodily injury coverage and $100,000 of property damage coverage. A minimum level of liability coverage for homeowners might be $300,000. The umbrella policy would then kick in for liability in excess of these amounts.
Some companies will offer a stand-alone umbrella policy that doesn’t require you to have your other policies with them. If this is something of interest, it's important to find an independent insurance agent or broker knowledgeable in this area.
Another factor to consider is the maximum liability limit offered by the policy. A $5 million limit is common, but some policies go higher. While there is no way to know how much someone might sue you for, in deciding whether a higher limit is needed you need to weigh the cost of that extra coverage against the potential risk of a large judgement.
It’s also critical to look at what the umbrella policy covers and what is excluded. If you enjoy high risk hobbies or are in a profession where lawsuits are not uncommon, be sure that the policy you are considering will cover you in the event these activities trigger a situation where the coverage is needed. How much umbrella insurance is recommended will vary with your personal situation.
How much does umbrella insurance cost?
According to the Insurance Information Institute, the cost of $1 million in personal umbrella insurance coverage will generally run between $150 and $300 annually. They indicate that the next $1 million in coverage will generally cost around $75 annually, with each subsequent $1 million in coverage running about $50 per year.
The cost of the umbrella policy is not the only cost to consider. As mentioned above, some insurers may require that you carry a minimum amount of liability coverage on other policies such as your automobile policy, your homeowner’s insurance or your watercraft policy. If your current limits are too low you may need to raise the limits on these policies which will likely result in higher premiums than before.
Do I save money with umbrella insurance?
Technically purchasing umbrella insurance does not save you money. There is the cost of the premiums for the policy, and there could be extra premiums if you are required to increase the coverage for other policies such as your homeowner’s or auto insurance.
However, the answer is potentially yes if you look at the bigger picture including what could happen if you are sued and don’t have this coverage. If you look at things that way, the cost of the umbrella policy potentially saves you a lot of money in the event you lose a judgement and are forced to pay out hundreds of thousands of dollars or more.
In order to raise this type of money you might need to liquidate retirement savings, sell your home, your business or other assets. The impact of this type of judgement could prohibit you from covering some or all of the cost of your children’s college education as you had planned to do, or it could derail your retirement dreams.
So technically, buying an umbrella policy will increase your monthly spending all things being equal. This will be the case should you never make a claim on the policy. But the minute you do make a claim that is ultimately paid by the insurer, your savings from having purchased the coverage could be huge.
Summary
Umbrella insurance does what the name implies. Umbrella coverage provides an “umbrella” over other types of liability coverage you may have via your homeowner’s auto or watercraft policies. Umbrella insurance kicks in after the liability limits on these other policies are exhausted.
Everyone’s situation is different, but an umbrella policy can provide relatively inexpensive protection against a financially crippling judgement. Umbrella policies provide asset protection against these types of large judgements which are not uncommon in our litigious society.
It's important to look at your own situation and decide upon which policy best fits your needs. The policy coverage should offer protection against potential liabilities arising from any unique aspects of your personal situation that could give rise to a major judgement against you.