Everything You Need to Know About the Umbrella Policy

The purpose of umbrella insurance is to improve coverage provided by property and casualty insurance policies.

Here is how umbrella insurance works.

What is an Umbrella Policy?

In simple words, an umbrella policy boosts coverage limits of various insurance policies.

There are limits to the coverage that your property and casualty policy can provide. In the absence of an umbrella policy, you will have to pay for any costs in excess of the coverage limits. 

The key point to note is that an umbrella policy is secondary and not standalone. It works on top of your existing homeowners’ insurance plan. The umbrella policy covers you for costs beyond the coverage limit of your policies like personal insurance, watercraft insurance, car insurance, condo insurance, and homeowners insurance. There is also coverage for liabilities that you may be subjected to from claims and lawsuits.   

There is also another name for this insurance policy – personal excess liability insurance.

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Here is How an Umbrella Policy Works

 

Umbrella liability insurance provides protection against the following:

• lawsuits due to injuries and property damage
• costs of legal defense

Under most circumstances, before the umbrella insurance policy can pay out, the underlying liability policy has to pay first. For instance, a home insurance policy covers the primary liability arising due to losses. That is, when the homeowner insurance policy has paid out maximum benefits, then the umbrella insurance will pay for the remaining liability if any.   

Here is a numerical example. Let’s say you get involved in a collision for which the court determines that you are responsible. The car insurance policy that you have pays only $500,000 for each accident by way of liability coverage. 

Sadly, passengers have suffered severe injuries due to which they cannot work. They consequently sue you for lost earnings and associated damages. Your insurance negotiates a settlement amount of $750,000 with the injured party. 

There is a massive difference here of $250,000. That is, the settlement amount is $250,000 in excess of the liability coverage extended by the car insurance policy. If you did not have umbrella insurance then you would have to pay this staggering amount on your own. But having an umbrella policy means that you will be covered for this excess amount ($250,000) up to the limits specified in your umbrella policy contract.

 

Umbrella Insurance Requirements

 

Insurers establish underwriting requirements for their umbrella insurance policies. You should read the terms and conditions to understand when the umbrella policy will start paying. The umbrella policy will come into effect only after the underlying policy pays up to a certain amount. 

These requirements can have strong implications on what kind of policies you can buy. Thus, if your underlying policy does not provide sufficient coverage up to the amount required by umbrella insurance, then your umbrella plan will not pay. 

In certain states, you need to have auto insurance coverage up to a certain limit. However, these limits are very modest. The low limit may not be sufficient for your umbrella insurance to start paying.

So when buying auto insurance (or some other underlying insurance policy), you must ensure that its coverage meets the minimum requirement mandated by your umbrella insurance. 

With some insurers, you may have to buy all of your policies from them if you want their umbrella insurance. 

The underwriting can vary between insurers. There may be coverage for a few million dollars or even just $1 million. It has all to do with the budget you have set. 

With some companies, you can double or even triple the coverage but the consequent premiums may not double or triple. It is best to explore various umbrella insurance offers to find the right one for your needs. 

 

Do You Require Umbrella Insurance?

Property and casualty insurance place a limit on liability coverage. This is the part of the policy that pays for the following expenses of the injured party.

• Medical bills 
• Lost wages
• Rehabilitative therapy

Liability coverage also provides for legal defense costs. All of these expenses put together are often more than the liability coverage limit. 

Financial responsibility laws are in force in nearly all states. These rules hold at-fault drivers to be liable for property damage and injuries that they have caused. Thus, aggrieved parties can sue at-fault drivers for resultant damages and injuries. The court may order the seizure of assets belonging to the at-fault driver as a result of the lawsuit.

Note that at-fault drivers are not free to walk away if they have no assets at all. They will still have to pay for damages awarded by the court from their future earnings. 

The umbrella insurance policy can protect you from extra liability without additional expenses. According to the Insurance Information Institute, you may have to pay around $150 to $300 per annum for a $1 million policy. 

It is not hard to see that umbrella insurance is extremely cheap and affordable. Moreover, it provides the highest possible value for money. There is hardly any other financial product for which you need to pay only $300 per year to obtain benefits worth $1 million when the need arises. 

A million dollars in exchange for $300 per year is not such a bad deal.

 

Is Umbrella Insurance All that Necessary?

 

You could end up losing all your savings and assets even if you have auto insurance. 

Auto accidents can lead to loss of life, injuries, property damage, and associated costs like medical costs, rehabilitation costs, lost wages, and much more. The total amount of all these costs may be much greater than your auto coverage. 

If you are found to be at-fault then the court may hold you liable for all of these damages. Your auto policy may pay for only part of the total damages awarded by the court. You may have to pay the rest if you do not have umbrella insurance. But if you have umbrella insurance, then it can pay the rest of the outstanding damages up to the coverage limit specified.

As you can imagine, paying for extremely high damage amounts can be a nightmare. Umbrella insurance can help save you from this terrible scenario if the court finds you responsible for damages incurred thus. 

Due to this reason, umbrella insurance is a powerful financial protection mechanism. It can prevent your assets from being wiped out overnight due to an unfortunate incident that transpired due to just one moment of distraction.  

The beauty of umbrella insurance is that it covers other members of your household or family besides you. 

An important caveat to bear in mind is that umbrella insurance will not pay for damage to your property. Financial benefits are paid out to others who have suffered injuries and property damage due to their actions. 

The prime benefit of umbrella insurance is that it costs far less than other insurance types and yet provides the highest benefits. 

Under umbrella insurance, you can also get coverage for other types of liability claims that auto insurance and other underlying insurance policies do not cover. This includes false imprisonment, slander, and libel. 

The umbrella insurance policy even provides benefits for rental property. Umbrella insurance will pay for amounts beyond what your renter insurance policy covers.

 

Umbrella Insurance Protection

 

Umbrella insurance can extend financial protection in cases where homeowner insurance, auto insurance, and other insurance plans fall short. 

Here are some of those situations. 

Your dog suddenly runs out of your home and attacks a person in the neighborhood. The person has incurred damages in the form of lost wages, medical bills, and therapy. The victim sues you not just for these costs but also for distress and suffering. Umbrella insurance can help to pay for these costs.

Your son gets into a physical altercation with another person in school and breaks his tooth. If you get sued to pay for damages, then umbrella insurance can cover you.

You are responsible for a highway accident that results in a pileup involving 10 cars. Passengers of these cars suffer serious injuries and severe property damage is inflicted on their cars. Your auto policy will most likely only be able to pay for a small fraction of damages thus incurred. When the court imposes massive damages, then umbrella insurance can pay for damages beyond auto liability coverage up to a defined limit.

You have prepared food for your daughter’s outdoor picnic party with school friends. Your daughter and her friends fall sick due to food poisoning for which you are responsible. When parents of affected children file a lawsuit, then umbrella insurance can pay for damages awarded.

While you are outside, your teenage son holds a party without your knowledge. Alcohol is consumed during the party and one of the partygoers is arrested for drunk driving. If you get sued, umbrella insurance can prove to be helpful.  

Under an umbrella insurance policy, you can also obtain benefits for the invasion of privacy, wrongful entry, and malicious prosecution. 

You will have noticed that umbrella insurance goes beyond the protection that auto insurance and homeowner insurance provide. 

Besides the policyholder, the examples above show that umbrella insurance provides financial coverage to other members of the household. 

So if you have a teenage driver in the house, you can rest assured knowing that umbrella insurance is available to pay for damages if your teenager is found responsible for a crash. 

However, you must make sure that you check which family members enjoy coverage under the plan. If a member is at-fault for an accident but is not covered under the terms of the umbrella policy, then it will not pay. 

Umbrella coverage provides financial protection wherever you go around the world. However, umbrella policies don’t cover cars and homes bought under the rules and regulations of foreign countries.

 

Who Needs Umbrella Insurance?

We all keep hearing horror stories on the news about how multi-million dollar damages are imposed on persons found at-fault. Moreover, we now live in a litigation-prone society where you will get sued out of the blue for the most trivial reasons. You can get sued for just about anything these days.  

To protect against such unfortunate circumstances, you will need umbrella insurance for financial coverage. In general, umbrella insurance is necessary if your assets are worth more than your auto plan coverage limit. Assets include home equity, investment accounts, college savings, retirement funds, savings accounts, and regular checking accounts. 

This general rule ensures that there is enough insurance coverage for all assets so that you don’t lose anything if there is a heavy lawsuit. 

However, this method has one major shortcoming. If the court imposes damages far in excess of your assets, then you could be in deep financial trouble.

 

Bottom Line

Umbrella insurance is virtually imperative (although it is not mandated under state rules). Total costs of at-fault accidents can be far in excess of liability coverage. Umbrella coverage can pay for this extremely high excess liability that auto insurance cannot cover. Without umbrella coverage, you will have to pay for this extremely high cost on your own.

The underlying insurance policy will have to pay first before umbrella insurance can provide benefits. Umbrella benefits will only be provided if the underlying insurance pays up to the minimum amount required by umbrella insurance. 

You now understand the basics of umbrella insurance. Make sure that you explore various offers before finalizing your purchase decision.