We are talking about umbrella insurance policies, not the pop-up and prevent you from getting wet in the rain umbrellas. An umbrella is a policy you can purchase to provide additional protection beyond what your homeowners and automobile policies can provide. An umbrella provides liability protection and not protection for you physical possession such as a house, car or boat.
So why purchase an umbrella? There are three main reasons to purchase an umbrella: increased liability coverage, broader protection than your other policies and drop down coverage. Let’s break these down a bit more.
At its purest, an umbrella policy provides an additional limit of insurance above your other policies, such as your homeowners and auto policies. Let’s say your liability limit on your home is $500,000 and on your auto it is $500,000. If you purchase a $1,000,000 umbrella policy, you will effectively have $1,500,000 for any homeowner liability claim and $1,500,000 for any auto liability claim.
That’s all well and good but $1,500,000 can seem a bit like overkill sometimes. Let’s take a look at some examples:
An 18 year old drove to the store with a friend. He left the road and struck a tree. The friend was hospitalized over a month with multiple fractures and injuries, some of which were permanent. The court awards the friend over $1,000,000 in damages.
You are driving your boat with friends. One friend is standing on the bow of the boat and falls off when you turn. The friend was knocked unconscious, suffered physical injuries and nearly drown. The friend gets an attorney and sues you for $1,500,000 in damages.
Broader protection can also be offered with some umbrella policies. The main areas of broader protection are:
International Coverage – Your homeowners and auto policies, typically, only cover claims that occur in the US, its territories and Canada. If you travel abroad, you probably have no liability coverage from homeowners and auto policies.
Care, Custody and Control – Your homeowners and auto policies exclude, with some exceptions, property that is damaged while it is in your possession. If you rent a boat, there is no coverage under your homeowners for any damage you cause to the boat that is rented.
Personal Injury – This includes libel, slander, defamation of character, invasion of privacy and a number of other legal issues.
Legal Defense – One of the most important portions of coverage you have is the insurance company’s responsibility to pay for your legal defense. Defense costs often exceed the final settlement. This is provided whether or not the claim is covered by the underlying as long as it is covered by the umbrella.
Non-Profit Board E&O - Personal Liability insurance on your homeowners policy will exclude lawsuits due to business pursuits. However, some umbrellas will cover your pursuits as a board member or officer of a non-profit.
Finally, what is “drop down” coverage? Umbrella policies don’t kick in until the amount of the claim reaches beyond your underlying home and auto insurance. Well, what if the claim isn’t covered by your home or auto insurance? If the umbrella has broader coverage that applies to your particular claim, the umbrella can “drop down” and either have a small deductible or no deductible depending on your policy. Ask your agent how your policy will respond.
Now that we understand why you need an umbrella, how much coverage to you need? You need to protect your assets so it depends how large your net worth is. However, it is important to keep in mind that if your net worth is $500,000 and you have $500,000 limits, you can still be sued for $1,000,000 which will use up your $500,000 limits and then they will come after you personally for the additional $500,000. This is what you need to prevent.
The best way to get started is to give us a call at The Frederick Agency! We will be happy to review your insurance program and recommend whether an umbrella is a good fit for you and help get you coverage for a competitive price.