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Umbrella Insurance Explained

Oct 11, 2007
Most of our insurance agency clients, whom I ask if they know what umbrella insurance is meant for, cannot answer positively. Yes, they have heard about it, but they cannot say what it is for, why people need one, and who should consider buying one. So, let's start with the square one.

Liability coverage is needed when a policy holder is being sued in a civil court (not criminal). The lawsuit against a person might come as a result of a bad driving (the most frequent case) or from whatever else one can be liable for.

The driving liability protection comes from a car insurance policy. The rest is covered under homeowner's liability policy (condo or renter's policy will do the job too) - dog biting, insulting strangers, and many other things, which have not much to do with one's residence. As usual, in the world of insurance exclusions apply. So, let your insurance agent take care of gaps and exclusions.

The maximum liability you can get on your car insurance policy is $500,000. The same goes with homeowner's insurance. Some companies would go up to $1,000,000, which does not make much difference if one's total assets exceed that number. If the real ugly thing happens and you are liable for more than you are covered for then guess what?

Now you have to pay the difference out of pocket. Why? Because you do not have that extra liability provided by that really inexpensive umbrella insurance policy, which adds one, two, three or more million liability on the top of what you have on your car or home insurance.

Most of the people would say "I do not have that much in assets". If that is the case then you do not need the umbrella insurance policy. While calculating the value of your assets do not forget to include 25% of the household income for the next 10 years (garnishment of wages) on the top of bank accounts and equity in your real estate.

When you buy a personal liability umbrella insurance policy, you are getting not just higher liability coverage limits. You are buying a broader coverage as well. Your liability coverage pays for lawyer's fees and defense costs, which normally add up quickly.

By the way, if you have rental property (up to 20+ units) in your state or in a number of states you can use your umbrella to cover that exposure as well. And the cost is very nominal - around $15 a year per rental unit. The title to the rented property should be on your name, not a business entity name. The personal injury protection under umbrella insurance policy offers coverage not sometimes found in your auto and homeowner's policy. It includes defamation, invasion of privacy, false arrest, false imprisonment, malicious prosecution, wrongful entry, or eviction. Many primary policies cover bodily injury and property damage, but not personal injury.

One of the best things about Personal Umbrella Insurance is that you get lots of coverage for the money. Coverage start at $1 million, but you can go as high as $10 (sometimes even 50) million. The total annual premium for a $1 million umbrella is very affordable and could be as low as $200 a year. The premium depends on many factors including number of cars in household, how many young drivers are there, previous claims. Many companies will not sell umbrella insurance to someone who does not meet the definition of a good driver.

Umbrella liability insurance can be purchased as a stand alone policy. However, insurance companies require that you buy an underlying basic liability coverage first (homeowners/renters insurance, car insurance, or both) before you can purchase an umbrella liability policy. If you do not meet this requirement, you will be personally liable for the difference between the liability limit you should have carried and the limit you do carry. Many insurers will not offer an umbrella policy to someone whose car is insured somewhere else.

It is important to distinguish between actual umbrella policy and excess liability policy, which many mistakenly call an umbrella. The difference is very clear - excess liability policy does not cover anything, which is not covered by underlying policy, while umbrella offers a broader coverage.

Normally, the umbrella won't cover claims arising out of a business endeavor. If you own a business, even a small one, you'll need to buy a business insurance policy to be covered against liability claims. If the court assesses punitive damages against you, those damages will not be paid by your umbrella insurance. Also, as a general rule, the umbrella policy will not cover intentional acts.
About the Author
Mikhail Portnov is a Certified Insurance Counselor.
He is the CEO of California-based Fidelity Amerisurance Insurance Services brokerage, which specializes in both personal and commercial lines of insurance.
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