What is an umbrella policy?
Most people have a rough idea what liability insurance does. On a car, it covers if you cause injury or damage to another person or their property. On a homeowners policy it will cover injuries or damage that occur at your home that you would be held liable for (dog bite, slip and fall, crippling food poisoning from a poorly executed tuna casserole). As a business, it might cover damage caused by your equipment or injuries that occur on your premises. However, each of these types of policies come with a limit to the amount of liability coverage provided. On a personal car policy or homeowners policy that amount is usually no more than a few hundred thousand dollars, a business policy might cover a million dollars or more in liability coverage. An umbrella policy is designed for the really big claims when the lower limits might not be enough to handle the full amount of a large liability claim.
Can I just carry higher limits on my main policies?
Sold in increments of a million dollars, an umbrella policy will provide excess liability (additional liability) when the underlying policy is not enough to cover the claim against you. Further, it can span across many different types of policies, making it a convenient solution if you have many different liability exposures. For example, sure you have a couple of cars and a home, but you also might have a boat or a rental house or motorcycle or RV, each with their own separate policy and with separate limit of liability. Here is where the umbrella policy gets its name because it acts like and umbrella and adds a covering layer of liability over all of the underlying policies. Sure you could just carry higher limits on each of the underlying policies but that would be more costly and harder to find, particularly if your net worth is high enough that you need more than $1,000,000 in coverage.
How much liability coverage do you really need?
The idea of carrying higher limits of liability is to protect your assets in the event of a large liability loss like a severe car accident or a serious injury sustained by a guest in your home. The best way to look at it is to imagine yourself in the shoes of the lawyer representing the injured party. How much of a settlement would make it not worth pursuing a lawsuit against the responsible party. You would think that a lawyer would always seek the higher amount, however there does come a point where the certainty of a settlement outweighs the uncertainties of a trial. It’s the old adage: A bird in the hand is worth two in the bush. Typically, we recommend you carry liability coverage at least equal to your net worth. While there is no such thing as being ‘judgement proof’, having that much coverage becomes strong incentive for the other party to settle for that ‘bird in the hand’. However, there also comes a point where the additional coverage becomes relatively inexpensive considering the higher coverage afforded. As an example, the cost to buy a $1MM umbrella policy is not as expensive as going from a $1MM to a $2MM policy. Similarly, the cost of a $10MM umbrella is not twice as expensive as a $5MM umbrella policy.
Additional benefits available
One very popular feature that has made a comeback in recent years on umbrella policies is excess uninsured motorist coverage. For companies that offer it, you can add $1MM in uninsured motorist coverage to an umbrella policy to protect you and your family from severe injuries sustained in an accident with an uninsured motorist. Some companies are even going so far as to offer $2MM excess UM coverage.
Also gaining popularity are umbrella policies that will cover some commercial exposure such as business offices. This is often a very inexpensive way to get some additional coverage for your business at a ridiculously low premium (as low as $35/year).
Speaking of cost…
Costs of umbrella policies can vary greatly depending on the options you choose, the drivers (teenagers?) and exposures on the policy (boats, motorcycles?) and even whether or not you use the same company for your umbrella as you do your cars and/or home. Often the lowest rates come from a simple $1MM umbrella policy written by the same company that has your cars and home. It is not uncommon for such umbrella policies to only cost $300-400 per year. But just as often, those policies may not have as many options, like the UM option for example. I for one am a big believer in the UM option because it is usually pretty inexpensive (around $100/year) and, after all, you can just as easily face financial ruin if you are the injured party as if you injure someone else. So while it is a good idea to check for an umbrella policy with the company that has the rest of your insurance, be sure to ask about other umbrella policies as well.