What Is It and How Is It Useful?
Umbrella liability insurance, or excess personal liability coverage, is intended to
protect you in case you are held personally liable to another person for injury or
property damage.
For example, if someone slips and falls from a crack in your sidewalk and
successfully sues you for money damages, your personal liability policy can provide
coverage to pay the damages. These policies are called "excess" policies because
they insure the "excess liability" over the limits which otherwise may be provided in
your homeowner's, auto, or other insurance policies.
Umbrella insurance is usually not expensive because, statistically speaking, most
people are not sued for "cracks in their sidewalks." When they are sued, however,
the potential for financial catastrophe is great. Generally speaking, a small premium
is usually enough to cover a significant claim, even though the chances of a claim
are remote.
What does this mean to you?
Excess liability insurance coverage can provide peace of mind for relatively little
cost.
A major reason for excess personal liability coverage is to protect you against a
catastrophic claim -- one that exceeds the coverage limits under your existing auto
or homeowner's policies. In fact, umbrella liability policies are usually available only
after you purchase the maximum liability limits under your auto and homeowner's
policies. The liability limits on your auto and homeowner's insurance policies serve
as a deductible on the umbrella policy.
For example, the liability limit on your auto policy is $300,000. Your umbrella
policy covers up to $1,000,000 of additional claims. If a claim is made against you
for $500,000, the primary carrier (the company with your auto policy) will pay the
limit of insurance of $300,000, and the umbrella policy carrier will pay the excess
of $200,000.
Typically, coverage comes in increments of $1,000,000 and is available in the $1
million to $5 million range for a premium of $200-$600 annually.
How Do You Assess Your Needs?
Umbrella insurance coverage should be considered if you are building or have
already built a significant estate that could be lost through the judicial process. In
addition, this coverage is appropriate even if you have little current net worth but
you have substantial future earning power.
Many financial advisors recommend that you obtain umbrella liability insurance
coverage at least equal to your net worth (assets minus liabilities). The cost of the
insurance is relatively inexpensive considering the amount of coverage you are
obtaining. Some excess liability policies cover the cost of legal defense; others do
not. You should determine if your coverage includes this feature and what, if any,
limits on legal costs are included in the policy.
What does this mean to you?
Determine your current net worth (assets minus liabilities). Will this amount increase
in the future? Because of the relatively low cost of this type of insurance, consider
purchasing enough coverage to protect your net worth for several years.
What Products Are Available?
There is no standard umbrella policy. Therefore, you need to analyze carefully the
coverage of each policy you may be considering before making a decision. Most
companies tailor their excess liability coverage provisions around their auto and
homeowner's policies. Because of this fit, it is often a good idea to purchase an
umbrella policy from the same company that provides your primary insurance. The
broader the coverage, the more potential risks and hazards you will be protected
from. Before buying, determine what is included and excluded from coverage.
Make sure the covered risks are clearly defined.
Premium and Policy Considerations
Premium costs for umbrella coverage are usually low. It is generally less expensive
to obtain umbrella liability insurance than to obtain additional homeowner's liability
insurance. This can make umbrella insurance a "good buy."
On the other hand, insurance carriers generally require policy owners to maximize
their auto and homeowner's liability insurance before they will issue umbrella liability
insurance. Thus, you should coordinate your purchase of both kinds of policies
(homeowner's and excess) to maximize your overall coverage at the lowest
possible cost.
Other Considerations
If you do not coordinate your policies, you will be responsible for any gaps in your
coverage. This can have the effect of imposing a very large "deductible" on your
claim.
You should evaluate your own activities to assess the likelihood of personal liability
claims and the risks that must be covered. Most umbrella policies exclude certain
kinds of claims (such as claims by family members against each other), and you
need to make sure that the exclusions are reasonable and acceptable to you.
Tip: If you have a lot to lose, consider umbrella insurance. Everyone who has a
significant estate or is developing a plan to build an estate should consider
protecting the estate against adverse claims by purchasing an umbrella insurance
policy.
