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Umbrella insurance increases the dollar limits of underlying liability insurance. This is generally so whether the underlying insurance if for Homeowners, Auto, business or any other type of liability. Umbrella coverage is generally much less expensive than your primary policy. The reason it is cheaper is because umbrella coverage is not available in most cases until after the limits of you primary coverage are exhausted. For example, if your homeowners’ liability coverage limit is $500,000, and you are sued by a neighbor who is severely injured on your property, your homeowners policy would only cover the first $500,000 in damages and/or defense costs. If the injuries suffered by your neighbor were so severe that you were liable for $800,000 in damages to your neighbor, your homeowner policy would cover the first $500,000 in defense costs and damages, and your umbrella policy would pay for the balance up to the policy limits. Without the umbrella policy, you and your assets would be exposed for the balance. The same analysis applies to auto insurance. If for example, you cause an accident and your primary auto insurance limits are $500,000, your umbrella policy which covers liability of from $500,000 to $1 million would not be triggered. If, on the other hand, the damages you cause could exceed $500,000, your personal assets would be protected up to your full umbrella policy limits. Umbrella policies are important for anyone who has assets that might be at risk if they cause serious harm involving an act covered by their insurance. In addition, umbrella policies protect your future earnings. This is so because if you cause damage to a third party and do not have enough insurance or assets to pay for the resulting losses, a court could allow the damaged individual to garnish a portion of your earnings each month to pay off this debt, or to take other steps which would imperil your future earnings.
In addition to increased liability limits, umbrella policies often provide additional coverage. Umbrella polices often provide coverage for personal liability claims such as libel, slander, defamation, malicious prosecution, wrongful eviction, false imprisonment, assault and battery, or other claims that are generally not covered by homeowners, auto, and other liability policies. Some umbrella policies also provide coverage if you face liability arising from your service on the board of civic, charitable, or religious organization. Most umbrella policies exclude coverage for these types of claims if they occur in the context of a business transaction.
Costs Covered Under Umbrella Insurance Most Umbrella policies cover both defense and indemnity costs once the primary policy limits are expired. But in most states, although it has to defend against punitive damages allegations, umbrella policies do not have to indemnify for a punitive damages judgment against you.
The most important thing you have to analyze in considering the purchase of Umbrella insurance is the issue of your assets. Many people don’t realize the extent of their net worth. You should consider the total value of your and your spouse’s savings, investments, retirement accounts, home equity, business value, personal property (jewelery, art, boats etc.) and income generating potential. Add it all up. The converse of Bob Dylan’s famous: “If you ain’t got nothing you got nothing to lose” line, is true. The more you’ve got, the more you’ve got to lose. Next, ask yourself what kinds of coverage for liability causing activities that might not be covered by underlying insurance, you may need to insure against. Some of these things might include suits alleging such things as defamation, invasion of privacy, malicious prosecution, assault and battery, wrongful eviction (of a tenant), wrongful termination (of a household employee), and a variety of intentional acts. What can we tell you? Suits over such things do occur. And they would not ordinarily be covered under “primary” homeowners, auto, and other liability policies. However at least some of this might be covered under an Umbrella Policy containing what is called a “drop down” provision. Such a provision can sometimes cover some things that are not covered in your primary insurance policies. So, if your assets are substantial and your family is like most, you’d better think about this. Some umbrella policies also provide coverage if you face liability arising from your service on the board of civic, charitable, or religious organization. However most umbrella policies exclude coverage for claims if they occur in the context of a business transaction. In any event make a list of the questions you come up with from thinking about all of this. Your checklist should include such issues as:
Then sit down for a heart to heart with an Umbrella agent. Bring your notepad.
Punitive damage insurance As mentioned, in most states, umbrella policies will not cover a punitive damages judgment. It is thought to be against public policy, and the purpose of punitive damages, to allow someone to just go out and buy this insurance and then proceed to take a sledgehammer to an obnoxious neighbor’s swimming pool.
False allegations against you Protection against claims and lawsuits like these, is often more about the cost of defending them than about the threat of losing. Even if a lawsuit against you is false and frivolous, you could still face very significant expense in the legal fees generated defending against it. Not only an Umbrella Policy but underlying liability insurance, is often responsible for paying the defense costs in such cases. There is often wording in these policies specifically to that effect. If the malicious allegations turn out to be true, however, well, that’s another matter.
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