Umbrella Insurance Coverage and How It Works

An umbrella is handy for keeping the rain off our heads, and umbrella insurance is equally handy for protecting us from financial "rainy days" that might result from serious injury incidents.  An umbrella policy is a policy-on-top-of-a-policy – that is, additional coverage you can purchase that kicks in when your standard liability policy is used up.  Typically, most automobile liability insurance policies top out at around $250,000 per person and $500,000 per incident, though some auto liability insurance companies will offer policies with coverage of $300,000 per person / $600,000 per incident or more.  And most homeowners' liability policies will offer up to either $300,000 or $500,000 in coverage.

What happens if you are found liable for an incident resulting in personal injury claims worth more than your policy maximum liability coverage?  If you cause an injury with a claim value of $1 million when you only have $250,000 in liability coverage?  The answer is not a good one:  You may end up personally responsible for paying the excess out of your assets and/or an ongoing income.

Do I Need Umbrella Insurance?

Whether or not you need umbrella insurance is a question of your personal finances and risk.  If you have substantial personal assets that an injury victim could seek to go after for satisfaction of a claim that exceeds your liability insurance, or if you have a high income that a victim could seek to garnish in satisfaction of a judgment, then you are certainly in a financial situation where you should be considering umbrella coverage.  The question of whether to risk going without umbrella coverage, in this case, is a fairly simple one to answer since umbrella coverage is typically fairly inexpensive.

Umbrella coverage is relatively cheap because you will first have to have gotten the maximum liability coverage that your auto liability insurance companies offers – so you will already be paying for 250/500 or 300/600 in auto liability policy limits, for example.  Since the umbrella coverage will only apply in situations where injury claims against your policy exceed these underlying limits – a very small percentage of all incident claims – the umbrella policy is insuring against a very unlikely event.  And the less likely an event is to happen, the less an insurance company charges to protect you against it.  The cost of an umbrella policy will be affected by the number of things that are covered – each auto-added to coverage, each home or premises added, each household member on the policy, and so forth.  The Insurance Information Institute estimates that the typical $1 million personal liability umbrella policy will cost about $150 - $300 annually.  And higher limits for those who need it is relatively inexpensive as well.

Some insurance companies that issue umbrella policies will require that you also have your underlying liability policies with them as well, while others do not require this.  In general, it's worth checking with your current liability insurer first to see what options they may have for umbrella coverage. There may or may not be discounts for having multiple policies with the same company. Still, there is at least the convenience of not having to deal with multiple insurers for your different liability policies.

Be sure to note what an umbrella policy does and does not cover.  In general, it applies to liability situations where your auto liability policy, homeowners policy, or renters insurance policy would provide coverage first.  Personal umbrella policies do not cover business or professional liability – you need separate business or professional policies for this.  Umbrella policies generally do not cover damage caused to you or your property, although they will cover damage you are responsible for causing to someone else's property.  However, one significant exception to this is umbrella policies that offer you uninsured/underinsured motorist coverage for motor vehicle incidents in which the responsible party has either no insurance or inadequate insurance.  Only a few umbrella insurers offer this UM/UIM coverage, and they are worth looking for – as we have noted elsewhere, UM/UIM coverage is a good deal, and most folks should get as much of it as they can afford.

How Do I Use My Umbrella Coverage?

If you have your underlying automobile, homeowners, renters, or other personal liability insurance coverage from the same insurer as your umbrella policy, then as soon as you notify them of a potential claim, they will take the umbrella coverage into account along with the underlying liability coverage.  If you have your umbrella policy through a different insurance company, then be sure to notify them as required in your policy language when and if any incident occurs that may expose you to liability.  If your liability and umbrella insurers are separate, they will have separate adjustors monitoring each portion of the claim. If it proceeds to litigation, they may even hire separate attorneys to represent you in the matter.  The umbrella policy doesn't actually pay anything to the injured parties, however, until and unless the claims or an award or judgment exceed the underlying liability coverage limits.

The following video explains more about personal umbrella insurance and how it works.

For information on insurance coverages you may need, check out:

• Collision coverage 
• Comprehensive coverage 
• Liability coverage 
• Uninsured motorist (UIM) coverage
• Underinsured motorist (UIM) coverage 
• Medical payments (med-pay) insurance 
• Gap coverage 

And for more information on insurance companies, their claim tactics, and how an experienced personal injury attorney should deal with them, see:

• The Insurance Industry and Individual Companies -- Huge and Hugely Profitable
• Our Tools -- How an Experienced Personal Injury Attorney Deals with Insurance Company Tactics 
• Insurance Company Tactics -- Dirty Tricks Insurance Companies Play in Accident Claims

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