Melissa Matzenbacher-Galan | Jan 10, 2024
Auto insurance is required in most states, but it’...
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Most everyone has home insurance, car insurance, or both—yet the liability limits on those and other policies may not be enough to cover a large liability lawsuit. An umbrella insurance policy adds a layer of liability coverage and can fill the gaps where other policies fall short.
According to the Insurance Information Institute, around 1,670 homeowners filed a claim for bodily injury or property damage because they or a family member caused a financial loss to someone. Liability issues can also arise because of an auto, boat, motorcycle, or other claim, and an umbrella policy can take the worry out of an unexpected lawsuit.
We’ll explain what umbrella insurance is, how it can benefit your family, and who needs it.
An umbrella policy is a liability policy that pays in excess over other underlying policies.
For example, a policyholder may have several insurance policies—home, auto, snowmobile, and ATV. If each policy has a liability limit of $300,000 and someone sued the policyholder for bodily injury or property damage they caused, the appropriate policy would pay up to the $300,000 limit. A $300,000 liability limit may be sufficient for some people, yet liability lawsuits can easily run over that amount. When that happens, the policyholder has no choice but to pay the balance out of their own pocket.
Umbrella policies generally offer a minimum of $1 million in coverage with the option for higher limits in increments of a million dollars.
Here’s how an umbrella policy works: If an auto owner has a $500,000 liability limit on their car insurance and they cause a car accident where the injuries and property damage amount to $750,000, the auto policy would pay the first $500,000 and the umbrella policy would pay the remaining $250,000. The policyholder wouldn’t have to pay anything.
Be aware that liability policies only pay damages to third parties. They won’t pay for your injuries or damage to your personal property. Umbrella policies also exclude the following types of incidents:
As with any policy, it’s important to read the entire umbrella policy to understand what is and isn’t covered under the policy.
While the primary benefit of a personal umbrella insurance policy is excess liability, there are other benefits as well. An umbrella insurance policy can also protect your assets, pay for legal costs, and cover additional perils.
An example of a liability claim will help clarify how an umbrella policy works. Dog bites are common types of liability claims for homeowners. Let’s say that a window installer came to Mr. Smith’s home to replace a window. While the homeowner’s dog hadn’t ever bitten anyone, the dog was frightened by the sound of the installer’s power tools and a stranger being inside the house. The dog bit the window installer which required multiple surgeries and hospitalizations along with medical bills for rehabilitation. The installer sued the homeowner for $1 million.
Fortunately, the homeowner had a $1 million umbrella policy. The homeowner policy paid out the maximum liability of $500,000, and the umbrella policy paid an additional $500,000.
This case also demonstrates how an umbrella policy can protect your assets. Since the insurance policies were sufficient to pay this claim, Mr. Smith wouldn’t have to tap into his home equity, savings, or investments to cover the difference.
Legal defense costs can also add up quickly when someone files a lawsuit against a policyholder, and an umbrella policy can help cover those costs.
In addition, having an umbrella policy may help a defendant settle a lawsuit faster as the parties will learn that they have sufficient liability insurance to settle a claim. Around 95% of personal injury lawsuits are resolved before the trial begins according to Black’s Law Dictionary.
Furthermore, umbrella policies may offer additional coverage that’s not found in the underlying policies. For example, umbrella policies may cover the following types of perils:
Everyone has liability risk, regardless of how much a person’s net worth is. The next section will give you more insight into who needs umbrella insurance.
The question of who needs umbrella insurance is somewhat subjective. A Schwab article points out that your coverage should never exceed your net worth, although others argue that everyone should have a basic umbrella policy,
One way to assess your need for an umbrella policy is to assess your risk factors. The Insurance Information Institute highlights some of the more common risk factors that suggest the need for an umbrella policy:
Here are a few other reasons to purchase an umbrella policy:
Regardless of the reason you’re considering purchasing an umbrella policy, it provides you with the benefit of having the peace of mind in knowing it protects your assets.
Because an umbrella policy protects against unexpected lawsuits in various ways, it plays a valuable role in financial planning. Your insurance needs vary as your life changes, and it’s important to review and adjust your insurance policies as life goes on.
Contact one of our licensed agents at the Leap Carpenter Kemps Agency to learn more about how an umbrella insurance policy can protect you and your family today. Contact us at 209-384-0727 to get a quote.
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