An umbrella insurance policy provides additional liability coverage over and above coverage you carry on your personal insurance policies covering cars, homes, boats, etc. Most of these basic policies only provide lawsuit coverage of $300,000 or $500,000 per accident. Yet, if you injure someone seriously, you can blow those limits just in medical bills and/or lost wages. If a judgment is rendered against you for more than your coverage, you will end up paying any excess amount out of your assets and/or future income.
An umbrella policy has three major benefits: $1 million or more of additional liability coverage over and above your primary coverage, additional coverage for defense costs, and coverage for many lawsuits that primary auto or homeowners insurance does not cover (i.e., renting cars abroad, serving on nonprofit boards of directors, etc.).
Who Needs an Umbrella?
Because it is so easy to cause an injury serious enough where you're sued for more than your basic coverage limits, I believe everyone needs one, particularly those who have current significant assets or income, good future income potential (i.e., law or medical students), or anyone who stands to inherit a future sizable estate. Basically, if you're considered in America's middle class or above, you should have an umbrella policy with at least $1 million limits. (Umbrella policies are commonly available in million-dollar increments from $1 million to $10 million.)
What Is the Cost?
Premiums for a $1 million umbrella policy range from $150 to $250 per year. Each additional million dollars of coverage is about $75 per year. I consider an umbrella policy to be the best buy in the insurance business by far!
How Much Coverage Is Recommended?
Here is my rule of thumb: Buy at least $1 million of coverage. If uncertain, buy $1 million more in coverage than you think you will need.
What Are the Primary Policy Requirements?
An agent selling an umbrella policy needs to make certain that the underlying automobile, home, boat, recreational vehicle, etc., liability limits meet certain minimum requirements—typically $300,000 or $500,000 per claim. If you carry only $100,000 per claim or less, you will generally need to pay something extra (typically only about $50 a year) to increase your basic liability policy coverages to the minimum required for the umbrella. If that change is not made, a coverage gap may exist, making you responsible for paying out of your own pocket any coverage shortfall.
Can You Be Turned Down for Coverage?
Yes, you can be turned down for coverage. Just like any other liability policy that you purchase, you can be turned down for a poor driving record or the condition of the premises of your residence (presence of diving boards, trampolines, and the like). If you are turned down, a few high-risk umbrella insurance companies may be willing to insure you for a few hundred dollars extra per year.
What Policy Features Are Recommended?
You want an umbrella policy that covers as much of your personal life activities as possible, especially those activities that are not covered by your basic insurance policies. Essentially, you want an umbrella liability policy with the fewest exclusions. Before you buy, it's a very good idea to request a sample policy and read through the exclusions. Make sure that you understand whether any of the activities in your life are excluded under the umbrella policy. If you find an excluded activity, ask the agent whether he or she represents another umbrella insurance company that will cover this excluded activity.
Umbrella as a Rider or as a Stand-Alone Policy?
It really doesn't matter which form of umbrella coverage you purchase, all things considered.
Additional Tips
Make sure that your insurance company is considered very financially sound (rated A+ or A++ by the A.M. Best company). Buy $1 million more of coverage than you think you will need. Keep your umbrella policy with the same insurance agent as and, if possible, the same insurance company as your other policies for auto, home, etc. (This greatly reduces your chance of having a coverage gap between the primary policies and the umbrella policy.) (See IRMI.com, Reducing Umbrella Risks by Having One Agent (March 2010).
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
