Personal Umbrella Liability Policy
The personal umbrella policy is excess liability insurance that provides protection against legal liability that is over and above that provided by auto, home, and boat insurance. People with significant assets need an umbrella liability policy to cover lawsuits that can sometimes amount to millions of dollars.
The umbrella policy also has broad coverage that covers some claims that wouldn't be covered at all by home and auto insurance, such as personal injury lawsuits arising from false arrest, slander and libel, or rental units that the insured may own. Not only is the cost of direct damages covered, but also the cost of consequential damages, such as the lost income suffered by a severely injured person because of the injuries. The personal umbrella policy also pays for the legal defense of lawsuits that is in addition to the policy limit for damages. So if you are sued and held liable for $1 million, and your legal costs are $200,000, then a policy providing $1 million of coverage will pay the full claim plus the $200,000 for legal costs.
The personal umbrella policy also covers any damage to the property of others that is held, controlled, or cared for by the insured, and these losses are covered wherever they may occur in the world. However, only lawsuits filed within the United States are covered; legal proceedings in foreign jurisdictions are not covered.
The amount of coverage usually ranges from $1 million to $10 million, and covers broad forms of liability. Most insurance companies have required minimum amounts of coverage—typically, you must have at least $250,000 of protection on your auto policy and $300,000 of protection on your homeowner's policy. If you own a boat, then you must also have boat insurance with a minimum amount of coverage. For instance, GEICO requires $100,000 liability coverage for boats under 26 feet with less than 50 horsepower; larger boats require at least $300,000 of coverage. Personal umbrella policies do not pay until the auto, home, or boat insurance is exhausted, unless it is for a loss not covered by those policies but is covered by the umbrella policy, such as slander and libel. If the underlying insurance lapses, then the umbrella policy will only pay those amounts that it would have to pay if the underlying insurance was in force.
When the umbrella policy does cover a loss that is not covered by any other insurance, then the insured must pay a self-insured retention or deductible that is much less than the insurance policy limits for auto, home, or boats—typically, the deductible is $250. Like any deductible, the insured must pay this for any loss, before the insurance company pays. For example, if an insured is in an auto accident that causes a $400,000 liability, then the insured's auto coverage would pay the policy limits of $300,000 minus the auto policy deductible of $1,000, which the insured pays, for a total of $299,000, and the umbrella insurance would pay the remaining $100,000. If, however, the insured is sued for slander and becomes liable for $400,000 of damages, and he has no other insurance covering the liability, then he pays only the self-insured retention of $250, and the umbrella policy pays the remaining $399,750.
The Insurance Services Office has developed the 1st standardized personal umbrella policy that is used by many insurers. Below are some of the characteristics of this policy.
Persons that are covered by the umbrella policy include:
- the insured and spouse, if the spouse is living with the insured;
- resident relatives;
- household residents under the age of 21 who are under the care of the insured;
- anyone using a vehicle owned by the insured and covered under the umbrella policy; and
- also includes any person or organization that is legally responsible for the insured, while the insured is using a covered motor vehicle.
Like all insurance policies, umbrella policies have numerous exclusions. Most exclusions can be classified as those that should be covered by other insurance policies, or intentional torts or other willful acts by the insured, or events that occurred outside of the time period in which the policy is in force, or for losses resulting from events that are not generally insurable. For instance, a typical umbrella policy does not cover legal liability that arises from business or professional services, because that type of coverage should be purchased separately, nor does it cover liability that arises from a breach of contract.
Some common endorsements to the personal umbrella policy include being able to remove coverage for watercraft or recreational motor vehicles (RV's) if the insured does not own them, which will reduce premiums. Although umbrella insurance does not provide uninsured motorists coverage, an endorsement to add it can be obtained in those states that require it.
Shopping for Umbrella Insurance
Typically, the first 1 million dollars of coverage is usually the most expensive, since at least part of any claim will be within this range; additional coverage will cost less because claims large enough to fall in the higher ranges are less likely.
Because the personal umbrella policy is excess insurance, it is relatively inexpensive compared to home or auto insurance. The 1st million dollars of coverage costs about $150 to $300 per year, the 2nd million costs about $75, and subsequent increments of $1 million costs about $50 per year.
The reason why insurance works is because the losses of the few are covered by the premiums of the many. Hence, the price that an insurance company charges will depend on how many customers that the company has for that particular policy and in that particular range of coverage. So it is possible when comparing 2 companies, for instance, that 1 million dollars of coverage will cost less at one company, but a 5 million dollar policy will be cheaper at the other company.
For instance, if an insurance company targets lower income individuals, it will probably have a low price for 1 million dollars of coverage, but a much higher price for a 5 or 10 million dollar policy relative to another company that markets to higher income individuals. Hence, it would be wise to shop around separately for the umbrella policy for the actual coverage that you will need from different companies and compare it with what your home or auto insurer is charging for that particular policy amount.