Umbrella Insurance: Don't Let A Claim Rain On Your Parade

It’s easy to tell yourself that you’ll probably never need to purchase extra liability insurance. After all, your chances of being hit with a multimillion-dollar lawsuit may be fairly slim. And besides, wouldn’t the liability coverage on your standard homeowners and auto insurance policies be enough to protect you against a claim or a lawsuit? Before you make such an assumption and underestimate the importance of having enough liability protection we will first look at what Umbrella Insurance is.

What Is Umbrella Insurance?

Umbrella insurance refers to a liability insurance policy that protects the assets and future income of the policyholder above and beyond the standard limits on their primary policies. Umbrella insurance is able to "drop down" to fill coverage gaps in underlying policies. It does this in two ways:

• It provides additional liability coverage above the limits of your homeowners, auto, and boat insurance policies. This protection is designed to kick in when the liability on these other policies has been exhausted.

• It provides coverage for claims that may be excluded by other liability policies including: false arrest, libel, slander, and liability coverage on rental units you own.

Who should have Umbrella Insurance?

First, evaluate how much exposure or risk you have in your life. Do you have a trampoline or pool in your house? Do you own an ATV or other recreational vehicles? Do you have multiple young, inexperienced drivers in the house? Do you have company over at your house often that use the pool, trampoline, or recreational vehicles? If you answered “yes” to more than one of these questions, then you might want to consider purchasing an umbrella policy. If you own your own business or you are a professional such as a doctor or lawyer, don’t expect an umbrella policy to help you out. You’ll still need a business owner’s liability policy and/or malpractice insurance. You want to do whatever you can to protect you and your assets. A judge or jury will consider throwing you a huge judgment if they know you have the assets or cash to back it up, so having an umbrella policy would be worth it. The Insurance Information Institute notes that, between 2001 and 2007, the average jury award for all liability cases increased by almost 62%. Having an umbrella insurance policy can protect you against these increases.

Umbrella Insurance: The Myths

Unfortunately, there are a number of misconceptions about umbrella liability insurance that could cause you to be underinsured.

“My other policies should provide enough coverage.”
Standard auto and homeowners insurance policies typically offer between $300,000 and $500,000 in liability coverage. If you’re ever found liable for an amount greater than these limits, you may need to use your home, financial assets, and even your future earnings to satisfy a legal judgment. An umbrella policy acts as an additional layer of protection above the limits of your primary coverage. To qualify for an umbrella liability insurance policy, you generally must purchase the maximum liability coverage available on your auto and homeowners policies, which serve as the deductible for the umbrella policy.

“I’m not at risk of being sued.”
If you have a swimming pool, have teenagers living at home, employ workers in your home, own a dog, or entertain frequently, you may have a higher risk of becoming the target of a personal liability lawsuit. According to the Insurance Information Institute, dog bites alone accounted for more than one-third of all homeowners insurance liability claims in 2009. More than 50% of dog bites occur on the dog owner’s property. You can see that even something such as owning a dog or having a swimming pool on your property can be simple reasons why you should have umbrella insurance.

“It’s too expensive.”
Umbrella policies typically charge a few hundred dollars a year for $1 million of coverage. The average price for a $1 million personal umbrella liability policy can be anywhere between $150-$300 with the next million costing around $75 and each million after that for approximately $50. The benefits can be used to pay jury awards, plaintiff medical expenses, and legal fees, up to the policy limits. The appropriate amount of coverage for your situation will depend on personal factors, but it’s generally recommended that you have liability coverage at least equal to your net worth.

Get the most out of your Umbrella Insurance

Here are some top tips on how to get the most out of your Umbrella Insurance:

• Raise your deductibles: It sounds counter-intuitive to offer to pay more in case of an accident – how does that save anything? But it’s pretty simple: High deductibles mean lower premiums. Stacy Johnson founder Money Talks says, “If you insure yourself so you’ll never lose a penny, you’ll probably end up without a penny to lose.” If you can afford to pay for the first $1,000 of loss, see how much you’ll save with a $1,000 deductible on your car and home policies: It could be 15 percent or more.

• Understand your policy: Insurance is confusing, but you can’t know where you can save if you don’t comprehend what you have. If you don’t understand, ask. Then make notes about what, and who, is included and excluded, what limits you have, what the law requires, and what you’re paying.

• Review your limit every 2-3 years:  Make sure your coverage is adequate. Your net worth is (hopefully) improving: Make sure your coverage is keeping up.