Umbrella Liability Insurance – Do I need it?

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

Umbrella liability insurance is a type of liability insurance available to individuals and companies protecting them against claims above and beyond the amount covered by their primary policies. If your liability coverage isn’t enough to cover the damages of an accident or an incident on your property, a personal umbrella insurance policy kicks in when your other liability insurance’s underlying limits have been reached. In other words, an umbrella policy can protect you when your automobile or homeowner’s liability insurance is not enough.

Keep in mind that an umbrella policy requires you to have a specific amount of underlying coverage on all other policies. In most states, you will need to have a homeowner’s policy with a minimum of $300,000 in personal liability coverage, plus an auto policy with limits of $250,000 or $500,000 for bodily injury coverage and $100,000 for property damage coverage and uninsured motorist coverage.

When an insured has a liability claim, he or she is covered up to the underlying policy limits, but any additional amount will be covered by the umbrella policy. The policy can protect future income as well as possibly cover legal fees. For example, if you have a car accident and your current auto policy has liability limits of $300,000 but the claim is $500,000, your personal assets would be a stake for $200,000 if you have no umbrella policy.

As another example, if you are required to have $300,000 worth of liability on your homeowners or car insurance but only have $100,000, and you have a $2M umbrella policy, you will still be liable for the “donut hole” of $200,000 before the umbrella policy will start paying.

The required limits for underlying policies can vary by insurer, so it’s important that you speak with your insurance agent regarding the limits on your primary policies, and determine how they correlate with the umbrella coverage you are considering purchasing.

What about excess liability?

Although you can get excess liability coverage on an existing policy, the main difference between excess liability and an umbrella policy is that the umbrella extends to automobile or other broader protections.

For example, if you only have excess liability on your homeowner’s policy and have a car accident, the excess liability policy on your home will not cover the additional liability for your car accident.

Umbrella coverage can also extend to other vehicles, boats, personal injury, or director/officer liability, depending on the policy. Also, umbrella policies tend to be more cost effective since you can spend less on the coverage but receive greater insurance protection.

Do I need an umbrella policy?

If you are a high net worth individual or are exposed to more than normal risk, it makes sense to look into this coverage. Do you spend a lot of time driving? Do you have a boat or RV? Do you entertain frequently in your home? Do you have a pool? Do you have any pets? Do you have a vacation home? Do you have teenagers who have just started driving? Do you own a small business?

Umbrella liability is fairly inexpensive and can protect you and your property from lawsuits. If you have assets to protect in the event of a lawsuit, it makes sense to have this type of policy. The policies usually start around $1M and cost around $200 to $400 per year. They are available in million-dollar increments — each additional million usually costs marginally less. Cost may vary by location, credit history, and driving records of the people in your household.

Have you evaluated your current policy recently?

You may already have an umbrella policy in place, but as assets grow over the years, you may need to consider raising the limits to cover your current exposure. In general, your policy should be equal to or greater than your net worth.

Note: We are not licensed P&C insurance agents and can only give you a broad overview of the advantages and disadvantages. Please discuss this with your agent before making any changes to your existing policies.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@ek-ff.com