Do You Need the Protection of Umbrella Insurance?

Do You Need the Protection of Umbrella Insurance?

June 25, 2020
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There's nothing as good as a sturdy umbrella to protect you in torrential rain. The same principle applies to umbrella insurance

You're not insuring your umbrella! But you are protecting yourself against severe risks. And for a remarkably low cost too.

In simple terms, umbrella insurance is a policy that increases the limits on liability coverage in both homeowners (or renters) and auto insurance -- although it often provides coverage against other risks too. 

Umbrella policies are also available for businesses to supplement commercial liability coverage, including rental property owners, and for professional liability (including malpractice).

Liability insurance is your protection against legal costs, lawsuit settlements and other expenses you face when you're responsible for property damage or personal bodily injuries.

The trouble with standard liability insurance is that it sets limits on how much the policy will pay out if you make a claim. With car insurance, the limit is typically somewhere between $300,000 and $500,000. For homeowners and renters, the limit is typically about $300,000.

In both cases, these limits can usually, but not always, be increased within your main policy for an additional premium. But then you have to add separately to each policy, which can be expensive. And sometimes the higher limits may still not be high enough for the risks you face.

Why? Because, these days, in our increasingly litigious world, the costs associated with liability claims and settlements can easily exceed these limits of regular policies. And if you breach these limits, the additional costs have to come out of your own pocket.

For instance, if you face a liability claim of $1 million, which isn’t unheard of, and your policy has a limit of $300,000, you'll have to find the additional $700,00 yourself -- a crushing cost for most of us that may threaten long-term financial security.

This could mean, for instance, a lien being placed on your home or a mandated deduction from future earnings.

That is, unless you have umbrella insurance. This kicks in when your main policy limits are breached and commonly provides up to an extra $1 million of liability coverage (sometimes referred to as "excess liability"). 

It can go even higher if you wish, or if you face a higher level of risk. For example, if you have a long or risky commute or if you have a couple of dogs that raise the risk of a visitor or passer-by being bitten. Or, if you are in a profession that is susceptible to costly lawsuits. This is something you can discuss with your agent who should be an expert at helping you assess risks.

Despite this reassuringly high limit of payout, the cost of umbrella insurance is actually quite low. This is mainly because the likelihood of a claim exceeding your standard policy limits is relatively low. 

That's not to say the risk is non-existent. It happens. Settlements and costs in liability lawsuits exceed $1 million in an estimated one in eight cases according to Jury Verdict Research, as reported by the National Association of Professional Financial Advisors (NAPFA).

And that, after all, is why we have insurance. And remember, defense costs in liability claims can be astronomically high, even if a lawsuit against you is actually dismissed.

How Much Does Umbrella Insurance Cost?

Typically, an umbrella insurance policy for homeowners, renters and car owners will cost you less than a dollar a day, sometimes as little as 50 cents, for an extra $1 million of liability protection. Often, this cost will be less than if you raise the limits separately on your auto and home insurance

If you raise that limit to say $2 million, it will naturally cost more, but it wouldn’t double the premium. The higher your coverage limit, generally the lower your costs will be for each million dollars of protection. The norm is around $100 per year for each additional $1 million of coverage.

One thing to note is that you can’t just buy an umbrella policy without already having standard liability coverage. And most insurance companies will want you to have coverage of around $300,000 before they'll issue an umbrella policy.

That's not all there is to it though. Most umbrella insurance policies offer additional benefits that may not be covered by regular policies. For example, they can provide coverage for false arrest, libel or slander claims, malicious prosecution or mental anguish that you are alleged to have caused.

In the case of business liability, umbrella policies generally specify the risks they protect against and encompass traditional business risk areas such as errors and omissions (E&O).

There are some areas of liability that generally aren't covered by umbrella insurance. These include liability claims arising from floods and claims relating to uninsured drivers. You should have separate coverage for these risks, increasing the limits within the policies if you think it's appropriate.

Unlike auto insurance, which is compulsory in most states, and homeowners insurance (which most lenders insist on), umbrella insurance is entirely a matter for your choice. However, given the rising costs of litigation costs, liability settlements and the relatively low premiums, it makes increasing sense to give this coverage serious consideration.

Ironically, it's people who have considerable wealth or a large asset values who are most vulnerable to expensive lawsuits. That's because litigants know they have the potential to pay large settlements, whereas those with few assets are less likely to be pursued in the civil courts.

Clearly, there are many considerations to be weighed into your deliberations on whether you should buy umbrella insurance.

If you'd like to talk this through with an experienced agent, without cost or obligation, please get in touch with us at Equity Insurance Group.