Umbrella Insurance

Policy & liabilty (Definitive Guide)

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Umbrella insurance is a type of private liability insurance and can be crucial when you end up liable for a claim bigger than your homeowner’s or auto insurance will pay. If you own a boat, umbrella insurance will also pick up where your ship’s liability insurance falls off.

And if you own rental property, umbrella insurance provides liability protection beyond what your homeowners policy insures.

While the chances are slim you will be sued and end up owing someone greater than that which your current insurance policies will pay out, if you did wind up in that circumstance, you could lose all of the money you’ve worked so tough to save. Umbrella insurance is designed to make certain that you never find yourself living that nightmare. Let us take a better look at exactly what umbrella insurance covers, who wants it, how it works, just how much it costs and what it won’t insure.

What Umbrella Insurance Covers

Here are some examples of incidents a umbrella policy could cover in case your homeowner’s insurance or auto insurance wasn’t enough:

— Your dog runs out of the home and brutally strikes a neighbor who was heading for a walk and minding her own business. Your neighbor sues you to cover her medical bills, lost wages and pain and distress.

— Your daughter gets into a fight at school and punches another girl, breaking her nose. The girl’s parents sue you.

— You cause a 10-car accident and your auto insurance property damage coverage is not high enough to pay for all 10 accident victims’ replacement vehicles. Nor is your own personal liability policy high enough to pay for their medical bills.

— You send cakes to your son’s college for a field trip lunch. Many pupils become sickened with food poisoning and their parents sue you.

Someone brings alcohol into the party, and among the party guests gets arrested for driving under the influence on the way home. You get sued.

Umbrella policies also cover malicious prosecution, wrongful entry, invasion of privacy and other harms.

Since you may have gleaned from these cases, umbrella insurance covers not just the policyholder, but also other members of his or her loved ones or household. If your teenager is not the best driver, then you can sleep better at night knowing your umbrella coverage will cover the injured parties’ medical bills if your child is found responsible for a significant accident. That having been said, make sure to understand how your policy defines a household member so you’re going to actually have the coverage you require.

You may also have noticed that even though umbrella insurance acts as coverage above and beyond your own homeowner’s and automobile insurance, the incident doesn’t need to involve your property or your automobile for your umbrella insurance to insure it. You’re also covered worldwide, with the exclusion of homes and automobiles you own under other countries’ laws.

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Do You Need Umbrella Insurance?

Many insurance businesses say you require it because of the lawsuit-happy world we are living in, where anyone can sue you for anything and destroy you financially. You can find a lot of private liability horror stories from the news, where juries given multimillion-dollar judgments to the sufferers that people had to cover. But how likely are you to find yourself in such a situation? Do you really require umbrella insurance? (For related reading, see: It’s Raining Lawsuits: Do You Want An Umbrella Policy? )

As a rule of thumb, you may hear you need to purchase umbrella insurance if the total value of your assets, such as ordinary checking and savings account, retirement and college savings and investment balances, other investment balances and home equity, is higher than the limits of your auto or homeowners liability. The theory behind this advice is that you want to have sufficient liability insurance to fully cover your resources so you can not lose them in a litigation.

This recommendation does not quite make sense, though, because jury awards may easily exceed insurance policy limits. The actual question you need to ask yourself is, am I at risk of being sued? Everyone is, so in a sense, umbrella insurance is reasonable for everyone. It is a small cost to pay for the extra peace of mind.

But some people are more likely to want an umbrella coverage than others. If you participate in some activity that puts you at greater risk of incurring excess liability, you are an even better candidate for an umbrella policy. Private liability risk factors include owning land, leasing it out, using household staff, acquiring a trampoline or spa, hosting big parties and being a well-known public figure. Possessing a teenage driver also puts you at increased risk, as does owning a puppy or owning a home with a swimming pool. Fundamentally the more likely you are to be sued, the more strongly you should consider purchasing umbrella insurance, but anybody who is risk averse will sleep better at night knowing they are protected by an umbrella policy.

An Example of How Umbrella Insurance Works

Let us say your homeowner’s insurance comes with a private liability limit of $300,000. You throw a massive holiday celebration, and one of your guests slips and slides in your arctic front steps. This decision is $700,000 greater than your homeowners insurance coverage limit.

Without a personal liability umbrella, you need to cover that $700,000 out of pocket. In your circumstance, the money might need to come from your retirement accounts, your primary source of savings. The loss is catastrophic and means you are going to need to work 10 years, find a higher paying job or cut back your expenditures to replenish your savings and return on track to be able to retire. But if you have $1 million in umbrella insurance, your umbrella policy will cover the portion of the judgment that your homeowner’s insurance does not, along with your retirement savings will stay intact. The umbrella coverage will also cover any lawyer fees and other costs associated with the litigation that were not covered by your homeowners policy. (For related reading, see: How to Protect Your Retirement By Lawsuits.)

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Therefore, in case you have a $5,000 deductible on your homeowner’s insurance, you are going to pay that sum out-of-pocket. Afterward, your homeowners policy will cover another $295,000, which gets you to the $300,000 policy limit. Your umbrella insurance does not have a separate deductible in this instance, since the homeowner’s policy covered a portion of the reduction. Your umbrella coverage pays the remaining $700,000 of the ruling and legal costs, and that means you are just out- of-pocket $5,000 for the $1 million ruling.

Imagine if you were found liable in a situation where your homeowner’s or automobile insurance didn’t apply? Then you’d cover an umbrella insurance deductible, called self-insured retention, before the umbrella coverage kicked in.

Just how Much Does Umbrella Insurance Cost?

The cost of an umbrella liability policy is dependent upon how much coverage you purchase, the state where you live (insurance rates vary by state) along with the danger that insuring you presents to the insurance company. The more homes or automobiles you own, and also the more household members your coverage will cover, the more it will cost.

However, umbrella insurance is quite cheap in comparison to other kinds of insurance, particularly considering just how much coverage it offers. Most insurance companies’ umbrella liability policies start at $1 million in coverage, with higher limits available.

Why is umbrella insurance so cheap? It’s partly because you need to carry lots of homeowner’s and auto insurance prior to an insurance carrier will issue you an umbrella policy. You’ll probably have to take the most liability policy available under your homeowner’s and auto policies before you are able to purchase an umbrella policy.

Most people already have at least $100,000 in homeowner’s coverage. Minimum auto insurance liability coverage depends on your state’s laws but is typically $25,000 per person and $50,000 per accident. The maximum you can usually purchase is $500,000 in private liability under your homeowner’s policy and $250,000 per individual and $500,000 per accident under your auto insurance plan. If you don’t have this much policy, your homeowner’s and automobile insurance premiums will go up, which makes the umbrella policy more expensive than it may seem at first glance.

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If increasing your policy and purchasing an umbrella coverage is too pricey for you, as an alternative, you may be able to purchase endorsements for your auto or homeowners insurance which boost your liability limits beyond the usual maximums. You probably won’t get as much coverage as an umbrella may provide, but you will still be better protected than you were previously.

Another potential requirement for getting umbrella insurance is that you’ve got your automobile and/or homeowner’s insurance with the identical company that issues your umbrella coverage. But if the umbrella insurer you choose will not require you to have your homeowner’s and automobile insurance policies with that firm as a condition of growing umbrella insurance, it might be cheaper this way to acquire the insurance company’s bundling discount. Then again, switching insurers might mean higher premiums, which means you will want to compare quotes. Another consideration is it may be easier to get all of your policies with the identical firm for administrative reasons in the event that you need to use your umbrella coverage.

What’s the Catch?

One good thing about umbrella policies is they provide comprehensive coverage. They cover any event that the policy does not expressly exclude, unlike some insurance coverages, which merely cover specifically named incidents. But no insurance policy covers everything. Here are some items your umbrella policy probably won’t cover:

— Damage a covered member of your family triggers on purpose. If you pushed your celebration guest down the staircase, umbrella insurance would not cover the expenses of the litigation or judgment (and neither would your homeowner’s insurance).

— Liability incurred in business or professional pursuits. You are going to need business liability insurance to insure those incidents.

— Liability you agreed to presume under a contract you signed.

— Liability associated with a war. Good luck finding any sort of insurance that covers war-related damage; the financial losses related to warfare are too high for insurance companies to pay for.

— Damage to your own property. Remember, it is a liability policy, so it will only cover you when you are held responsible for damage to someone else’s property. Make sure you have enough homeowner’s insurance to cover damage to your property. (For related research, see: Locate The Best Homeowner’s Insurance. )

The Bottom Line

Even the most careful person with the best intentions can wind up on the hook for a massive judgment from a private liability suit. As you’re not likely to find yourself in this circumstance, it is still wise to protect yourself against such a devastating financial loss. Umbrella insurance can help you do that.

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