Why You Always Need an Umbrella — Even When It Isn’t Raining

Bad things happen: that’s why people buy auto and homeowners insurance policies. But America’s love affair with lawsuits means your coverage could fall short. That’s where umbrella insurance policies come in. They provide a convenient and surprisingly affordable extra layer of protection for your key assets.

What happens if you are sued for causing an auto accident or your neighbor slips and falls on your property? If you are found liable for causing serious injury, the sky-high cost of medical treatment, lost work time and possibly pain and suffering damages could quickly exhaust the coverage limits on those policies. For instance, say you are found liable for $1 million in damages and your policy limit is $500,000. Your insurer would pay $500,000, but you would be on the hook for the rest. Virtually everything you own would be available to pay off the debt.

That’s where umbrella policies come in. The coverage begins once you reach the limit of your underlying auto or homeowners policy (whichever applies), up to the policy limit, usually $1 million or $2 million. In the example above, your homeowners insurance would pay out $500,000 and your umbrella policy would pay the remainder.

Premiums usually cost between $200 to $300 a year for $1 million of coverage. Your actual cost depends on such criteria as the amount of coverage, the insurance company issuing the policy and your own “personal risk factors,” such as the number of traffic tickets you’ve gotten in the past few years, and possibly your credit report.

Tips for Buying an Umbrella

Because umbrella insurance works with your auto and homeowners policies, it’s a good idea to buy all three from the same company. Not only will you likely enjoy a discount, you will also eliminate the potential hassles of dealing with different insurance companies if a claim occurs.

One of the big pitfalls with umbrella policies is that even when people do buy coverage, they often don’t buy enough. An individual’s appetite for risk often determines coverage levels. For example, if you have $1 million in assets, you may be satisfied with a $1 million policy. But you should also bear in mind that if you are found liable for an amount greater than that, say $2 million, you could still lose all of your assets and end up having to use your future income to make settlement payments.

What Limits Should You Buy?

What factors determine how much coverage you need? If you drive your car rarely and don’t often have visitors to your home, you may decide that your need for the extra umbrella insurance is limited. However, if you live in a wealthy town, where people just love to sue, if you drive a lot in congested areas or if you operate a home-based business and have employees or clients coming to your home on a regular basis, your liability risks may justify a larger policy. Three more reasons to get higher limits:

•    If you entertain frequently, especially if you serve alcohol, you have a higher liability exposures. A personal umbrella can protect you if an inebriated guest causes an accident.

•    If you own a swimming pool. Swimming pools are considered an “attractive nuisance,” which increases your liability exposures.

•    If you own lakefront or oceanfront property, you are exposed to risks of serious accidents or drowning.

Umbrella policies have some limits. Most will cover you for liability arising from your service on the board of a civic, charitable or religious organization. But they won’t cover you for intentional acts that cause damage, for liability arising from a business you run or for punitive damages. In most other cases, however, it pays to have that extra layer of liability protection.

For information on personal liability umbrellas or a review of your existing coverage and exposures, please contact us.