Understanding Umbrella Insurance

Note: This is a Q&A I created for an insurance agent who provides special insurance policies such as umbrella policies. This was one of a series of several articles on very specific types of insurance the agent offered. It also ran with a campaign of accompanying videos.

What is umbrella insurance? What is an umbrella policy? Do you need one? Those are all questions I get all the time in my agency, and it’s a very important question.

You might not be surprised to know that as an insurance agent, I like umbrella insurance policies. But let me tell you: I am a HUGE fan of them: when I first became an insurance agent back in the 1980s, the very day I discovered what an umbrella policy was, I ran out and bought one. I sat in a class leaning about liability and when I realized what someone else could do to me if I didn’t have enough liability coverage. I was still such a new agent that I wasn’t making much money, but I told myself: “I can’t really afford an umbrella policy, but I’ll find a way to get one even if it means I eat top ramen every day!” I’m so glad I did, because if I had ever done something like hurt someone in a car crash, and if I was found at fault and had to pay a large settlement, the courts could have liened my paycheck for the rest of my life, and even more than 30 years later, I could still be paying it off today! Fortunately, that didn’t happen, but I’m glad I protected myself in case it ever did.

What is Umbrella Insurance and do I need it?

Umbrella insurance is a special kind of insurance policy that gives you liability coverage above and beyond the limits of your other liability policies. That’s why it’s called an “umbrella”—think of it as a separate policy that protects your other policies. It’s unique: it’s different than most other types of insurance policies.

How does an umbrella policy work?

It’s important to know that your umbrella policy doesn’t kick in until your other policy limits are reached. Meaning, if you have a $1 million umbrella, but your car insurance limit for liability is $200k, your car insurance policy will cover you up to that $200k limit, and if you end up with a car accident where the damages you cause exceed that limit, your umbrella policy then adds an additional million dollars to your coverage, so your actual limits for liability would then be $1.2 million.

Keep in mind, though, that umbrellas don’t work if you don’t have another policy under it. For example, your umbrella will not cover you in the case of a car accident if you don’t have a car insurance policy. You have to declare all the policies that you want under it, and these will show up under your declaration page, so you’ll know exactly what is and isn’t covered by it when the policy is issued. It’s important for you to remember to declare everything you want coverage on: for example, if you forget to mention your vacation home in another state, it won’t be covered… you have to mention everything before it’s issued.

What kinds of things do umbrellas cover?

Umbrellas cover you for liability, which means it adds to the limits you already have in policies such as: renters insurance, homeowners insurance, auto insurance, and other policies that cover you for personal liability.

Most of the actual claims my clients have been in where they were protected by an umbrella policy have involved: car crashes, trampoline accidents, dog bites, skiing accidents, golfing accidents, and mountain biking accidents. These are the kinds of things you’ll be covered for with an umbrella policy. The only they a personal umbrella policy doesn’t cover is a business liability issue: you have to have a separate business policy for that (and I offer those too).
Don’t I already have liability in my auto insurance? Can’t I just get a bigger auto policy?

That’s a good question: yes, your auto insurance covers you for liability. However, the limits are generally fairly small: most companies will offer you $100k in coverage, or maybe $250k but that’s generally it. You can’t just call up your auto insurance agent and say “increase my limits to $1MM.” That’s what the umbrella is there for—to give you more coverage than your other policies offer.

What if I get sued by someone?

There are many, many benefits of having an umbrella policy, and liability lawsuits is good example of one of the main benefits. If you get into a car accident, for example, and you hit a car with a family inside it, and everyone is injured, you may get sued if you’re at fault in the car accident. In some cases, you actually be the defendant in a separate lawsuit for every person in the car, which means you could be fighting four or five lawsuits at the same time.

This can be extremely overwhelming and very expensive. That’s where a good umbrella policy comes in: it won’t prevent you from making a mistake or causing a crash, but at least the financial and legal side will be covered. Even if you are getting letters and calls from multiple attorneys for multiple lawsuits, your policy will cover the cost of giving you an attorney to take your case, and he or she can represent you for each legal case. You only have one person you need to talk to, and since these attorneys are insurance litigation specialists, they know exactly how to handle these cases. They have teams of assistants and paralegals that will contact you and guide you through the process. You can relax: they’ve been through this process before and they’ll help you get through it all.

Being a defendant in a lawsuit can be very scary and you may be afraid that you can’t find help, but your umbrella policy will not only cover your liability, but will also cover the cost of the attorneys that represent you. The attorneys will generally try to settle the case before court, but even if your case does go to trial, you are still going to be represented at no additional cost to you. Your policy pays for that.

What if I lose in court? Am I still covered?

The umbrella policy covers your losses in court. You have no deductible, no attorneys fees, and no bills at all. Some people wonder if their rates will go up or if the policy will be cancelled if there’s a large payout or claim, but that’s just not the case. In all my years of selling umbrella policies, none of my clients have ever had their umbrella policies cancelled or not renewed or charged extra just because there was a large claim.

I will say this though: almost every time I have a client that’s made a claim on an umbrella policy, when it’s all said and done, they call me and ask “Can I get a bigger policy?” They know the peace of mind that their policy offers, and they want to make sure they’re extra-covered for the future!
Who does my umbrella policy cover? Just me, or my whole family?

Generally, everyone that is considered a dependent of yours, so your spouse, your children that live with you, etc. Read your exact policy to be sure, but usually everyone that lives in your house (that you’re responsible for) will be covered on the policy.

How is the cost of a policy determined? Is it based on my age or the amount of coverage?

Pricing for your umbrella policy premiums is based on tiers. The policies I offer are tiered by one million dollars, and the smallest policy is one million, while the largest is ten million. Meaning, we offer $1MM, $2MM, $3MM, and so on, up to $10MM. That’s pretty unusual: there are many companies out there that offer umbrellas but will only offer up to a million dollars. The policies I carry are some of the highest in the industry, and they’re very competitively priced. For example, I recently wrote a $7MM policy for a client that’s costs just over $1,000 per year. That’s a very small premium for such a massive amount of coverage!

Most of my clients with umbrellas are paying between $100-200 per year, and a $1MM policy is the most common.

What if I have auto or homeowners insurance with another company like State Farm or Geico? Can I still get an umbrella with you?

Yes! I can offer umbrella policies for anyone, whether they have all their coverage with me or not. This does happen from time to time because a lot of the smaller insurance carriers don’t offer umbrellas, so you can have your auto policy with AAA, for example, but if you want an umbrella, I can set you up with one that works with your current policy and insurer.
Who should get an umbrella policy? Aren’t they only for rich people?

Generally, we tell people that if you own a house, and it has a value of around $350k, that’s when you should start thinking about getting one. Because if you own a home at that price range, that probably means you’re making a decent income, and you probably have some nice things you own that you want to protect. But there’s no minimum net worth you need—anybody can get coverage if they want it.

What happens if I am sued after causing a car crash and I don’t have enough insurance?

If you don’t have enough insurance, the bad news is that you still have to pay any judgments against you, whether you can afford to or not. You can’t remove a judgment through a bankruptcy, so if you can’t pay it all, you’ll have to pay for it over the rest of your life. If you can’t come up with the money to pay for it, the courts can start sizing your assets and selling them to pay for your judgment, and that includes: garnishing wages, taking your house, rental properties, cars, boats, snowmobiles… almost anything you own of value can be sold in order to pay your judgment. The courts can even garnish any inheritance you might receive!

That’s why I think these kinds of policies are so important. If you end up taking some sort of action that accidentally hurts, maims, or even kills someone, that’s obviously a tragedy. It’s a huge, enormous, life-changing tragedy. However, if you have the right coverage, at least the tragedy you’re dealing with won’t also be accompanied with huge legal bills and judgments that you can’t pay. Having the right insurance can give you the peace of mind that money is one less thing for you to worry about.

If I get a large umbrella policy won’t I just become a big target for lawsuits?

No. Here’s the great news about having an umbrella: nobody knows you have one. If you end up ending up in arbitration or in court due to a mistake you’ve made, you will never be asked whether you actually have enough coverage to pay for a claim. Only you, your insurance agent, and your attorney will know. Insurance policies are private info, so there is no public record that someone who wants to sue you could somehow look up. Not even the judge or the jury during a lawsuit can know if you have one.

Final Thoughts On Umbrellas

If your roof gets destroyed by hail, it will be an inconvenience in your life for three weeks, but it will be repaired and you won’t even remember it in the future. If you make a tragic mistake of texting while driving or making some other error that ends up hurting someone else for life, or ending their life, that will never go away. It will forever change the way you look at life. So what an umbrella policy does is offer to take away the financial burden involved with this kind of event. Sometimes when people have a major liability lawsuit for personal injuries or wrongful death, I’ll start to get calls from their friends and neighbors, where they’ll say “I don’t know exactly what the Johnson family is going through right now, but can I get one of those umbrella thingies they’re telling me about?”

Umbrella policies are your “ace in the hole” — when everything else fails, it’s there to protect you as the last line of defense. I know not everyone can afford the extra premium it costs, and some people already struggle with the cost of insurance already. But if there’s any chance you have assets you want to protect or any chance you might end up making a mistake that could seriously injure someone else, I think you should consider adding an umbrella policy to your existing insurance policies.

I would love to be your agent and give you a quote on a competitively-price policy with the right limits for you. Contact my office today and I’ll be happy to serve you. If you can bundle more than one policy together I can also get you a discounted rate, so I would love to also talk to you about your auto, homeowners or renters insurance as well.

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