What is an umbrella (or excess liability) policy and why should you consider one?
By: Mike Lloyd
An umbrella insurance policy is an extra layer of liability coverage that extends beyond the limits of your foundational insurance policies (home/condo/renters/auto/boat/etc.). For example, let’s say your renters/home policy has a $500,000 liability limit, an umbrella policy would sit over that policy and other policies providing additional limit if it is ever needed.
Fortunately, they are inexpensive — it’s common to see annual premiums of ~$400 for $1 million of coverage and ~$1,000 for $5 million.
Because jury trials carry the risk of significant financial judgements, many liability cases are settled before trial; however, many settlements significantly drain the defendant's financial resources.
Umbrella policy coverage can be triggered in many ways but some of the most common are: car or boating accidents and people getting hurt where you live (slip and fall, dog bite, pool or trampoline injury or death, etc.).
They are inexpensive for significant limits which tells us that they are infrequently needed; however, when they are needed, they are REALLY needed and you will be thankful that you have the coverage and insurance company on your side.
We live in a crazy world where unfathomable things happen to good people. Unfortunately, something unthinkable may happen to you. If you are directly involved (not just responsible…) in an unfortunate incident where someone gets injured, it’s almost certain that lawsuits will quickly follow. The insurance company will step in with their army of experienced lawyers to defend you and should pay for the resulting medical, legal and other expenses up to the limit of your policies.
In these scenarios, you want a great insurance carrier on your side. Most umbrella policies include a duty to defend, meaning the carrier handles your legal representation for covered claims. Most also have defense outside the limits, ensuring legal costs don’t reduce the funds available for settlements or judgments. These features are not always standard but will be greatly appreciated if you find yourself as a defendant in a lawsuit.
Since the mid-2010's, many factors have increased the frequency and severity of insurance settlements. One of the factors is referred to as "social inflation" and include large jury awards or "nuclear verdicts", a rise in for-profit funding for litigation claims, evolving public attitudes favoring plaintiffs, aggressive attorney advertising, and broadening definitions of liability. As a result, if you ever find yourself dealing with a liability claim, the chances of it being costly are only increasing.
I contend that everyone should have an umbrella policy; however, there are certain considerations that elevate risk and therefore increase the importance of 1) having a policy, and 2) having a higher limit.
In my opinion, it is a lazy approach to simply match your umbrella limit to your net worth.
It's more about the level of risk that you’re exposed to and the possibility of being sued for something unexpected rather than just what you have to lose today. Your lifestyle and the activities you engage in should drive the decision on coverage terms and limits needed.
For example, if you have teenagers at home who drive your vehicles, frequently host social events at your home where alcohol is consumed, have a dog that sometimes gets over-excited and aggressive, or participate in sports with a high risk of accidents like skiing and wakeboarding, your chances of an accident resulting in an insurance claim are much higher and carrying a larger umbrella policy is even more important.
The starting limit for an umbrella policy is typically $1 million in coverage. If you don’t have an umbrella policy and are overwhelmed by choosing a limit, just start with $1 million and know that you are self-insuring over $1 million.
If you want to get more specific, we recommend starting with your net worth + future earning potential and then adjust based on what you have and how you live. To help, we created the PVIG Umbrella Limit Tool™ as a rubric to guide your thinking on the appropriate size of your umbrella policy.
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