Navigating today’s complex risks environment is like walking on a tightrope (ideally with a safety net). Well-crafted auto, homeowners, and other insurance policies help to mitigate many risks that arise in the course of daily life. However, each of these policies has a defined maximum coverage amount. If an occurrence exceeds the coverage limit, the insured is responsible for the remainder of the claim amount. This can be financially devastating for the insured and their family. Fortunately, personal umbrella liability insurance can help. As John Ritenour of Insurance Office of America (or IOA) notes, umbrella liability coverage can help an insured navigate a variety of unexpected events.
Umbrella Liability Insurance: An Overview
The term “umbrella liability insurance” accurately describes this type of insurance coverage. These policies are designed to cast a protective umbrella over the insured, providing protection that extends beyond the limits of his or her existing policies.
A well-crafted umbrella liability insurance policy generally contains coverage for bodily injuries (or personal injuries) to another person. The policy also offers coverage for damage to someone else’s property. Personal liability coverage, along with protection against rental property-related lawsuits, is usually part of an umbrella liability insurance policy. Coverage will depend on the written policy.
Multiple Forms of Protection
Umbrella liability insurance provides several forms of coverage. This differentiates an umbrella policy from other insurance offerings.
Coverage in Excess of Other Limits
Umbrella liability insurance often provides coverage when the insured’s auto, homeowners, or boat insurance policies have reached their policy limits. To illustrate, assume the insured’s homeowners policy has $250,000 of coverage for a certain type of occurrence. However, someone files a claim for $500,000. If the insured has an umbrella insurance policy with a limit of at least $250,000, the balance of the claim will be covered under that policy. If the insured does not have umbrella coverage, the extra $250,000 must be paid out of pocket. Most people do not have the financial resources to meet this demand.
Coverage for Otherwise Excluded Claims
Umbrella insurance coverage often acts as a safety net, covering claims typically excluded from other types of liability insurance policies. To illustrate, libel, slander, and false arrest coverage are common components of umbrella insurance policies.
If the insured owns rental properties, umbrella insurance also provides liability coverage on those units. IOA’s John Ritenour states that landlords can be subject to multiple liability-related risks.
Three Additional Coverage Benefits
Some umbrella liability insurance policies cover items the insured is using on a rental basis. To illustrate, the insured decides to rent a pontoon boat for an afternoon on the lake. If an incident occurs during the boat trip and the affected person files a claim, the umbrella policy will likely cover it.
In addition, an umbrella liability insurance policy may provide global coverage. If the insured is vacationing several hundred miles away or they are sailing on a cruise ship in the Mediterranean, umbrella liability insurance coverage may still be in force.
Finally, umbrella liability insurance generally covers other members of the insured’s household. This may include their spouse, children, and/or other relatives who reside in the same home. To potentially qualify for coverage, these relatives cannot have auto or property insurance coverage in their own names.
Umbrella Insurance vs. Excess Liability Insurance
There is an important distinction between umbrella liability insurance and excess liability insurance. The latter insurance raises the coverage limits on one of the insured’s existing policies.
However, umbrella insurance goes a step further. Most umbrella policies include coverage not contained in base insurance policies. Examples include payment of damages and legal fees if the insured is accused of slander or libel.
What Umbrella Liability Insurance Covers
A typical umbrella liability insurance policy has four key provisions. Each policy component offers protection against specific types of claims.
Bodily Injuries
Bodily injury liability insurance covers the cost of harm to someone else’s body. This coverage includes medical bills and/or claims of liability related to the injuries.
To illustrate, this coverage applies to a serious car accident in which the insured is at fault. If a guest slips and falls in the insured’s home, bodily injury liability insurance would cover this incident. If a relative’s child becomes injured while playing in the insured’s yard, bodily injury coverage would apply.
If the insured’s dog bites a visitor to the property, some insurers will cover this incident while others will not. Other insurers exclude certain dog breeds or otherwise limit the coverage. Coverage will depend on the details provided in the policy. A knowledgeable insurance agent can explain each policy’s specific provisions.
Property Damage
If the insured causes damage to someone else’s physical property, property damage liability insurance covers that incident. To illustrate, assume the insured causes an auto accident that results in damage to the other motorist’s vehicle.
The crash also destroys several pieces of artwork the driver was taking to a picture-framing shop. Property damage liability insurance would cover both types of damage.
Personal Liability
The umbrella policy’s personal liability coverage protects the insured from personal claims against them. These claims are often not covered by a person’s other insurance policies.
To illustrate, personal liability coverage extends to claims of slander (a damaging spoken statement). The coverage also protects against claims of libel (a harmful written statement).
Claims of defamation of character, false arrest, and malicious prosecution are also covered according to the umbrella policy limits. As insurance expert John Ritenour emphasizes, an umbrella policy’s personal liability coverage can help to remove the financial sting from an uncomfortable situation.
Rental Property-related Lawsuits
If the insured owns rental properties, he or she faces certain liability risks as a landlord. Umbrella liability insurance offers protection against certain types of lawsuits.
To illustrate, a visitor falls on the rental property and sues the landlord for related damages. Umbrella liability insurance offers protection against this lawsuit.
In another case, the tenant’s dog bites a neighbor while they are visiting the tenant’s home. The neighbor sues the landlord for the resulting injuries. Some umbrella liability insurance policies offer protection against this type of lawsuit. An experienced insurance agent can determine if the coverage applies.
Related Legal Costs
In addition to covering damages up to the umbrella policy limits, the policy generally covers related legal costs in excess of that amount. To illustrate, assume the insured has a $1 million umbrella insurance policy. Someone files a $1 million lawsuit against the insured. In addition to paying the full damages, the insurer will provide the insured with a legal defense or cover their associated legal fees, says John Ritenour.
Note that some insurers include a “retained limit” clause in this policy provision. Like an auto policy deductible, the insured must pay this amount before the coverage pays out.
What Umbrella Liability Insurance Does Not Cover
Umbrella liability insurance excludes four main types of occurrences. Other insurance coverage is available for most events.
Insured’s Injuries or Property Damage
An umbrella liability insurance policy does not cover the insured’s injuries resulting from an occurrence. Likewise, the coverage does not apply to damage to the insured’s personal property. An experienced insurance agent can recommend an appropriate coverage option.
Contractual Liability Issues
Many umbrella liability insurance policies exclude contractual liability-related occurrences. To illustrate, assume the homeowner signs a contract with a home remodeling company. The company completes the work and provides the homeowner with an invoice.
However, the homeowner refuses to pay the invoice, breaching his previously signed contract. If the contractor sues the homeowner, the latter’s umbrella liability insurance provider will likely decline to provide coverage for this event.
Losses Related to Business Operations
If the insured owns a business, their umbrella liability insurance policy excludes operations-related losses from coverage. This exclusion relates to incidents that result in someone else’s injuries or property damage. According to John Ritenour, the business is determined to be liable for the damages from those incidents.
In addition, the business is also responsible for liability claims associated with those occurrences. If the business has commercial umbrella liability insurance, that policy will likely provide coverage.
Intentional or Criminal Action
If the insured deliberately harms someone, their umbrella liability insurance will not cover any claims related to this occurrence. The same exclusion applies if the insured commits a criminal act.
Boat-related Occurrences
Some insurers’ umbrella policies completely exclude boat-related events unless the insured already has a boat insurance policy with the company. Other insurers limit coverage to specific types and/or sizes of watercraft.
Umbrella Liability Insurance Eligibility
Umbrella liability insurance is intended to provide supplementary coverage to another policy. Therefore, the insured must meet certain requirements before umbrella insurance coverage can be put in place.
First, the insured must already have an active auto or property insurance policy with the company. Homeowners insurance is the preferred form of property insurance.
In addition, the insured’s auto and/or property insurance policy must contain minimum levels of liability insurance coverage. Adding this additional coverage will likely cause an increase in premium costs.
Umbrella Liability Insurance: How Much Is Necessary?
Because everyone’s net worth is different, it is impossible to provide a blanket answer to this question. As a starting point, IOA’s John Ritenour states that the insured should consider their total net worth. This figure will include the value of the insured’s home (if applicable), as well as all investment and savings accounts.
Next, the insured should evaluate his or her existing liability insurance coverage. After subtracting the existing coverage from total assets, he or she will arrive at the amount of umbrella liability insurance needed.
Of course, adding more variables to the equation could change the amount of needed umbrella liability insurance. To illustrate, a current medical student is likely to considerably increase income once he or she becomes a practicing physician. In this case, consulting with a knowledgeable insurance agent is the best course of action.
For perspective, insurers generally issue umbrella liability insurance in million-dollar increments. The lowest-tier policy provides $1 million of coverage, and the next-tier policy offers $2 million of insurance coverage, and so forth.
Accounts Protected from Potential Lawsuits
Certain assets are legally protected from lawsuits. To illustrate, an employer-sponsored retirement account such as a 401(k) is protected against many lawsuits. The federal-level Employee Retirement Income Security Act of 1974 (or ERISA) guarantees this protection.
In contrast, Individual Retirement Accounts (or IRAs) do not receive federal protection from lawsuits. The exception to this rule: IRA funds that are rolled over from another employer-sponsored account.
However, IRA accounts and the insured’s home equity may receive at least some protection through state laws. It’s advisable to verify applicable state law provisions before determining the needed amount of umbrella liability insurance.
Choosing the Right Umbrella Liability Insurance
Finding the best umbrella liability insurance coverage will help the insured to gain much-needed peace of mind. However, navigating the many available policy features and exclusions can be overwhelming.
Therefore, it’s essential to work with an insurance agent familiar with the nuances of this insurance coverage. As co-founder John Ritenour points out, Insurance Office of America brokers are well equipped to find the best coverage package for each insured’s needs.
