Question 1

What is an Umbrella Liability Policy?

Accepted Answer

First, let’s talk about what an Umbrella Liability Policy is and what it does. Simply put, an Umbrella Policy provides an additional limit of liability coverage above and beyond the liability limit on your underlying policies. Underlying policies could include a Homeowner’s/Renter’s Policy or Personal Auto policy, or, in the case of a Commercial Umbrella Policy, it may include Commercial General Liability, Cyber Liability, Liquor Liability, Business Auto etc. A Homeowner’s or Personal Auto Policy with $500,000 of liability coverage per occurrence can be increased to $1.5M by simply purchasing an inexpensive $1M Personal Umbrella Liability Policy, often for as little as $100-$200. Most companies will offer umbrella limits in $1M increments and many standard insurance markets will offer coverage up to $5M, or more. In other words, if you have an auto policy with a $500,000 liability limit and you cause an accident in which the other driver incurs $750,000 in bodily injury, your Auto Policy limit would be insufficient, as the injured party has incurred medical bills exceeding the amount of insurance you carried. The other driver, or their family, may still come back and sue you for the difference and an umbrella liability policy can provide additional coverage when the underlying policy limits are exhausted.

Question 2

Who Should Have an Umbrella Policy?

Accepted Answer

Understanding what an Umbrella Policy is and what it does is a little easier than determining just who, exactly, needs one. Truthfully, the insurance agent’s answer, in the days of ever-increasing litigation, should be "everyone". Offering an Umbrella Liability Policy to insureds is something agents should be doing even to protect themselves against possible Errors and Omissions claims; insureds (you) should be made aware that Umbrella Liability coverage is available to protect your business or personal assets in the event of a third party claim. Still, some insureds view the offer of Umbrella Insurance as an attempt by their agent to "up-sell" them coverage. When your insurance agent is offering you an umbrella policy, it should be made very clear to you that this is an optional coverage, albeit one that is highly recommended. Once it is established that the ball is in your court, it is important to look at your insurance needs objectively to properly determine if an Umbrella Liability Policy is indeed coverage you need.

Question 3

What are Some Important Considerations Regarding Umbrella Policies?

Accepted Answer

The following are a few things to consider when deciding on the purchase of an umbrella policy, but, is by no means an exhaustive list:

1. High Net Worth Insureds

The first, and perhaps most obvious, group of insureds who should be looking seriously into buying a Personal Umbrella Liability Policy are those folks who have accumulated a high net worth. Asset volume is discoverable by attorneys, and many times it is easy to determine if the at-fault party has deep pockets at just a quick passing glance. Real estate assets in the form of large tracts of valuable acreage, or a large multi-million dollar home and expensive cars are quick tip-offs to a third party who is seeking compensation after a loss. Selling off an estate to pay a settlement may get you out of hot water, but it also serves to severely alter the plans you had for your wealth and assets and the opportunities you hoped to provide to the next generation in your family.

2. Businesses

Small businesses are the lifeblood of our country. Hard working men and women sometimes spend a lifetime building a brand and accumulating wealth through their companies. If you’re a small business owner, you don’t want to see all your hard work eliminated by one mistake. Even small businesses may have a large amount of property assets that need to be protected in the event a third party liability claim is brought against the company. While establishing an LLC or INC may serve to protect your personal assets, your business may be forced to liquidate in the event of a large settlement if an insufficient liability limit is carried. If your business is your sole source of income, this could put significant strain on your personal finances as well. For this reason, businesses need to assess their assets as well as their liability exposures when selecting a Business Umbrella Liability limit. If you are engaged in the manufacturing of transportation components, for example, the probability of a catastrophic products liability exposure could be significantly increased, making it necessary to carry an umbrella policy with high limits ($5M or more), depending, of course, on the size and scope of your operations.

3. Insureds with Youthful Drivers

It is no secret that youthful drivers have an increased risk of automobile claims. Of course, kids will be kids, but along with that comes the inherent possibility of poor, or even reckless, choices. Because of the increased risk of an accident that is presented by having a youthful driver in your household, it is important to consider what a sufficient liability limit is in our current age of rising medical costs and high dollar settlements. If you carry a $250,000 per person bodily injury liability limit on your auto policy, you may be grossly under-insured in the unfortunate event your child causes an accident resulting in severe bodily injury or death. An umbrella liability policy can both protect your family and its assets and also fulfill the moral obligation that is often felt by the responsible driver after an accident occurs. Imagine having to tell a family that your auto policy is insufficient to pay for their child’s medical bills associated with an accident caused by your child. An Umbrella Liability Policy can help you avoid that scenario. Protecting yourself, your family, or your business with an Umbrella Liability policy is becoming more and more necessary. Litigation continues to increase and settlement amounts and court judgments continue to rise with it. The last thing you may want to discuss is the necessity of another insurance policy; however, taking an active role in the analysis of your possible loss exposures and the protection of your assets, wealth, and income stream is imperative.

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