Your property insurance agent may have recommended you add an umbrella policy to your homeowners or auto insurance policy. What is an umbrella policy, and how can it protect you?
What is an umbrella policy?
Umbrella insurance is a secondary policy providing an additional layer of liability coverage above what your homeowners or auto insurance provides.
No one likes to think of worst-case scenarios. But tragic accidents do occur, and sometimes they result in costs beyond the coverage your homeowners or auto insurance provides. For example, suppose the personal liability coverage limit of your homeowner’s policy is $250,000. If a person injured on your property has $900,000 in hospital bills and the accident was your fault, you could be personally liable for an additional $650,000. Paying this could wipe out your personal savings or, in some states, even result in the loss of your home or retirement savings. This is the sort of nightmare scenario umbrella policies protect against.
Although high net-worth individuals often have umbrella policies, even middle-income people should consider this coverage, especially with teen drivers in the family.
How umbrella coverage works
Umbrella coverage protects those covered in two ways.
First, umbrella policies add additional coverage above the limits of your existing liability payout for covered risks. If you are at fault in an accident and your liability coverage limit is $250,000 for home or auto, for example, the umbrella policy may add an additional $750,000 to $1 million in protection stacked on top of the $250,000. This additional coverage may be split up over personal injury protection and property damage.
Second, an umbrella policy may cover liabilities not defined under a primary homeowners policy, such as slander, invasion of privacy and false arrest. This benefit is known as “drop-down” coverage. While the umbrella benefit amount for existing liability definitions is stacked on top of the primary homeowner’s policy, drop-down coverage covers liabilities excluded from the primary policy from the first dollar. The drop-down feature differentiates umbrella policies from “excess insurance” policies, which simply add additional protection to existing, defined liabilities in a primary policy.
Qualifying for an umbrella policy
To obtain an umbrella policy, you must have a primary policy in place with an insurer for home or auto or both. And your liability coverage on that policy must be more than the insurance company’s required minimum. For example, the minimum personal injury benefit available on an auto policy maybe $150,000 per incident, with higher protection available by paying an additional premium. To purchase umbrella coverage, you may be required to have $250,000 in liability on the primary policy.
Claims paid and prevalence of umbrella policies
In any given year, three-quarters of claims paid on umbrella policies arise from auto accidents. Some property-casualty insurers have more than 10 percent of their customers covered by umbrella policies.
Related – Don’t Overlook Homeowners Insurance