When you have auto insurance and homeowners insurance, you have the basic coverage recommended to cover yourself in the case of an accident or a catastrophe. If you have “big toys” like a boat, snowmobile, ATV or recreational vehicle, you’ll want a policy for each of them as well. But all of these policies have their limits.
What if your claim ends up exceeding your coverage? What if you are sued? What if something happens that isn’t covered by your policy? You could be covered in excess of your original policy if you buy umbrella coverage.
What is an Umbrella Policy?
An umbrella policy is insurance that is purchased to provide coverage in addition to your primary, or underlying policies. It can also act as primary insurance for losses that aren’t covered by standard auto or home policies. Umbrella policies basically expand the coverage of your primary policies.
When something happens and an insured party is liable to pay someone for injury, death and/or property damage for a covered loss, the primary insurance policies pay up to their limits. Then anything over those limits is the responsibility of the insured to pay out of pocket. With an umbrella policy, that excess liability amount is paid by insurance, up to the limit of the umbrella policy.
Though umbrella insurance is sometimes referred to as excess insurance, there is a difference. Excess insurance policies don’t expand coverage beyond the original policy, they only extend the limit of coverage. Umbrella policies, on the other hand, provide broader coverage for incidents that the primary policies won’t cover. Some examples of these include false arrest, libel, slander and invasion of privacy.
Umbrella Policies and Your Home
Homeowner’s policies and auto policies don’t compensate for all situations. There may be exclusions, so it is important that you read your policy carefully. Additionally, there are limits to how much your insurance will pay out for an accident.
Most homeowner’s policies provide $300,000 to $500,000 in personal liability coverage. This covers things like slip and fall injuries and more. If the damages, surpass that amount, you will likely be on the hook to pay for any excess over those limits. Umbrella coverage could increase your coverage to $1,000,000.00 or even more, depending on the policy and limits you choose.
Umbrella Policies And Your Car
The same concept applies to auto insurance. Auto insurance provides coverage for bodily injury, uninsured motorists, and underinsured motorists. Coverage amounts can be provided as “split limits” such as 250/500 or a “combined single limit” (CSL) such as 500CSL
Split limits provide for a certain amount of coverage per person killed or injured, such as $250,000 in this example. In this case, we’ll say the maximum amount per accident is $500,000. Conversely, combined single limits of $500,000, for example, would provide up to $500,000 per person, with a cap per accident of $500,000.
Let’s say the insured crosses the center-line, kills an adult and a child, and is subsequently sued in a wrongful death suit for $850,000. (Wisconsin law caps loss of companionship awards at $350,000 per adult and/or $500,000 per minor.) With a split limit of 250/500, the insurance policy would cover up to $250,000 per person, up to a total of $500,000. Because of the $250,000 per individual limit, the insurance will only pay $500,000, which leaves the insured responsible for the additional $350,000. An umbrella policy would kick in and pay the additional $350,000.
In the same scenario, if the insured had a $500,000 CSL policy, it would have paid policy limits of $500,000, leaving the insured to pay the $350,000 balance. Again, an umbrella policy would have kicked-in and paid the additional liability, and protecting the insured financial well-being.
Are You At Risk?
There are some things that can increase the chances that you’ll need an umbrella insurance policy:
- You own a dog or pet
- You have a pool
- Your commute is long
- You frequently have guests or parties
- You own a rental property
- You have a young driver in your household
- You hunt with a firearm
On the other hand, regardless of increased risks, accidents can happen to anyone. If you are risk adverse, you may want an umbrella policy just to help you sleep better at night. If a person is found liable for damages in excess of the liability limits they carry, they could stand to lose a lot of their assets in a lawsuit judgment.
Umbrella Insurance Requirements
Because umbrella coverage is intended to be a form of secondary insurance, you’ll have to fulfill insurance requirements before you can buy an umbrella policy. Underlying insurance requirements will vary. Some typical insurance coverage requirements may be:
- Homeowners insurance personal liability coverage of $500,000
- Auto insurance property damage coverage of $100,000 per accident
- Auto insurance bodily injury coverage of $250,000 per person/$500,000 per accident
That’s the basics of umbrella coverage. Remember, umbrella policies not only supplement homeowners and auto insurance, they can also cover you when having fun on your ATV, RV, boat and other insurable vehicle. It is very important to let your agent know if you purchase a motor vehicle, boat, etc so they can make sure you have adequate underlying coverages as well as make sure the umbrella carrier will provide coverage over the vehicle. If you think you might need the extra coverage that an umbrella policy could provide, consult your insurance agent.