What Is Umbrella Insurance?

Umbrella Insurance FAQ

Q. What Is Umbrella Insurance?

ANSWER: An umbrella policy will augment the amount of liability insurance coverage (limits) you carry in your primary liability policy. That policy might be for business insurance, including professional, or it could be a personal umbrella insurance policy to increase your coverage for liability for your home, boat, auto, sports activity, snowmobile, jet-ski, etc. An umbrella policy was created to provide additional financial protection in the event of a lawsuit. It also was meant to provide liability coverage that was not contemplated by the primary coverage, but might prove to be very important to the insured.

Q. Umbrella Insurance vs. Excess Liability Insurance

ANSWER: Years ago there was a clear distinction between “umbrella insurance” and “excess liability insurance”. Years ago the homeowners’ insurance industry commonly called one of their coverage forms “All-risk”; and it is now known as “Special”. Lawyers painstakingly taught the insurance industry that words matter. An “All-risk” policy was meant to cover all perils that weren’t specifically excluded. Juries often agreed when exclusions were challenged as ambiguous, given the name “All-risk”. The same is true of the evolvement of the “umbrella” policy. It was meant to cover all that wasn’t specifically excluded. As such, the umbrella carrier would often be at odds with the primary liability carrier over coverage questions. Insurance companies soon decided it would be much easier to provide “following form” policies.

If the coverage was provided in the primary policies the “Excess liability” policy would provide “Excess” liability limits for that same coverage. Over the years the number of true “umbrellas” became rarer and rarer and the need to distinguish between the two became less critical. Much of what is sold under the name “umbrella insurance” is really “excess liability insurance”. Also an “umbrella” usually provides coverage “up to” a certain limit of liability. A classic $1,000,000 “umbrella” would augment your coverage up to $1,000,000. So if you had $250,000 combined single limit coverage, the maximum a true “umbrella” would pay is $750,000 combined single limit. On the other hand a $1,000,000 “excess liability” policy would pay a maximum of $1,000,000 combined single limit over and above what your primary policy would pay. If you had $500,000 combined single limit coverage, the maximum a true “umbrella” would pay is $500,000 combined single limit. On the other hand a $1,000,000 “excess liability” policy would pay a maximum of $1,000,000 combined single limit over and above what your primary policy would pay.

Umbrella vs. Excess Liability Insurance The coverage you have in your “umbrella” policy is something that needs to be discussed with your insurance agent.

Q. What Does Umbrella Insurance Cover?

ANSWER: The simple answer for many umbrellas is that they cover only what is covered in the primary policies but add dollars available to pay claims. Some “umbrellas” may afford coverage beyond the primary policies, but in those areas they will feature a “self insured retention”. On many personal umbrellas the self-inured retention is minimal, while on a commercial umbrella it will probably be in the area of $10,000. You are responsible for loss that is within the “self-insured retention” limit.

Q. How Does Umbrella Insurance Work?

ANSWER: In most instances, the primary carrier is responsible to cover the legal expense involved in determining culpability. Legal expense may or may not be included in your primary carriers’ limit of liability. Your umbrella carrier will require that you carry a minimal amount of coverage in the primary. For example; many companies require that you carry $250,000 per person bodily injury liability with $500,000 per occurrence limits. You stipulate the insurance company and the limits you carry. Most insurance underwriters have standards regarding the financials strengths of the “underlying” carriers. In the event of loss, should the carriers or the limits you have stipulated turn out to be inaccurate, your “umbrella” company could move to have their coverage voided . . . if the change is material. Or, they could require that you pay the amount of coverage that is missing in the primary before their policy will “attach”. It is important to have the help of a competent advisor when purchasing an umbrella.

Q. Why Is Umbrella Insurance Important?

ANSWER: Primary liability companies often are unwilling to provide the policy liability limits you feel you need to protect your assets (or future earnings). For example: Your auto company might provide a maximum auto bodily injury liability coverage of $250,000 per person and $500,000 per occurrence and $250,000 property damage liability coverage. You believe you would like to protect yourself against a suit for an accident to cover legal expense and court awards or settlements to a limit around $1,000,000. You buy an umbrella to provide the additional dollars of coverage. In rare instances you might have a liability exposure you consider significant that is covered in the umbrella policy that is not included in the primary. You might think $250,000 per person bodily injury liability limits sounds like a large amount of money. If you’re responsible for an auto accident where a person is injured in such a way that they will need long-term care that amount would be woefully inadequate.

Q. How Much Does Umbrella Insurance Cost?

ANSWER: Personal Umbrellas can be quite inexpensive if your primary limits are high enough and your exposures are limited. For example; if you are a tenant and have $500,000 liability limits on your homeowners’ policy, own one car and have primary limits of $250,000/$500,000/$250,000 AND you don’t have any abnormal exposures you want covered, your premium could be as little as $200. If you’re a mid-sized medical clinic and you’re looking for a $3,000,000 umbrella over a $1,000,000 primary your premium could easily be several hundreds of thousands of dollars.

Q. Is Umbrella Insurance Tax Deductible?

ANSWER: Personal property and casualty insurance expense normally are not tax deductible. Business property and casualty expense normally are deductible. For definitive answers talk to you accountant.

Q. How Much Umbrella Insurance Should I Carry?

ANSWER: Bad things happen. If you have a large amount of assets, or expect to have a large amount of assets or income during your lifetime it is financially prudent to protect against loss. Some people will tell you to consider the risk in your life to decide if you need an umbrella, but judging exposure is best left to risk management experts. Defense cost can many times equal or exceed court awards. Umbrellas can be used to augment the eroded limits on your primary coverage due to defense cost. As a rule of thumb it is a good idea to carry $1,000,000 more in umbrella coverage than what you have in assets and potential assets.

Q. Where Can I Get Umbrella Insurance?

ANSWER: Most insurance agents are equipped to help you with the purchase of a business or personal umbrella.

Q. Does Umbrella Insurance Cover Professional Liability?

ANSWER: Umbrellas can cover professional liability. Most do not, because most umbrellas are for personal liability exposures. Ask your agent.

Q. Does Umbrella Insurance Cover Malpractice?

ANSWER: Umbrellas can cover malpractice liability. Most do not, because most umbrellas are for personal liability exposures. Ask your agent.

Q. Does Umbrella Insurance Cover Lawsuits?

ANSWER: “Umbrellas” will cover amounts that you become legally liable to pay due to negligence. They will also cover your legal defense, whether or not you are at fault.

Q. Does Umbrella Insurance Cover Property Damage?

ANSWER: “Umbrellas” will cover amounts that you become legally liable to pay due to negligence for property damage. They will also cover your legal defense, whether or not you are at fault.

Q. Does Umbrella Insurance Cover Dog Bites?

ANSWER: The answer to this question is become increasingly more problematic. If dog bite liability is covered in the primary policy, and if your primary policy limits for dog bites are sufficient, your umbrella will probably cover dog bites, if they aren’t specifically excluded. Ask your agent.

Q. Does Umbrella Insurance Cover Floods?

ANSWER: No.

Q. Does Umbrella Insurance Cover Uninsured Motorists?

ANSWER: More and more umbrellas are including uninsured/underinsured motorist coverage. With 16% of drivers in the United States uninsured, and many more carrying very low limits, these coverage are becoming very necessary. Ask your agent.

Q. Does Umbrella Insurance Cover Car Rentals?

ANSWER: Many umbrellas will respond to rental car liability coverage. It depends on the particular umbrella and the coverage provided by the primary carrier. Ask your agent.

Q. Does Umbrella Insurance Cover Rental Property?

ANSWER: Coverage for property in your care, custody, and control is excluded by most liability insurance policies. If you own property for rent you can purchase an umbrella to cover your liability exposures beyond your primary limits. If you’re a tenant you have significant personal liability exposures (such as auto liability) and should consider the need for an umbrella to increase your protection.

Q. Should Landlords Have Umbrella Insurance?

ANSWER: Landlords normally have significant assets to protect and should consider the purchase of an umbrella.

Other Enhanced Insurance articles related to Umbrella Insurance:

Whether to Buy an Umbrella Insurance Policy

Do You Need an Umbrella Insurance Policy

Always Compare Coverage before Buying an Umbrella Policy

What Are Umbrella Insurance Coverage Discounts

What Coverage Claims Occur under Umbrella Insurance

What is the Normal Umbrella Coverage Rate Cost

Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.

While the majority of people want an agent involved in their purchase of insurance, many people want to see if they can save money by buying direct from the insurance company. Others want to try a direct quote to make sure the premium they’re now paying through their local agent is fair. If you want a quote for your coverage, click on the competitive quote button on the right side of this page.

Jim operates an insurance agent network called Insurance Partners, aggregating agents in the Midwest for over 25 years. He was National Agent of the Year for Metropolitan in 1993 and Midwest Agent of the Year for Travelers in 2011. He served as a founding board member of the Surplus Lines Association of Minnesota.

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