Umbrella Policy: Protection for the Worst

Every homeowner knows the value of having an insurance policy that covers their home and its contents from perils such as wind damage, fire, and theft.

Homeowner’s policies and automobile policies also provide liability coverage in the event someone gets hurt on your property or you are in an accident.

The liability coverage on your policy may seem more than adequate — $250,000, $300,000, even $500,000 — but the reality is that does not guarantee you will be completely protected in an extreme case where you are the responsible party.

We live in an extremely litigious society. We spend 2.2% of our gross domestic product on tort litigation, which works out to roughly $1,000 for every man, woman, and child.

Standard homeowner and auto policies sometimes cannot keep up. When a person is sued for an amount above their insurance policy, liquid assets like cash, stock, and other savings and investment vehicles, plus other real estate, are potentially in play.

Who’s on the hook

Obviously if you cause an accident, you know you (and your insurer) are on the hook, but there are plenty of cases where you may be the responsible party without even knowing it! Parents of teenage children, in particular, need to be aware that most states shift some or all of the burden of responsibility to parents when children engage in acts that injure other people.

Teenagers have been having house parties — sometimes with parental blessing, often without — since there were houses to party in. Let’s suppose late one night someone gets seriously hurt, or god forbid, multiple people, at your house. Maybe a deck collapses, or a fight breaks out, or there are cases of severe alcohol poisoning. What are the risk management implications?

What if your newly licensed driver causes an accident?

Friends are friends but when someone is injured, all bets are off. Thankfully, there’s a comprehensive, easy way to protect your family in these difficult circumstances.

A true bargain

Umbrella or “excess” liability insurance sits on top of your home and auto policies. It kicks in after a claim reaches the limits of those policies and goes beyond it. Typically sold in million dollar increments, an umbrella policy provides coverage for you against all manner of peril, inside and outside the home, including situations where you are at negligent and at fault.

Let’s suppose you have a $1 million umbrella policy on top of your auto policy, which itself offers $250,000 in liability coverage. In this case, if you were to cause an accident and have a court judgement against you for $750,000, the auto liability limit takes care of the first $250,000 and the umbrella covers the rest. Your house and other assets remain out of harm’s way.

Some people think they don’t need an umbrella policy because they don’t have significant assets beyond their house, but umbrellas are not just for the wealthy. Indeed, a court can order wage garnishment to settle legal claims.

The good news is that in a world where there are few true bargains, umbrella liability is definitely in that category. One million dollars of coverage is often no more than $200-$250 annually, which is pennies compared to the value it provides.
Umbrella policies are an easy addition to your risk management portfolio. You don’t know when a storm might hit, so make sure you will be covered if it does.