When Do You Need Umbrella Insurance?

4 March 2019
 Categories: Insurance, Blog

If you're like many people, you don't give too much thought to your insurance coverage unless or until you need to make or defend against a claim. Unfortunately, this results in far too many people inadvertently under-insuring themselves against damage or loss. To avoid this unpleasant discovery, it's often a good idea to invest in an umbrella insurance policy that can protect against a wide range of potential claims. Read on to learn more about umbrella insurance policies and what you should consider when deciding on one.

What is an Umbrella Insurance Policy?

An umbrella insurance policy, as the name implies, provides you with a broad "umbrella" of coverage for losses under your auto, homeowner's, and personal liability policies. Some types of umbrella insurance even protect businesses and sole proprietors against employment discrimination lawsuits, slip-and-fall lawsuits, and other types of legal claims.

For example, if your auto insurance policy carries a $100,000 liability limit, while your homeowner's insurance policy has a $50,000 limit, taking out an umbrella insurance policy with a $1 million limit will provide you with up to $1 million in coverage for claims under your auto and homeowner's insurance policies. If someone files a claim against you for $500,000 after an auto accident and your insurers decide to settle the claim, your auto insurance policy will pay out up to its $100,000 limit and your umbrella policy will step in to provide the rest. 

Because an umbrella insurance policy covers only what your primary insurance policies don't, you'll usually be required to "max out" your underlying policies before you can qualify for umbrella insurance. This means that you aren't usually able to stick to the most meager possible levels of auto and homeowner's insurance while expecting the umbrella coverage to fill in the gaps—at least not without paying a much larger premium.

Who Needs an Umbrella Insurance Policy?

Umbrella insurance policies are ideal for those who have assets that exceed their insurance limits. For example, if you have a net worth of $500,000 and your auto insurance policy only pays out $100,000 per accident, someone who is injured in an accident and accrues bills in excess of this $100,000 limit may choose to sue you. If this happens and you're deemed at fault, you could be on the hook for your own legal fees and any judgment the plaintiff can obtain against you.

And this doesn't just apply to those with large net worths. If a plaintiff obtains a civil judgment against you, such a judgment can be collected from future assets. This means that if you're expecting an inheritance in the future, win the lottery, or begin earning a much larger income, the plaintiff will be able to collect his or her award from these funds, even if they weren't available when the judgment was first entered. Umbrella insurance can protect both your current and future assets. 

An umbrella insurance policy carries a maximum liability limit that is far higher than you'll find with most other types of insurance policies. This can provide you with peace of mind that, no matter what happens, you won't be personally liable (and your assets won't be subject to judgment).

Some people believe that having an umbrella insurance policy can make you a more attractive "defendant"—that is, that someone who has a claim against you may be less likely to settle (and more likely to pursue it in court) if they perceive you as having "deep pockets" thanks to your insurance policy. However, there's little actual data to support this school of thought; furthermore, defendants with assets are also perceived as having "deep pockets," so it's usually better to err on the side of insuring against these losses. 

To learn more about umbrella insurance policies and whether you should get one, contact services such as Bear River Insurance.