In much the same way a rain umbrella covers and protects you from a rainstorm, an umbrella insurance policy covers and protects you from the effects of a lawsuit. General liability insurance is available to individuals and businesses and provides coverage for legal fees and payouts that arise from injury, negligence or malpractice. An umbrella policy provides additional protection for claims that exceed general liability policy limits.
Identification
An umbrella insurance policy is insurance that goes beyond the dollar limits set for general liability insurance you already have in place. In addition to providing extra protection for lawsuits that result from property damage or physical injury, it provides protection from "intangible" injury lawsuits. Intangible injuries can result from things like libel, slander and invasion of privacy. You determine coverage requirements and then set umbrella policy limits based on the level of protection you desire. Coverage considerations include the dollar value of personal or business assets, the location where you live or do business, lifestyle and the likelihood of a lawsuit occurring.
Characteristics
Two distinguishing characteristics of an umbrella policy include coverage and the policy deductible. For individuals and businesses, one umbrella policy provides extra coverage for all the general liability policies you own. For example, if you carry general liability insurance for your home and auto, one umbrella policy includes coverage for both. Deductibles for umbrella insurance are high, usually more than $300,000 as of 2010. The reason for the high deductible is that umbrella insurance should not kick in until and unless general liability insurance reaches its payout limit.
Function
To understand how an umbrella insurance policy functions, consider an example where your home and automobile insurance each include $300,000 of general liability coverage with a $500 deductible and you purchase a $1 million umbrella insurance policy with a $300,000 deductible. You are in an automobile accident and get sued for $1.2 million dollars. You pay the first $500 to cover the deductible, your auto liability insurance pays $299,500 and then the umbrella policy kicks in and pays the remaining $900,000.
Significance
Without this additional protection, your personal and financial assets are at risk. If insurance cannot cover a lawsuit settlement, you still owe the money. If liquidating assets such as property or investments leave a remaining balance, future income is also at risk. Settlement payments over time can affect present and future income as well as your estate if you die before satisfying the settlement. In addition, other income, such as an inheritance you receive could be subject to seizure
Misconceptions
One misconception regarding umbrella insurance is that it is expensive to purchase. Premium costs for an umbrella policy are relatively inexpensive and depend on what you cover. On average, if you cover your home and two automobiles, the premium for a $1 million policy will run $100 to $150 annually as of May 2010. Another misconception is that umbrella insurance is only for the wealthy. In reality, anyone involved in an accident that results in injury or death can be the target of a lawsuit. According to "Injury Facts 2010" published by the National Safety Council, in the year 2007, one in nine people sought medical attention for an unintentional injury and 121,000 people died from the results of an unintentional injury.
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