Most people are aware of the need for automobile and homeowner's insurance to protect against the financial risks of auto accidents, personal liability and property damage or loss. Yet, many do not realize that the maximum benefits offered by such policies may be insufficient in case of a lawsuit or major loss. Umbrella insurance provides extra protection beyond the limited coverage of basic home and auto policies.
Definition
Umbrella insurance is also known as excess liability insurance. It provides additional coverage for situations when the costs associated with an accident, lawsuit, or property loss exceed the coverage limits of primary insurance. "The New York Times" reported in 2008 that about 12 percent of State Farm policyholders held umbrella policies.
Types
Personal umbrella insurance supplements the protection offered by homeowner's insurance and personal automobile policies. Business or commercial umbrella policies cover businesses when basic business liability insurance is insufficient.
Availability
Most major insurance companies offer both business and personal umbrella policies. In order to obtain umbrella insurance, an individual must first have primary insurance that provides at least a minimum amount of coverage. For instance, a company might require that an individual have auto and home insurance policies with liability coverage up to $300,000 before issuing an umbrella policy. Policies typically start at $1 million of coverage and can go as high as $10 million or more.
The Process
In the case of a loss that requires filing an insurance claim, the relevant primary policy provides coverage first. Thus an individual's home or auto policy or a business' basic liability policy must first be exhausted before the umbrella coverage kicks in. The deductible of the umbrella policy is equal to the maximum coverage amount of the primary policy. So if a judge awards a plaintiff in an auto accident lawsuit $1 million in damages, the defendant's auto policy might cover the first $300,000, and the umbrella policy would cover the remaining $700,000.
Benefits
The primary benefit of umbrella insurance is the decreased risk that a liability claim will lead to major financial loss because insurance coverage is insufficient. In addition, some people find that just having an umbrella policy in place provides invaluable peace of mind. These policies cover liability for bodily injury and property damage in a wide range of situations, including auto accidents, accidents on the insured's property and natural disasters. They typically also cover other types of liability, such as claims of libel and slander.
Limitations
Personal umbrella policies will usually not cover liability related to business and professional activities. Business owners and individuals who work from home need to purchase separate business liability insurance to cover those situations, and can then obtain business umbrella insurance. Personal umbrella policies also often exclude coverage for certain types of recreational vehicles, damages that are covered under Workman's Compensation, and liability arising from war or certain other circumstances.
Considerations
Problems sometimes arise when primary policies and an umbrella policy are held by different insurance companies. When the insured files a claim, the companies may not agree on who should be paying for any covered costs. By purchasing your umbrella insurance and primary policies from the same company, you can reduce the likelihood of such problems and make the claims process go more smoothly. Some companies also offer premium discounts for multiple policies.
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