Oleksandr Rohovnin With over $1.3 trillion paid in premiums annually, the ever-growing U.S. insurance industry is among the first to recover from the coronavirus pandemic, and not without reason. The core insurance products – health, home, and auto insurance – are considered indispensable by most Americans and are often compulsory.
But what about extra insurance, the one that would cover you if something unexpected were to happen and incur losses higher than expected? Would you love to have a thick additional protection layer? More importantly, is umbrella insurance worth it?
Infographics Source: www.theagentinsurance.com
Though the answer seems obvious, most people underestimate the value of umbrella insurance, which sometimes leads to dire consequences.
- Imagine a situation when your kids are throwing a party at your house, and one of their peers slips on a slippery porch, falls, breaks a leg, and gets a concussion. That eventually leads to their parents initiating a lawsuit awarding an exorbitant judgment of $500,000, way higher than your basic package can cover. If you had umbrella insurance, though, you would only have to pay a relatively small deductible of a few thousand dollars – your insurer would compensate the rest.
In many cases, umbrella insurance can save the day, but let’s not get ahead of ourselves. First, let’s start with what it is and how it works.
What Is Umbrella Insurance?
Whether you own renter’s insurance or any other type, it may not always be enough to compensate for your financial losses due to liability claims. However, umbrella insurance can help you with it. A type of liability insurance, it provides liability coverage. In other words, it covers liability claims, whereas, for example, the damage to your property and cases alike will not be covered.
What Does It Cover? Real-life Examples
The umbrella covers various liability claims, from car accidents to slander to false imprisonment. Here are a few examples of what it can help you with:
- Bodily injury and personal injury: If you injure another driver in a car accident, your regular auto insurance policy can only cover it up to the pre-selected limit. However, if the damage is beyond the limit – which can happen for a variety of reasons: the injury may be severe, or it may keep the injured from work for a prolonged time, or the accident may include more than one car, etc. – then you will have to pay the rest from your pocket, which may put your assets at risk. And if you own umbrella insurance, it will help you cover the additional costs that your standard policy doesn’t cover.
- Damage to someone else’s property: Regardless of the reasons for damaging the property of a third party – unless it was caused intentionally – this insurance can help you cover the losses. At the same time, it won’t protect your property and belongings.
- Landlord liability: Whether you lease private or business property, an umbrella can protect you from claims from injured guests, vendors, tenants, etc. For example, if a guest were to be injured at the rental property, then your umbrella insurance would cover all the expenses on top of the costs covered by your basic package.
Most packages cover from $1 million to $5 million, allowing you to choose the coverage you’d feel safe with. Besides, as you might have noticed, your best umbrella insurance will cover not only you as the owner of the policy but also your family members or your household, making it even more valuable.
It might be reasonable to purchase umbrella insurance if you have kids that drive a lot, or you frequently accept guests, or just if you want to ensure you’re well protected from all significant mishaps.
What Cannot Be Covered?
No insurance policy in the world can cover everything, and personal umbrella insurance is no exception. While providing coverage for many specific cases – including libel, slander, defamation, false arrest/detention/imprisonment, malicious prosecution, invasion of privacy, wrongful eviction, and more – an umbrella liability policy won’t cover the following:
- Damage caused on purpose: Umbrella insurance won’t cover intentional damage like any other insurance. Suppose you deliberately pushed your guest into the pool, and they initiated a lawsuit. In that case, you will have to cover the expenses out of your pocket (it goes without saying that no insurance will cover deliberate instances).
- Damage to your property: As a type of liability insurance, umbrella insurance will only cover the claims of a third party – the damage caused to someone else’s property.
- Business and contractual liability: Whether these are professional or business activities, they can only be covered by business liability insurance. Likewise, contractual liability – that is, the one that you assume when you sign a contract with another party – will not be covered. For that, you’ll need contractual liability insurance.
- Armed conflicts or wars: Since there’s no limit to the damage that armed conflicts and wars can cause, no insurance company will ever take such immense risks.
It may seem like a long list, but the truth is, personal umbrella insurance covers much more than it doesn’t, making it one of the best tools to mitigate the risks coming from large-scale unexpected unwelcomed events.
Infographics Source: www.answerfinancial.com
How Does It Work? Nuances To Be Aware Of
As for the car accident case described above, your umbrella insurance would cover the additional expenses on top of your regular auto insurance policy, leaving your assets and possibly your retirement account intact. However, you still have to be aware of the nuances of umbrella insurance:
- You will have to pay a deductible. Regardless of whether your standard package applies, you will have to pay a deductible, either a standard one or self-insured retention (SIR).
- You will have to have a standard policy. You may be asked to buy auto homeowner’s insurance with the same company before you can buy an umbrella insurance package. Even though it may be cheaper and more convenient for you (having all your insurance within the same company may spare you tons of paperwork), the freedom of choice would be somehow limited in this case.
- Switching to a single insurer may be too expensive. The convenience of having a single insurer may cost you a pretty penny if the rates of your new company are higher, which is why you have to compare quotes in the first place.
However, there aren’t too many pitfalls when purchasing your best umbrella insurance package.
How Much Would It Cost?
As is always the case with insurance, the final price of it will depend on many factors, including your location, the amount covered by your standard policy, and how risky it is to insure you. For example, the more cars or houses you cover with your umbrella insurance, the more it will cost.
That said, umbrella insurance is still relatively cheap. More often than not, it covers at least $1 million for the price of up to $300 a year. And if you want to increase the coverage, you can pay an extra $50 ($2 million for up to $350, $3 million for up to $400, etc.).
You might wonder why it is so cheap. Still, the answer is on the surface: chances are your basic insurance will be enough to cover the expenses, leaving only a slim chance that your umbrella insurance will have to step in. On that note, most auto insurance packages cover at least $25,000 per person or twice as much per accident. And if your insurance company thinks that your basic coverage is insufficient, it will employ a higher premium to compensate for the risk.
Alternative Solutions to Umbrella Insurance
If you have a limited budget, you can increase your basic coverage or go for an endorsement – modification and additions – to your standard package. Both approaches can help you improve your liability coverage at the expense of an increase in your premium. However, they still won’t cover the specific cases that can be covered by umbrella insurance.
Wrapping Up: Is the Game Worth the Candle?
Without a shadow of a doubt, the answer to the notorious question ‘is an umbrella policy a good idea’ is a definite Yes. Protecting you from the devastating consequences of liability claims or judgments, an overarching package of umbrella insurance will also make your life easier and safer.
After all, only a couple hundred dollars a year are worth limiting the risk of liability claims and boosting your certainty in protection against the unexpected.
Oleksandr is an expert in deep research. He covers insurance topics across four major insurance verticals – auto, health, life, and home insurance – while taking into account the legal landscape of the state in question. Come rain or shine, you can expect regular quality blogs and timely updates from Oleksandr.
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