Umbrella insurance increases the dollar limits of underlying liability insurance. This is generally so whether the underlying insurance is for Homeowners, Auto, Business or any other type of liability. Umbrella coverage is generally much less expensive than your primary policy because, in most cases, it covers liabilities that exceed the limits of your primary coverage.
For example, if your Homeowners’ liability coverage limit is $500,000, and you are sued by a neighbor who is severely injured on your property; your homeowners policy would only cover the first $500,000 in damages and/or defense costs. You and your assets would be exposed for the balance. If the injuries suffered by your neighbor were in excess of $500,000, your Umbrella policy would pay for the balance up to the Umbrella policy limits.
The same analysis applies to auto insurance. If for example, you cause an accident, your primary Auto policy would protect up to your policy limit. Your Umbrella policy would cover losses over the Auto policy limit and protect your personal assets up to the Umbrella policy limits.
Umbrella policies are important for anyone who has assets that might be at risk if they cause serious harm involving an act covered by their insurance. Umbrella policies may also protect your future earnings. If you cause damage to a third party and do not have enough insurance or assets to pay for the resulting losses, a court could allow the damaged individual to garnish a portion of your earnings each month to pay off this debt, or to take other steps which would imperil your future earnings.
Additional coverage provided
In addition to increased liability limits, Umbrella policies often provide additional coverage for personal liability claims. These include libel, slander, defamation, malicious prosecution, wrongful eviction, false imprisonment, assault and battery, or other claims that are generally not covered by Homeowners, Auto, and other Liability policies.
Some of these liabilities might be covered under an Umbrella Policy containing what is called a “drop down” provision. Such a provision can sometimes cover some things that are not covered in your primary insurance policies.
Some Umbrella policies also provide coverage if you face liability arising from your service on the board of civic, charitable, or religious organization. Most Umbrella policies exclude coverage for these types of claims if they occur in the context of a business transaction.
Protection against claims and lawsuits does more than simply pay for the damages. Even if a lawsuit against you is frivolous, you still face the expense of defending yourself. This can become quite expensive.
Costs Covered Under Umbrella Insurance
Most Umbrella policies cover both defense and indemnity costs once the primary policy limits are expired. But in most states, although it has to defend against punitive damages allegations, Umbrella policies do not have to indemnify for a punitive damages judgment against you.
In most states Umbrella policies will not cover a punitive damages judgment. It is thought to be against public policy, and the purpose of punitive damages, to allow someone to cause damage or harm intentionally.
False Allegations Against You
Protection against claims and lawsuits related to false allegations is often more about the cost of defending them than losses. Even if a lawsuit against you is false and frivolous, you could still face significant expense in legal defense fees. Both the Umbrella Policy and the underlying Liability insurance are often responsible for paying the defense costs in such cases. There is often wording in these policies specifically to that effect.
If the malicious allegations turn out to be true, however, well, that’s another matter.
If your assets are substantial Umbrella insurance can provide important coverage.
Common Issues Involving Umbrella Insurance
- Whether the underlying claim is or is not covered under the umbrella’s coverage provisions.
- Whether the Umbrella insurance limits are too low to protect the insureds’ assets against a lawsuit or judgment.
- If there is a gap in coverage, who is responsible for it: The underlying agent; the underlying insurer; the Umbrella agent or the Umbrella insurer?
- Whether the Umbrella carrier has an independent duty to defend the insured(s) and/or settle the claim.
- Whether the Umbrella carrier has an independent duty to attempt to settle the claim against the insured(s).
- Does the Umbrella cover occurrences that are not covered by the primary policies?
- What is the Umbrella’s duty to defend and how is it triggered?
- Are the Umbrella coverage limits reduced by the amount of money that the insurer spends defending the litigation?
- Who are the individuals covered under the Umbrella, and are family members not currently living in the family home (such as sons and daughters away at school) covered?