Personal Umbrella coverage is a valuable piece of an overall insurance program. It provides an additional layer of liability coverage over and above your primary insurance policies. This provides you greater protection against catastrophic financial loss.
A Personal Umbrella policy gets its name from what it does - it typically extends over and above all your personal underlying exposures. While you still need primary policies in place to insure your properties, vehicles and toys, a single Personal Umbrella policy can provide secondary liability protection over all of them.
To further illustrate why an Umbrella policy is called an Umbrella policy, picture with me three people wearing rain jackets all huddled under a single large umbrella. Each individual may have their own protection against the rain (their rain jackets), but that umbrella provides them a second layer of protection. In the same way, if a lawsuit rains down from above, you want as much liability coverage standing between you and your bank account and assets as possible, regardless of whether the loss involves an auto accident, a dog bite, a boating injury, etc.
Unfortunately, the name “Umbrella policy” is vague enough to create a lot of confusion about what it is and what it covers. So, while a Personal Umbrella policy is a great way to add more liability protection, I’d like to use this post to clear up a few things that a Personal Umbrella policy is not.
A Personal Umbrella policy is not a substitute for primary insurance coverage
Because the name “Umbrella” suggests that it covers everything, often people assume that if they have an Umbrella, they can avoid buying other policies. Maybe they don’t need to buy a watercraft policy as protection against boating accident. Maybe they don’t need primary liability insurance for their hunting cabin to cover them if there is an injury at that location. And maybe they can skip the purchase of an off-road vehicle policy to protect them if someone gets hurt by their four wheeler. Unfortunately, none of these assumptions are correct.
For the most part, Umbrella policies are not intended or priced to provide the first layer of liability protection. This is why Umbrella policies specifically required underlying coverage be in place. These required underlying limits do vary somewhat from carrier to carrier, but to illustrate how this works, here is what is currently required by one specific carrier who we represent:
Again, let me be clear that your Personal Umbrella carrier’s underlying insurance requirements may be different than those shown above, as this example is for one specific carrier only. Do not rely on these amounts; check your own policy!
So, what happens if you don’t comply with your Personal Umbrella’s underlying insurance requirements and a loss occurs? Will your Personal Umbrella carrier scold you for being a bad boy or girl but go ahead and save the day? Unfortunately not. If a loss occurs and the required relevant primary coverage was not in place, one of two things will happen, depending on how your policy contract is written. Either your Personal Umbrella carrier will completely deny your claim or they’ll cover your claim but only after you pay out of pocket the six-figure amount you were supposed to carry.
As an example, let’s say that you own a small, rustic cabin way back in the woods. The cabin isn’t in the best condition and isn’t worth too much; so you don’t worry about insuring its value. And you falsely assume your Personally Umbrella policy is fully protecting your liability this location. During a terrible thunderstorm, a passerby takes refuge in your cabin, but strong winds cause the rickety structure to cave in, severely injuring the person inside. The next thing you know, you are being served with a $1.5 Million lawsuit, alleging that you are responsible for the injury because you were negligent in maintaining the cabin.
A horrible accident, but at least your Umbrella policy has your back, correct? Well, it would have if you had spent around $20 a year to extend primary liability coverage to the cabin. Unfortunately, in this example, your Umbrella required a $300,000 underlying liability limit, which you didn’t carry. If you are lucky, your Umbrella carrier may not deny your claim entirely, but, even so, when the $800,000 settlement is reached, you will be responsible to pay the first $300,000 out of your own pocket before your Umbrella pays for the rest.
Let me be clear: a Personal Umbrella policy can be a life-saver in protecting you against catastrophic financial loss, but it is very important that you pair it with the underlying primary liability coverage it requires.
Having said all this, many Personal Umbrella policies do provide some “drop-down” coverage. This is when you carried all the required underlying insurance, but the loss that occurred fell between the cracks of your primary policies and wasn’t covered by any of them. In this case you may be responsible for a small share of the loss, such as $250 or $1000. As an example, maybe your primary Homeowners policy doesn’t cover Personal Injury but there is no exclusion for this in your Personal Umbrella. You make a post on Facebook, describing your horrible experience with a family doctor, and the doctor sues you for slander. In this case, you have no primary insurance policy to cover you, but your Personal Umbrella picks up the slack and pays for your legal defense. If there is a verdict or settlement against you, you pay your $500 share and your Personal Umbrella pays the rest. (It’s important to note that not all Personal Umbrella policies work this way, however.)
A Personal Umbrella policy is not a simplified, cheaper way to protect your property against damage
As has been explained already, a Personal Umbrella policy provides additional liability coverage. What a Personal Umbrella policy does not provide is coverage for loss or damage to your property.
Unfortunately, this can be misunderstood because of the vague name “Umbrella”. Sometimes people assume that if they have an Umbrella policy, it will fully cover all their property and possessions against damage, theft or any other loss.
This is simply not the case. If you carry “Liability only” on your car and it gets damaged in a car accident, your Personal Umbrella will not pay for the repair or replacement. When your old rustic cabin that you didn’t bother insuring finally falls down in a storm, your Umbrella policy will not pick up the slack and pay to rebuild it. If you don’t insure your pontoon during the winter and the garage it is stored in burns down, after your Homeowners policy pays its watercraft limit of $1000 or $1500, your Umbrella will not pay for the rest of the value of the boat.
To repeat: A Personal Umbrella policy provides you with extremely valuable liability protection, but don’t be confused by the name: It doesn’t provide any coverage for the damage or loss of your own property. That’s what primary insurance policies are for.
A Personal Umbrella policy is not offered at a flat price
Some insurance buyers might assume that you pay a standard price for an Umbrella policy to cover whatever exposures you might have now or in the future, but this is really not how it works. Most Umbrella policies will base their premium on the number and type of exposures you own. For example, an Umbrella policy might have an annual premium of $35 for each car, $25 for each motorcycle, $30 for each additional residence, etc.
Depending on your Umbrella carrier, this premium is often fixed for the policy term and then re-calculated at each renewal, based on anything new you have acquired in the meantime. However, there are also a number of carriers that will actually make an adjustment to your premium in the middle of the policy term if you add or remove exposures.
For this reason, many Personal Umbrella carriers ask you to let them when exposures are added, removed or replaced. Of course, this process is simplified when the same agent and carrier provides all your underlying personal insurance policies as well as your Personal Umbrella. This is usually the best way to go.
It’s important to note that some Personal Umbrellas will actually exclude coverage for certain exposures if you haven’t disclosed them and paid an extra premium to cover them. For example, one of our carriers excludes coverage for any loss caused by an ATV, motorcycle or jet ski that is not listed on the Umbrella policy.
A Personal Umbrella policy is not able to extend over commercial insurance
As the name applies, a Personal Umbrella policy extends over your other personal insurance policies. By and large, it does not and cannot extend over a commercial insurance policy.
Here’s how this works. Let’s say that you own a couple homes that you rent out for investment income. You have been insuring them each on a personal Dwelling Fire policy and relying on the additional layer of liability coverage provided by your Personal Umbrella policy. However, when you buy your third rental home, a friend tells you that you could save money by combining the properties under a single commercial package policy. While there may be other coverage advantages to moving your rental home insurance from personal policies to a commercial policy, it is important to be aware that your Personal Umbrella policy probably won’t cover the rental homes anymore. So you should make sure to buy a high enough liability limit under your new commercial policy to pick up the slack. Or you could buy a commercial umbrella policy for the rentals.
In summary: A Personal Umbrella policy is not… a waste of your money!
The best way I could close this post is by emphasizing what a good idea a Personal Umbrella policy is. While it doesn’t do everything that some people assume it does, what it does is very important: It provides you with additional liability protection against a catastrophic financial loss. Properly understood and set in place, this is very valuable coverage indeed.
This post provides general, summarized information about the subject matter discussed. Because underlying limit requirements, coverage limits, policy terms and rates can vary significantly from one carrier to the next, specific examples used in this post should not be relied on to apply to your own insurance situation. Instead, it is important that you read your own policy(s) carefully. While outside the scope of what we explained in this post, it is worth noting that many Personal Umbrella policies also have the option to add a second coverage, Excess Uninsured/Underinsured Motorist protection.
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
Coverage descriptions found in this blog are summaries provided for general educational purposes and cannot fully detail the terms, conditions, limitations or exclusions of a specific insurance policy. Please read your policy carefully.