All insurance policies have liability limits, but what can you do if the limit doesn’t protect your financial well-being should someone file a claim against you? Without additional coverage they could potentially seize personal or company assets which would seriously impact your future.
Two common insurance solutions are excess liability insurance and a personal umbrella insurance policy. Both provide additional layers of coverage for bodily injury and property damage above primary insurance policies, however there are differences.
Excess Liability Policy
An excess liability policy provides additional coverage should a claim exceed your policy limit. It kicks in when the claim exhausts the coverage limit provided by your existing policy.
However, the coverage provided by an excess liability policy is never broader than the underlying policy. It bumps up the liability limit, but doesn’t offer additional coverages.
Additionally, excess liability insurance can only be applied to one underlying policy. As a result, if you buy an excess liability policy under your homeowners or general liability insurance policy, but a vehicular incident leads to a claim the policy won’t provide protection.
An umbrella policy also kicks in when a claim exhausts your coverage limit. However, it can be applied to multiple underlying liability policies and it provides additional coverage for liability exposures not provided by the underlying insurance. It extends the coverage definition beyond bodily injury and property damage to include personal and advertising injury.
As an example, a driver under your policy runs a red light, hits another car, causes significant damage to the vehicle and injures the driver. Repairs total $60,000 and medical treatment totals $800,000. The underlying policy liability limit is only $500,000.
The underlying policy pays $500,000 and the umbrella policy pays the additional $360,000. Without this additional protection, this amount would be paid out-of-pocket.
Individuals at higher risk of lawsuits should consider an umbrella policy. If you own significant assets, rent property, own a hot tub, pool, dog or trampoline, volunteer, coach sports, or act as a director or officer of an organization an umbrella policy can provide coverage, even if the underlying policy does not include it. This includes claims for libel and slander not included in standard policies.
Umbrella policies can work in conjunction with many insurance products. These include homeowners, auto, condo, watercraft and other specialized policies as well as business products such as general liability insurance, employer’s liability insurance, cyber liability, commercial auto insurance and hired & non-owned auto insurance.
Certain conditions must be met before an umbrella policy kicks in and business clients may need to pay a self-insured retention (SIR) before the insurance company responds to the loss. Umbrella policies also depend on the liability limit of the underlying policy. If you reduce the underlying policy’s limit, the umbrella policy won’t kick in until the previously agreed upon limit is reached. Some insurers may consider this breach of contract and refute the claim completely.
Considering the flexibility and greater protection of an umbrella policy, it is often the wisest choice. However, it is always best to discuss your insurance needs with a qualified insurance agent.
Umbrella policies are available in increments of $1,000,000 up to at least $10,000,000 and they’re surprisingly affordable. According to the Insurance Information Institute, the average cost of a $1 million personal umbrella liability policy is between $150 and $300 annually. The cost increases $75 for the next million and $50 for every subsequent million.
The amount of liability coverage required on the underlying policy depends on the insurer. Typically, it is $250,000 of liability insurance on an auto policy and $300,000 on a homeowners policy before the insurer will sell you an umbrella policy.