Let’s say you have a policy for your home and your family’s cars. You have just the right policy for the apartment you rent out to others as well as coverage for your boating excursions. Your homeowner’s policy even has a special, added protection for the business that your spouse runs out of your home. While it looks like you have all the coverage you need; perhaps you should consider…..an umbrella.
Umbrellas are designed to be carried over a person’s primary (also known as underlying) liability coverage. Primary refers to the fact that in the event of a loss, the liability portion of your auto or homeowner coverage is the first to respond. Umbrellas or excess liability policies respond to an eligible loss only after the primary insurance has paid its limit.
It’s quite possible that your primary insurance limits provide more coverage than you’ll ever need. However, circumstances could involve a type of loss that is not completely covered by a primary policy. For instance, your newly licensed child is driving the family car and slides on an icy highway. He ends up causing a chain collision damaging several cars and injuring a dozen drivers and their passengers. Or maybe you often volunteer to help transport members of your son’s first grade class on field trips and you have an accident because you tried to beat a yellow light. If you don’t have enough primary coverage, any shortage may have to come out of your personal assets.
Umbrellas generally provide additional liability coverage for the following underlying policies:
- Personal Automobile
- Recreational Vehicles
- Personal Liability
The additional coverage may often extend to handling related expenses, also on an excess basis, such as the cost of providing a court defense.
Umbrella vs. Excess Coverage
A traditional umbrella offers broader protection, supplementing primary policies and handling a variety of other, less common losses. For instance, you may have to go to court after being accused of slandering another person. The liability section of your homeowners policy may not cover this type of loss, called personal injury. An umbrella policy might include coverage for personal injury, so the loss is covered. An umbrella may also handle losses related to hobbies or other activities. For example, you:
- Have an in-home hobby of training guard dogs and a neighbor’s child is attacked
- Publish a newsletter on the Internet covering local or state politicians and one issue wrongly accuses a state senator of committing a crime
- Collect rare instruments and, as a part of the hobby, you also repair and restore such property for other people. One day you drop an antique mandolin which shatters when it hits your garage’s concrete floor
Generally, umbrellas provide coverage for any amount of a loss that exceeds the primary policy’s deductible. However, when handling a loss that is not covered by primary insurance, a special kind of deductible called a self-insured retention (SIR) may apply. An SIR is the dollar amount you have to pay before the umbrella coverage responds to an eligible loss.
Of course, umbrellas don’t always work as named. Your policy may act only to provide additional amounts of coverage to supplement existing protection. This is how an excess policy performs. Excess policies respond the same way as a primary policy. In such cases, they “follow the underlying coverage.” This means that the policy covers ONLY the situations handled by its underlying coverage.
Only a careful evaluation of the actual policy wording will reveal the extent of the additional protection.
The best way to find out if extra coverage is necessary is to discuss your coverage needs with a professional insurance agent.