Umbrella Insurance: How It Works and What It Covers

A while back, my wife Tanya bought me an umbrella. She knew I was walking into work and getting pretty wet from the two-block walk in the rain. I can’t tell you why I didn’t go out and buy one myself. Most of the time, I’d have some sort of jacket. I found out that if it’s light rain, my rain jacket or overcoat could do the trick. But for a deluge, I wanted to have an umbrella. Otherwise, I’d sit cold and wet at my desk most of the day. Thankfully now when I reach into the back seat of my car, the umbrella Tanya bought me is always within arm’s reach.

How Big Is My Umbrella?

An umbrella insurance policy shields you from the deluge of financial liability during a catastrophic event where you’re responsible for damages. It adds liability protection above the liability limits of underlying insurance policies, which I’ll share more about below. We recommend that most clients carry a minimum of $1 million in umbrella coverage. That may seem like a lot, but it amounts to a few hundred dollars a year. Some suggest carrying an umbrella policy to cover up to your net worth. That’s a good rule of thumb, but it’s important to consider protecting more than just your assets or net worth because sometimes, legally, a claimant can be awarded some of your wages, too.

Umbrella policies cover a wider range of damages than your auto and home personal liability coverage, such as legal fees, tenant injury (if you’re a landlord), and lawsuits for defamation of character. Umbrella policies have important, if not common-sense exclusions. Of course, if you harm someone intentionally, yep, the umbrella has holes, and you’re definitely getting soaked in liability. If you cause damage to your own property, also not covered. The other big exclusion is for business liability - think malpractice or causing damage on a job site. You need special business liability and errors and omissions insurance for those two things (Maybe that will be a future blog post. Exciting business insurance!)

Will My Umbrella Always Open?

When I said before that an umbrella policy depends on underlying insurance, this is what I mean. If you’ve ever read through your home or auto policy, you’ve seen the first page or two are the declarations, which summarize key information about your policy, including the coverages. You’ll notice one of the line items is liability coverage. This coverage provides money for injury you cause to someone else or damage to property.

(Sidebar: You’re only required by state law to carry a small amount of liability coverage. AVOID a policy with only these legal minimums. Sure, you’re legal, but it would be miserable if you had an at-fault accident. You’d be on the hook for a lot of money. Remember, insurance is the transfer of risk from you to the insurance company. Having only low legal liability insurance minimums, you retain a huge amount of risk.)

Anyway, typically, we see $300,000 of liability coverage on home and auto policies. We LOVE it when we see $500,000 of liability coverage, though. These become the underlying liability coverage (your rain jacket) on which your umbrella policy is based. If you don’t satisfy the underlying insurance, you risk having claims not paid or the policy being canceled.

Umbrella Shopping

The best way to buy this policy is from whatever company carries your other property and liability insurance (think home, renter, condo, and auto insurance). If you’ve got your umbrella insurance through the same carrier, they’ll ensure you have the necessary underlying coverages in place to satisfy the umbrella. If you get your umbrella from another carrier, they’ll ask you, but ultimately, it’s on you to maintain the required minimums. I’ve seen cases when adding an umbrella policy actually lowers premiums on your underlying policies.

At The Dala Group, helping you reduce your risk through appropriate insurance is one of our core services. That’s why we ask you to send us your property insurance policies for review when you become a client and during your annual review. It’s important to evaluate your risk exposure regularly because your family situation and financial picture are always changing. We want you to have peace of mind and help shoulder the load because insurance probably isn’t on your top ten list of weekly priorities. If you’re a client and haven’t sent us your policies in the last twelve months, upload them through your client portal. If you’re not a client and are interested in a partner to walk with you as you navigate your personal financial situation, book a 15-minute intro call with one of our wealth advisors to get started. Remember, having an umbrella during a deluge keeps you from being soaked. I have an umbrella handy myself, and the cost and time to buy one are well worth the peace of mind I have if I need it.