by Casia Chappell, CFP®, CPWA
Vice President
Wealth Planning and Portfolio Management
Umbrella insurance is one of the most commonly misunderstood and overlooked types of insurance coverage available. This form of liability coverage sits on top of your existing auto, homeowners or watercraft policies and is designed as an additional layer of protection from large claims that exceed your standard policy limits. A comprehensive insurance strategy includes multiple layers of coverage to ensure that you’re adequately protected from several angles.
Due to its name, umbrella insurance is often assumed to be a financial safety net that can cover almost any liability risk. While it plays a valuable role in wealth protection, umbrella insurance is far from comprehensive. Misunderstanding its limits could leave you exposed to risks you thought had been mitigated.
Umbrella policies are used to cover liability claims that go beyond the limits of your underlying policies. For example:
A major auto accident where damages exceed your auto liability coverage
A personal injury lawsuit after a guest is injured on your property
Legal defense costs arising from defamation or slander allegations
These policies typically start at $1 million in coverage and can extend to $10 million or more, depending on your risk profile and insurer. On average, each million dollars of coverage costs a few hundred dollars per year. The ideal amount of coverage will depend on the risk factors in your life, the amount and type of assets that you own and your tolerance for risk.
A common area of exposure for policyholders is related to business activities. Even if you operate a business from your home, your umbrella policy may not cover liability that arises from activities or incidents related to the business. Depending on the nature of the business, you may need specific business protection through commercial liability insurance, directors and officers (D&O) coverage, or by establishing a separate legal entity such as a limited liability company (LLC).
Even within the realm of personal liability scenarios, there may be limits to what a standard umbrella insurance policy will cover. For example, cyber liability, fraud, or data breaches caused by personal use devices are commonly excluded from coverage. Disputes arising from rental properties or household staff such as housekeepers or in-home childcare providers may also be excluded by a typical umbrella policy. Additional coverage can be obtained through “add-ons” to your homeowner policy, such as personal cyber insurance or stand-alone policies like workers' compensation and Employment Practices Liability Insurance (EPLI), to mitigate those risks.
It's important to review your umbrella insurance as life changes occur to ensure coverage continues to match your needs, risks and exposures and to keep your policy performing as expected. When purchasing new real estate or vehicles, be sure that the insurance policies on those assets are appropriate for your umbrella coverage. Adding a teenage driver to your household or building a pool in your backyard could also change your coverage needs. An evolving net worth is another reason to review your coverage as a disconnect between your assets and coverage could mean that your existing policy is no longer sufficient for your needs.
Umbrella insurance is an essential part of a layered liability protection plan, however some of its limitations could expose you to significant and unexpected risk. Many of these risks can be mitigated with higher coverage limits, supplemental policies or riders, or additional risk management structures. We recommend that policyholders review their coverage, including the underlying home and auto policies, on a regular basis with their agents to identify gaps. Please reach out to your portfolio manager or client relationship associate if you would like a referral to a licensed property and casualty insurance agent to help review your current coverage.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. We believe the information provided is from reliable sources but should not be assumed accurate or complete. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.