We’ve done several posts on umbrella insurance already. By now, you know what it is and how it functions. Since we live in an extremely-litigious country, where anybody can sue anyone for millions more than they’re worth, umbrella insurance is a low-cost way for individuals to get significant extra liability coverage – protecting against legal outcomes that would otherwise spell bankruptcy.
But understanding abstract descriptions is only the first step in making such a significant decision. I’ll lay out some of the more nuanced ways umbrella insurance functions in this post. Hopefully, I’ll assist you in your hunt for the correct policy.
I hate to start this way: but it’s essential to understand how the math works. Umbrella insurance is a personal liability policy that covers claims in excess of regular homeowners, auto, or watercraft policy coverage. But since the liability limits on those major policies are already substantially high, you’d have to be pretty wealthy for this type of insurance to make sense. If you’re considering umbrella insurance, your situation should look something like this…
Total Value of All Assets > Total Liability Limit of All Insurance Policies
Because if your assets are worth more than the amount you could potentially owe in an accident – you’re at risk of losing everything.
Since umbrella insurance covers not just the policyholder but other family and household members, your next consideration is family size, and less obviously, staff who spend a significant amount on property owned by you. One of the critical benefits of umbrella insurance is the protection extended to multiple, more-vulnerable Others close to the policyholder. So the more people there are in your “family unit,” – the more you’d benefit from this type of insurance. But if this doesn’t sound like your situation, you should likely consider other policies before umbrella insurance.
There’s also a sense of hierarchy at work here. By this, I mean that there’s a logical order of importance to the insurance policies you purchase. Because there’s such a slim probability you’d ever file a claim, umbrella insurance is one of the last policies people ever purchase. And since it covers injury to others or damage to their possessions, it doesn’t directly protect policyholder property. Which, at this point, is assumed to be separately, already, insured.
In many cases, if you own assets like a home, car, or land, you’re required by law to have insurance on that asset at the time of purchase. So again: umbrella insurance is a supplemental policy – the cherry on top.
Ultimately: the chances are slim you’d ever end up losing a lawsuit for more than what your existing insurance would pay. But, it does happen – and it’s happening more frequently. If you find yourself in one of these “nuclear verdict” situations – where a jury decides you’re personally liable for damages than you could ever hope to repay – Umbrella insurance will pay out damages above the liability limits of your original policies, cover the associated legal costs, and help you protect your savings.
