I've discussed almost all forms of insurance on this blog and also have regular reminders about the need for a will. But there's something I haven't addressed yet and I'd like to do so today. That topic is umbrella insurance.
Let's start with a definition from Wikipedia:
Umbrella insurance refers to insuring more than one property as opposed to insuring only one. For example the owner might get a discount for insuring both his house and car rather than insuring them with separate policies because it might cost more. Typically, an umbrella policy is pure liability coverage over and above the coverage afforded by the regular policy, and is sold in increments of one million dollars. The term "umbrella" is used because it covers liability claims from all policies underneath it, such as autos and homeowners policies. For example, if you have an auto insurance policy with liability limits of $500,000 and a Homeowners policy with a limit of $300,000, then with a million dollar umbrella, your limits become in effect, $1,500,000 on the auto policy and $1,300,000 on a homeowners liability claim. Umbrella policies are mainly used by those who have sizable unencumbered assets, such as a home with a large amount of equity to ensure that even a catastrophic claim will not allow those assets to be placed at risk.
Now let's move to a piece from the NY Times on umbrella insurance. They illustrate how umbrella insurance can work:
Here's the nightmare: Your car skids. You crash into a Mercedes with a highly paid business executive at the wheel. He’s hurt so badly he cannot return to work. A jury awards him millions of dollars and you have to pay it.
You’re wiped out financially. The court takes your savings, goes after your home and, for decades, requires you to give up a part of your salary.
For some people such a nightmare could never happen. They have an extra insurance policy, known as umbrella or excess liability coverage, which takes care of their liability for the lawsuits and medical bills of the auto accident victim — or of the teenage guest who dives into the shallow end of the swimming pool or the deliveryman who trips on the front steps.
And here's another example:
One of Mr. Cox’s clients crashed into the rear of a car on a slick highway. A woman and a child were critically injured. After two years of litigation, his client settled the lawsuit for more than $5 million. The client had $15 million in umbrella coverage. The policy paid for the settlement and all legal costs. “Without the umbrella,” Mr. Cox said, “they would have been completely wiped out.”
As you can see, umbrella insurance can be a key part of protecting your assets over and above what are normal insurance levels. For those with any sort of significant level of assets, umbrella insurance is a good financial move, but not many people carry this sort of protection:
State Farm, the biggest home insurer in the country, with a clientele of mainly middle- and lower-income homeowners, says about 12 percent of its policyholders buy umbrella coverage.
For those who want/need umbrella insurance, it's very affordable:
Buying such coverage usually does not greatly increase the overall cost of home and auto insurance. For example, in Louisiana, insurance on a $1 million home well away from the coast might run $4,500 a year, Ms. Edmonston, the Baton Rouge agent, said. Two cars could raise the cost of the package to $7,500. And $5 million in umbrella coverage might cost about $600 more, or about 8 percent of the total. In New York, agents say, $5 million in coverage might cost about the same.
I've had umbrella insurance for several years now and just upped ours to cover our ever-growing list of assets. In today's society where people sue others at the drop of a hat, cheap, umbrella insurance is a key part of protecting those assets that you've worked so hard to accumulate.