Personal umbrella insurance

?Who needs umbrella insurance

Some insureds need more extensive liability coverage than can be provided by personal lines policies. This need can be met through a personal umbrella policy, which has two important purposes:

■Provide additional liability insurance over and above the basic coverage provided by underlying liability insurance

■Cover some losses excluded by the underlying liability insurance

Coverage limits for a personal umbrella policy range from $1 million to $5 million.

1. Excess Liability Coverage

Let’s examine how a personal umbrella provides excess liability coverage. 

Suppose an insured has the following liability coverage:

Excess liability coverage example

For a loss payable under the homeowners policy, the insured would have an additional $1 million of coverage after the $100,000 limit under the homProperty

eowners contract had been exhausted. On a $300,000 loss, the homeowners contract would pay $100,000 and the umbrella policy would pay $200,000.

 For a loss payable under the auto policy, this same personal umbrella policy would pay up to an additional $1 million, but only after the $100,000 limit of the underlying auto policy was used.

Because of the pivotal role played by the underlying policies, the insured must identify any underlying liability insurance to the insurer before an umbrella policy is issued.

 If the insured allows an underlying policy to lapse or be reduced in coverage, the insured is responsible for paying damages up to the underlying policy’s limit before the umbrella policy takes over.

Suppose the insured has a homeowners policy with $200,000 in liability coverage and a $1 million umbrella policy. 

If the insured has a $100,000 liability loss payable under the homeowners policy, the homeowners policy will pay $100,000 and the umbrella will pay nothing because the loss is fully covered by the underlying insurance.

If this same insured has a $300,000 liability loss that would have been payable under the homeowners policy except the insured allowed the homeowners policy to lapse, the umbrella will pay $100,000.

 If the insured allows an underlying policy to lapse, he must pay damages up to the underlying policy’s limit before the umbrella policy will pay.

2. Coverage for Excluded Losses

A personal umbrella may also cover losses that are excluded by the underlying policy. For this type of coverage, the insured must select a retention limit. 

Retention limits, which vary from $250 to $10,000, work like deductibles. They are sometimes referred to as self-insured retentions because they represent the amount of loss the insured must cover out of pocket. Self-insured retentions do not apply to losses that are covered under the underlying liability coverage.

Of course, even an umbrella policy has exclusions, such as intentional acts, liability covered under workers’ compensation, and liability arising out of business pursuits.

 When a loss is excluded under both the underlying policy and the umbrella, no coverage is available.