What is umbrella insurance? Why you should care!

Umbrella insurance is secondary insurance coverage that covers liability over and above the standard liability cover taken on other policies like the homeowner or other small business policies. It could provide a cover on multiple properties and assets depending upon the selection of the coverage. It is typically considered as ‘excess’ insurance or better known as an umbrella policy. This excess liability insurance policy can prove in the event of lawsuits or other monetary claims made against the policyholder. 

What does umbrella insurance cover?

The term ‘umbrella’ refers to the broader coverage feature of the umbrella insurance policy. Such policies offer more extensive coverage over one or more primary policies held by policyholders. The umbrella policy provides you with additional liability protection over primary policies such as home, auto, investment, property and separate umbrella policies can extend over business insurance policies.

The International Risk Management Institute (IRMI), US, defines ‘follow form’ as, “When an umbrella policy provision follows the underlying policy as to how the provision applies. Follow form also identifies ‘excess’ liability policy that follows the underlying policies for most policy provisions. The policy may stand alone for certain exclusions, conditions, etc. while relating to the underlying coverage for most provisions. This type of policy form is typically used as an excess of scheduled underlying insurance and usually contains a requirement that the insured maintain scheduled underlying insurance.”

In simple words, a commercial umbrella insurance policy acts as an added layer of protection against unforeseen liability losses by offering higher limits. Umbrella liability is usually written over the following primary policies:

  • Commercial General Liability
  • Employer’s Liability Coverage
  • Commercial Auto Policy

Here is a possible list of things that could be covered under an umbrella policy:

  • Slander, libel and loss to someone else’s property are covered under certain specific conditions
  • Invasion of privacy
  • False arrest, detention or imprisonment
  • Lawsuits

The umbrella insurance policy acts as an extra layer of security for policyholders against the risks mentioned here.

In essence, it’s an inexpensive way to protect one’s financial future and existing assets.

Of course, it’s true value is when the policyholder’s base or primary policy liability limit is exhausted. The umbrella insurance policy can come to the rescue and cover the remainder of the dues leftover from primary policy (as per the limit of the policy) which is why it is important to consult a professional to discuss what items and what items should need protection and for how much.

Do you need an umbrella insurance policy?

Before buying any insurance policy, you must ask yourself some specific questions to decide whether they need that particular insurance policy or not. Umbrella insurance is no different. If you are contemplating buying an umbrella insurance policy, here are a few questions that you need to ask yourself:

  • What is my asset value? Is it covered for any unforeseen losses in the future?
  • Are there significant risks I might face in the future? Medical, legal, etc.
  • Is my inflow of income enough to pay for a lawsuit?
  • And, most critical, is my existing policy or policies adequate?

The answer to these questions will help you decide if you need an umbrella insurance policy to cover against any unforeseen and unfortunate incidents that might happen in the future.

Of course, such events can burn a deep hole in your finances. It is during these times that umbrella insurance will provide you with the financial cushion you need.

How much umbrella insurance coverage do you need?

The best way to decide this is by evaluating your assets and liabilities and understanding the value of what you are trying to protect. Add up your assets – the value of the properties you own, cash in bank, investments and everything else of any financial benefit. Now, deduct your liabilities to calculate your net worth. After this evaluate your policies and see if their limits are enough to provide you with coverage and protection in case of an unfortunate event. The answer will help you decide how much umbrella coverage you need.  However, please keep in mind that it is not uncommon for lawsuits to reach millions if not tens of millions of dollars regardless of the amount of assets you have.

If you are considering to buy an umbrella insurance policy, it is always advisable to get in touch with an insurance company or an agent to understand the nitty-gritty of buying a policy. A great insurance agency will not only help you understand the policy better but also assist you in deciding the details of the cover and the premium best suited for you after analyzing your financial standing. You will get the cover you need, at the price that works.