Individuals generally don't believe that they could be held liable for a loss in which the amount of indemnification would be so large that it would surpass the limits of their liability insurance and possibly imperil their personal wealth. Although not common, it does happen. And when it does, you will be thankful if you have personal umbrella insurance. It's a solution to managing the risk of being held liable for a catastrophic event resulting in major losses beyond the coverage limits of primary policies (for information catastrophic losses related to your home, see Does Homeowners Insurance Cover Natural Disasters?)
For example, an inebriated insured party crashes into another vehicle. It results in a total loss of both cars, hospitalization of the insured driver, and severe injuries to the other driver and the passengers (find out more about Auto Liability Insurance). Besides the medical treatment costs going up into the tens to hundreds of thousands for the other parties, rehabilitation costs would rack up another large bill, not to mention their expected loss in wages. The insured would have to compensate them all for medical expenses as well as damages for pain and suffering, which would likely exceed their liability coverage limit in their auto policy.
What Is Personal Umbrella Insurance
Like the liability insurance provisions in homeowners and auto insurance policies, umbrella insurance provides coverage for bodily injury and property damage for which the insured is found liable. In addition, the insurer is obligated to participate in the defense of any claim made. In most instances, this means the insurer will hire an attorney to defend the claim on your behalf. In instances where the insured is precluded from hiring an attorney by law (e.g., the insurer is not an admitted insurer in a foreign country and precluded from directly hiring an attorney), the courts will permit the insured to hire an attorney and the insurer would reimburse the former for defense costs.
What makes personal umbrella insurance different, however, is that it provides coverage in excess of any underlying insurance. For instance, if an insured has $1,000,000 in umbrella coverage and $500,000 in auto liability coverage, for damages of $750,000, the umbrella policy would cover the additional $250,000 not covered by the auto liability insurance.
Another difference is personal umbrella insurance can provide broader coverage than the coverage afforded by either home or auto policies. For example, it provides worldwide coverage, while a personal auto policy only provides coverage in the United States of America, its territories and possessions, Puerto Rico, and Canada (will you be Driving to Mexico? Here's What You Need to Know About Auto Insurance).
Important Provisions of Personal Umbrella Insurance
First, liabilities covered by a personal umbrella policy but not by any underlying policies are subject to a deductible. This means that you would have to pay a certain amount out of pocket before coverage kicks in.
Second, the policy requires maintenance of underlying insurance. This means the insured must maintain their homeowner's and auto policies that were in force at the time the umbrella policy was issued and must report any changes to the insurer (see The Ultimate Guide to Auto Insurance for all you need to know about auto policies).
For insureds who do not own vehicles, the insurer will either exclude liability stemming from ownership or use of an automobile by way of endorsing the policy, or otherwise require the insured to obtain what is known as a named non-owner policy, which provides the individual with auto liability coverage even though they don't own an automobile.
Furthermore, the underwriting guidelines of the insurer will require the insured to maintain a minimum amount of liability coverage under these policies.
It's rare for an individual to sustain a loss valued at a high dollar amount exceeding the liability coverage of their primary policies. Nevertheless, these losses sometimes do occur and have the potential to bring you to financial ruin. Personal umbrella insurance provides the additional coverage needed to protect you against these rare occurrences at a low cost.