Are you getting excessive?
You have a policy for your home and the cars driven by your family. You have just the right policy for the apartment you rent out to others as well as special coverage for your boating excursions. Your homeowners policy even has a special, added coverage to handle the business that your spouse runs out of your home. Yes, it looks like you can breathe a sigh of relief and be confident that you have all the coverage you need. Or should you have an umbrella? An umbrella is the term for a liability policy that fits over your primary policies on an excess basis (and sometimes provides protection that is not available under your primary coverage).
Doesn’t “excess” mean too much?
Not in the case of carrying umbrella coverage. Umbrellas are designed to be carried over a person’s primary or underlying liability coverage. A person’s primary coverage is typically part of his or her personal automobile and homeowner’s coverage. Primary refers to the fact that in the event of a loss, the liability portion of your auto or homeowner coverage is the first to respond. Umbrellas or excess liability policies respond to an eligible loss only after the primary insurance has paid its limit.
It’s quite possible that your primary insurance limits provide more coverage than you’ll ever need. However, circumstances could involve a type of loss that is not completely covered by a primary policy. For instance, your newly licensed child is driving the family car and slides on an icy highway. He ends up causing a chain collision damaging several cars and injuring a dozen drivers and their passengers. Or maybe you often volunteer to help transport members of your son’s first grade class on field trips and you have an accident because you tried to beat a yellow light. If you don’t have enough primary coverage, any shortage may have to come out of your personal assets.
Umbrellas generally provide additional liability coverage for the following underlying policies:
- Personal automobile
- Recreational vehicles
- Personal liability
A traditional umbrella offers broader protection, covering primary policies as well as a variety of typically uncovered exposures. For instance, you may have to go to court after being accused of slandering another person. The liability section of your homeowners policy may not cover this type of loss (this type of loss is called personal injury). An umbrella policy might include coverage for personal injury, so you’ll be covered if that situation were to come up. You may also need a traditional umbrella to handle unusual situations such as hobbies or activities that may increase the likelihood of facing liability losses. For example:
- You have an in-home hobby of training guard dogs, and a neighbor’s child is attacked
- You publish a newsletter on the Internet covering local or state politicians, and one issue wrongly accuses a state senator of committing crime
- You collect rare instruments, and, as a part of the hobby, you also repair and restore such property for other people. One day you drop an antique mandolin which shatters when it hits your garage’s concrete floor
Generally, umbrellas provide coverage for any amount of a loss that exceeds the primary policy’s deductible. However, when handling a loss that is not covered by primary insurance, a special kind of deductible called a self-insured retention (SIR) may apply. An SIR is the dollar amount you have to pay before the umbrella coverage is triggered.
Of course, umbrellas don’t always work as named. Your policy may just provide additional amounts of coverage to supplement existing protection. This is how an excess policy performs. Excess policies respond the same way as a primary policy. In such cases, an umbrella may “follow the underlying coverage.” This means that the umbrella covers only the situations covered by its underlying coverage. In this case, the umbrella also excludes a loss that’s excluded under a primary policy. While in many instances umbrellas provide broader coverage, only a careful evaluation of the actual policy wording will reveal the extent of the additional protection.