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Excess or Umbrella?

By February 27, 2013June 9th, 2020No Comments

In 2009 a jury in Hernando County, Florida, rendered a verdict of just more than $330 million to the family of a 13-year old girl who was tragically killed in a car accident caused by a drunk driver.

Large verdicts are becoming increasingly common. While of course no one is condoning drunk driving—and legitimate arguments can be made about the price tag on a human life—the point is that the average cost of claims against negligent parties is rising at an alarming rate. According to the National Law Journal, premises liability awards increased 16.4 percent to an average of $242,782 in 2009. In that same year, motor vehicle awards jumped almost 40 percent to an average of $48,480 and wrongful death claims averaged $2,185,000.

These numbers should serve as a reminder that liability limits provided by home, auto and other insurance policies should be carefully reviewed. And this review should prompt the question: Are the limits high enough to protect your family’s financial well-being and way of life if a claim is made against you?

Unfortunately there is no definite answer to that question. But if the statistics above make the opportunity to purchase more liability insurance coverage appealing to you, it’s important to consider your options. Two common choices are excess liability insurance and a personal umbrella policy.    

Umbrella vs. Excess
If you have increased the liability limits of your home, auto or other insurance policy to as high as your company will offer and still are not comfortable, you have two options. The first is typically called an excess liability policy. This policy does nothing to the terms of your other insurance policies – it simply raises the limit of liability you have available for a claim. Think of this policy as dollars held in reserve if a claim exceeds the limits you currently have available.

A second option is a personal umbrella policy. Most umbrella policies function as an excess liability policy. However, in addition to acting as a reserve, the umbrella provides additional coverage for types of losses that otherwise would not be paid. Examples of additional coverage may include:

  • Expanding the auto coverage territory to almost anywhere in the world
  • Personal injury coverage for claims such as libel or slander
  • Liability for certain claims resulting from your role as a director/officer of an organization.

Maintenance of “Underlying”
The intent of an umbrella policy is to extend limits and coverage on some or all of the insurance policies you currently have. Such policies typically include your homeowners and auto insurance policies and may also include others such as a condo, watercraft or ATV. The policies covered by the umbrella are called “underlying” policies.

Underlying policies are important because most umbrellas will only cover such a policy if certain rules are met. Examples of such rules typically include the financial strength rating of the insurance company from which you purchased the underlying policy and the limits of insurance included on that policy.

For example, to obtain an umbrella policy, you likely will have to prove that the limits of the underlying policies that it covers (such as your homeowners and auto insurance) are not less than a specified dollar amount. Should you change those limits mid-term, you risk changing the way your umbrella will apply toward a loss.

Say you decide to purchase a $1 million umbrella policy and the umbrella provider specifies that it will cover your homeowner’s policy provided it includes a personal liability limit of at least $300,000. You currently have $300,000 personal liability on your homeowner’s policy and show a copy of it to the umbrella provider as proof. A few months after the umbrella policy takes effect, you call your homeowner’s insurance company and request that your personal liability limit be lowered to $100,000 to lower your premium.

A few weeks later someone suffers a serious injury for which you are legally liable and a claim is filed. Your policy limit of $100,000 is used up but there are still bills to pay. You are certain everything is okay because you have a $1 million umbrella policy. However, since you no longer meet the terms of the agreement, the umbrella provider may not pay a dime until the required minimum of $300,000 has been met. In this case, you would be out-of-pocket for $200,000. This is the difference between your personal liability limit ($100,000) and the required minimum specified by the umbrella provider ($300,000). Some personal umbrella policies may not respond at all once the terms have been breached.

It’s important to remember that excess and umbrella polices differ depending on which insurance company you choose to work with. Understanding how such policies relate to your underlying policies can be tricky. A call to your Trusted Choice® independent insurance agent will help you determine which policy is right for you and what you need to do to be sure it works at claim time.