Insuring Against the Unknown by Deloitte & Touche LLP
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Umbrella Insurance Insuring Against the Unknown by Deloitte & Touche LLP |
| What Is It and How Is It Useful? | |
| How Do You Assess Your Needs? | |
| What Products Are Available? | |
| Premium and Policy Considerations | |
| Other Considerations | |
| Help and More Information |
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What Is It and How Is It Useful? Umbrella liability insurance, or excess personal liability coverage, is intended to protect you in case you are held personally liable to another person for injury or property damage. For example, if someone slips and falls from a crack in your sidewalk and successfully sues you for money damages, your personal liability policy can provide coverage to pay the damages. These policies are called "excess" policies because they insure the "excess liability" over the limits which otherwise may be provided in your homeowner's, auto, or other insurance policies. Umbrella insurance is usually not expensive because, statistically speaking, most people are not sued for "cracks in their sidewalks." When they are sued, however, the potential for financial catastrophe is great. Generally speaking, a small premium is usually enough to cover a significant claim, even though the chances of a claim are remote. What does this mean to you? Excess liability insurance coverage can provide peace of mind for relatively little cost. A major reason for excess personal liability coverage is to protect you against a catastrophic claim -- one that exceeds the coverage limits under your existing auto or homeowner's policies. In fact, umbrella liability policies are usually available only after you purchase the maximum liability limits under your auto and homeowner's policies. The liability limits on your auto and homeowner's insurance policies serve as a deductible on the umbrella policy. For example, the liability limit on your auto policy is $300,000. Your umbrella policy covers up to $1,000,000 of additional claims. If a claim is made against you for $500,000, the primary carrier (the company with your auto policy) will pay the limit of insurance of $300,000, and the umbrella policy carrier will pay the excess of $200,000. Typically, coverage comes in increments of $1,000,000 and is available in the $1 million to $5 million range for a premium of $200-$600 annually. Umbrella insurance coverage should be considered if you are building or have already built a significant estate that could be lost through the judicial process. In addition, this coverage is appropriate even if you have little current net worth but you have substantial future earning power. Many financial advisors recommend that you obtain umbrella liability insurance coverage at least equal to your net worth (assets minus liabilities). The cost of the insurance is relatively inexpensive considering the amount of coverage you are obtaining. Some excess liability policies cover the cost of legal defense; others do not. You should determine if your coverage includes this feature and what, if any, limits on legal costs are included in the policy. What does this mean to you? Determine your current net worth (assets minus liabilities). Will this amount increase in the future? Because of the relatively low cost of this type of insurance, consider purchasing enough coverage to protect your net worth for several years. There is no standard umbrella policy. Therefore, you need to analyze carefully the coverage of each policy you may be considering before making a decision. Most companies tailor their excess liability coverage provisions around their auto and homeowner's policies. Because of this fit, it is often a good idea to purchase an umbrella policy from the same company that provides your primary insurance. The broader the coverage, the more potential risks and hazards you will be protected from. Before buying, determine what is included and excluded from coverage. Make sure the covered risks are clearly defined. Premium and Policy Considerations Premium costs for umbrella coverage are usually low. It is generally less expensive to obtain umbrella liability insurance than to obtain additional homeowner's liability insurance. This can make umbrella insurance a "good buy." On the other hand, insurance carriers generally require policy owners to maximize their auto and homeowner's liability insurance before they will issue umbrella liability insurance. Thus, you should coordinate your purchase of both kinds of policies (homeowner's and excess) to maximize your overall coverage at the lowest possible cost. If you do not coordinate your policies, you will be responsible for any gaps in your coverage. This can have the effect of imposing a very large "deductible" on your claim. You should evaluate your own activities to assess the likelihood of personal liability claims and the risks that must be covered. Most umbrella policies exclude certain kinds of claims (such as claims by family members against each other), and you need to make sure that the exclusions are reasonable and acceptable to you. Tip: If you have a lot to lose, consider umbrella insurance. Everyone who has a significant estate or is developing a plan to build an estate should consider protecting the estate against adverse claims by purchasing an umbrella insurance policy. Enjoy the following special features and information sources that Deloitte & Touche OnLine has put together to guide you through your insurance planning! Books How to Buy the Right Insurance at the Right Price, by Bailard, Biehl & Kaiser (Dow Jones-Irwin, Homewood, IL 1989) Personal Financial Planning, by G. Victor Hallman & Jerry S. Rosenbloom (McGraw-Hill, Inc., New York, NY 1993). The Guide to Buying Insurance: How to Secure the Coverage You Need at an Affordable Price, by David Scott (The Globe Pequot Press, Old Saybrook, CT 1994). Periodicals Do You Need This Umbrella? Kiplinger's Personal Finance (July 1995). The Perils an Umbrella Policy Can Protect Against, Kiplinger's Personal Finance (July 1995) Now You Can Cover Your Assets for The Price of a Fancy Dinner, Money (December 1994). Jumps to the Internet Insurance Information Institute: This organization seeks to improve the public's understanding of property/casualty insurance by providing information and analysis to the media, individuals and organizations. The III publishes a number of helpful consumer guides (available at no cost) such as 12 Ways to Lower Your Homeowners Insurance Costs . Insurance News Network: This organization provides unbiased consumer information about auto, home and life insurance, including premium costs by state and insurance company ratings from Standard & Poor's. National Association of Insurance Commissioners: This is an organization of insurance regulators from the 50 states whose primary purpose is to protect the interests of insurance consumers. The NAIC publishes a number of consumer guides including 1995 Guide to Health Insurance for People with Medicare, Consumer's Guide to Home Insurance and Consumer's Guide to Auto Insurance. SafeTnet: A comprehensive set of links to insurance-related Internet sites. Click here to see State Insurance Departments Insurance Organizations Insurance Information Institute National Insurance Consumer Helpline National Consumers League National Insurance Consumer Organization |
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