Also known as a personal liability policy (PLP) or personal liability umbrella policy (PLUP), Umbrella insurance covers claims in excess of regular homeowners, auto, or renters policy coverage. It can protect you from bodily injury liability claims and property damage liability claims. Umbrella insurance can also provide a broader form of coverage and can help cover legal fees, false arrest, libel, and slander. This additional layer of protection can bring you peace of mind, knowing that you're covered in case of unforeseen events.
Why Consider Umbrella Insurance?
While most individuals have liability insurance as part of their auto and homeowners insurance, it's important to note that the state minimum required liability insurance for personal auto insurance is often insufficient to cover liability for anything other than minor bodily injury or property damage claims. Similarly, homeowners' policies typically provide a limited amount of liability protection, which may not be enough in certain circumstances. This underscores the need for umbrella insurance.
Earning power and net worth are two critical factors that should be considered when deciding on umbrella insurance for an individual. Because judgments from liability can be perfected by levy and seizure, assets and earning power are at risk. It’s not uncommon for bodily injury from an auto accident to far exceed normal liability coverages of 100/300. A slip and fall or drowning in a backyard pool can create liability claims far in excess of the normal homeowners liability insurance for such accidents of $100,000.
Protection Provided by Umbrella Policies
An umbrella policy protects these higher types of claims. An umbrella is an excess liability policy that covers liability in excess of the underlying liability coverage for auto and home policies. While it may be a stand-alone insurance policy, it is more commonly issued by the underlying auto or homeowners insurance carrier. An umbrella policy will not be issued without the umbrella carrier insisting on certain underlying liability coverages for auto (typically 100/300) and home (300). This comprehensive nature of umbrella policies ensures that you're well-protected in a variety of situations.
The umbrella policy supplements the underlying liability coverages of auto and home (or renters) and usually provides coverage of $1 million or more. The primary purpose of this type of policy is to protect assets and earning power from levies and seizures in which the insured is held liable for damages to property or persons.
Umbrella policies generally provide coverage for the entire family or household that auto and home policies do not. For example, some policies provide legal fees outside the policy limits, and some provide coverage for false arrest, libel, and slander.
While most umbrella policies provide for legal defense, that is not always the case, so read your policy. Also, in a situation where the umbrella insurance is willing to pay the face of the policy, there is no additional requirement to legally defend the insured.
Cost, Exceptions, and Limitations
Umbrella policies are very inexpensive, often $100 to $300 per $1,000,000 of coverage. However, the premium is determined by an assessment of the risks by the insured – so if you have teenage drivers, ATVs, large dogs, a swimming pool with a diving board, or a trampoline, you might end up paying more. Despite these potential increases, the overall affordability of umbrella policies makes them a smart financial decision for protecting your assets and earning power.
However, umbrella policies do not cover all liabilities. Criminal acts and intentional acts are not covered, with the exceptions of slander and libel. Umbrella policies typically exclude domestic workers, workers on personal property, and losses resulting from driving while under the influence. In addition to excluding intentional acts and crimes, liability resulting from rental and business activities is excluded unless specifically covered under the contract.
Conclusion
Umbrella insurance, also known as personal liability policy, provides increased coverage beyond the limits of homeowners, auto, or renters insurance, including protection against liability claims, legal fees, and instances of false arrest, libel, and slander. Since state-mandated minimum liability insurance often falls short in covering significant liabilities and considering individual earning power and net worth, umbrella insurance provides an affordable and comprehensive safety net for personal assets and future earnings against substantial claims.
WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen.
Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.
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