Umbrella Liability Insurance Provides Protection Against Large Losses
What if one of the neighborhood children fell while climbing a tree in your yard and suffered a severe, permanent injury? Or your dog bit a neighborhood child? Or you accidentally hit a swimmer with your motorboat? Or a houseguest fell and broke a hip near your pool? Or your neighbor took offense at a joke and sued you?
Harsh examples, yes, but so are the realities of today's legal environment. Too often people are involved in lawsuits for events beyond their control. People injured on your property, or by your actions, may be able to prove that you were negligent and collect damages.
Dollar amounts, and the frequency of settlements, for all sorts of liability cases have skyrocketed in recent years. Thus, one of the biggest financial risks that people face is the risk of being brought before a jury and being sued for hundreds of thousands, even millions, of dollars. Fortunately, there is insurance to protect against this risk and it is relatively inexpensive.
Umbrella liability (a.k.a., "excess liability") insurance supplements the liability limits (e.g., $300,000) of a homeowner's or renter's policy and an automobile insurance policy. In addition, it covers situations excluded by other insurance such as lawsuits for libel and slander, defamation of character, false arrest or false imprisonment, liability due to boat or aircraft accidents, and damages you cause while on someone else's property. Activities related to an insured's business or business property are not covered, however. Umbrella liability policies provide at least $1 million in additional liability protection over and above what policyowners already have with their existing home and auto policies.
Here's an example of how umbrella liability insurance works. Assume an accident takes place on your property and you are successfully sued for $650,000. You carry $300,000 of underlying liability on your homeowner's insurance, along with a $1 million umbrella policy. The first $300,000 of the settlement would be paid under the homeowner's policy and the umbrella policy would pick up the $350,000 difference.
If you were held liable for $1,300,000, you would be covered for the full amount, a combination of $300,000 from the homeowner's liability coverage and the $1 million umbrella liability limit. Losses above this amount would not be covered as they are beyond the limits of both policies.
Relatively few people pay large liability claims so the cost of umbrella coverage is reasonable. An estimated 80% of suits against individuals are settled for less than $300,000. Policies generally cost between $150 and $250 annually for the first $1 million of coverage and about $15 to $25 for additional $1 million increments. It should not cost more than $400 for $5 million of umbrella liability coverage.
Below are some tips for purchasing umbrella liability insurance:
Be sure to purchase the underlying amounts (e.g., $300,000) of auto and homeowner's insurance required by the policy issuer. Otherwise, they'll be a gap in coverage because umbrella liability policies only pay damages that exceed this amount. Some insurers will also require that you purchase both your homeowners and auto policy from them before they will issue an umbrella policy.
If you are active in the community, check to see if service on nonprofit boards is covered.
Check at least three competing umbrella policies and compare coverage and exclusions (e.g., damages by pets, overseas coverage, covered family members).