I once had a fellow tell me how good it felt to know that his barn was covered by an umbrella in case a windstorm hit. I was glad to hear he had an umbrella but didn’t have the time to tell him that the umbrella wouldn’t cover his barn for a windstorm, or a fire, or well, anything like that. So what’s the deal with that umbrella thingy?
If you’ve bundled your home and auto insurance, you’ve probably heard agents or even financial advisors mention that you should get an umbrella. So what in the world is a “personal liability umbrella,” and should you consider getting one?
First things first, an umbrella is not designed to cover property like a house or a barn or a car, it is designed to cover your liabilities. What is liability?
Liability is a fancy word for the simple idea that if someone is harmed because of something you’ve done (or sometimes neglected to do) then you have a duty to make it right. In other words, if you harm someone, you owe them.
The clearest and most common examples of liability have to do with your car insurance.
A Few Examples of Liability
If you hit Jim’s parked Tesla, you’re liable for the damages. You owe him the cost of the repairs.
Thankfully, your car insurance policy covers those repairs and as well as a replacement rental if he needs it. That’s because your policy covers your liabilities. The insurer takes over, and you’ll likely never hear from Jim (not because the insurer did away with him, 🙂 but because they paid him for you!)
That one is pretty straightforward. The process is similar for injuries but less clear because, instead of car repairs, you’re dealing with person repairs. Let’s take a simple example first.
If you hit pedestrian Lori while driving, you owe Lori for her injuries. Thankfully, your car insurance covers your liabilities. You have a liability limit of $100,000. Between hospital bills, lost work time, and physical therapy, Lori incurs $80,000 of costs. Over time, your insurer pays all of those costs. You’ll likely never hear from Lori. Phew!
But person repairs can get complicated! What happens if 40-year-old pedestrian Shawna can no longer do the work she used to do?
On top of medical bills, Shawna faces extended loss of earnings and will also struggle to enjoy activities she has long enjoyed with her family. Her attorney writes to your insurer that she’s seeking $900k in damages. You have car insurance liability limits of $100,000. A pretty big gap. What happens?
Uh-Oh: The Danger Zone
Your insurer will likely disburse the full $100,000 and then advise you to get an attorney. After all, you paid your insurer to cover up to $100,000 of your liabilities, and it has. Now you’re on your own. You will likely hear from the other person’s lawyer.
Now you’ll need to use your resources to defend yourself. You do have some savings, you have some home equity, you have a job making decent money, and you have a good attorney. Your attorney made a solid defense, and you’ve been found liable–not for $800,000– but for $500,000 (beyond the $100,000 the insurer already paid).
That means, in addition to paying your attorney, you have to come up with $500,000 to pay the other person.
“I don’t have that kind of money!” You might be thinking, “You can’t squeeze blood from a turnip!” Actually, they can. They’ll get the funds through some combination of your savings and taking (“garnishing”) a portion of your wages for however long it takes. (There’s also bankruptcy.) Yikes!
An Umbrella Can Make a Huge Difference.
Car insurance claims like the one above are the most common use cases for umbrellas. At a minimum, a personal liability umbrella adds $1 million of additional protection from your insurer. Having an umbrella really changes the above scenario with Shawna.
If you have an umbrella, the insurer would defend your case from start to finish up to the liability limits of the car policy plus the umbrella limits.
Though car injuries are the most common cause of liability claims, liability umbrellas do offer liability coverage beyond car injuries. Like what?
Let’s return to the fellow’s barn up above. If someone were to accidentally get hurt at his barn, or anywhere on his property, and sue him, his umbrella would pay for the defense of his case beyond his home insurance.
Umbrellas have also been known to extend to dog bites, freak pool accidents, kids coming onto your property and getting hurt, a suit from a rental property, or even your own kids accidentally causing injuries to someone.
Again, the most common arena for the use of umbrellas is the use of cars. As medical costs continue to increase, we expect that umbrellas will play a larger role in shielding clients from liability claims.
Common Questions:
How much does an umbrella cost?
Cost typically range from $300 to $900 (annual) depending on a range of factors.
What factors matter for pricing?
The most critical factors are how many drivers & vehicles, drivers’ ages, and driving history. If you own home rentals, boats, or recreational vehicles those can add a little bit to the cost.
Where do I get one?
In general, a common place to look is with your current car insurer since there may be a discount and special pricing for combining the auto and umbrella. (If that has you rethinking insurance, consider having us run a comparison for you.)
How much coverage is common on an umbrella?
Though $1 million dollars is by far the most common amount selected, more and more people are considering $2 million or more of coverage. Liability claims keep getting bigger and the cost of the additional coverage isn’t much more.
What about uninsured motorists?
Yes, some companies offer an option to include $1 million or more of uninsured motorist coverage on the umbrella as well. This is worth considering because then the umbrella can help you recover if you get injured by an uninsured (or underinsured) motorist.
So should I get an umbrella?
If you want someone to tell you should, then “yes, you should.” 🙂 But at the end of the day this is a decision only you can make.
Hopefully, even amidst the ups and downs, your earnings and assets will grow as you proceed in life. In that sense, the case for getting an umbrella generally gets stronger over time.
As a younger person, an umbrella is a relatively minimal cost for protecting your current and future earnings. It is true that if you’re a family with teen drivers and several vehicles the cost of an umbrella is higher. But it’s important to acknowledge that that is because your risk is higher. (Your teen’s liabilities are yours. Gulp!) As a retired person, an umbrella is a relatively minimal cost for protecting the assets you’ve worked hard to build.
What if I’m not ready yet for an umbrella, is there anything else I can do?
Yes, one middle step many people take is to increase their car policy liability limits and their home insurance liability limits. For instance, you might consider bumping your car and home insurance limits from $300,000 to $500,000.
The coverage increase is not as significant as the protection an umbrella provides but is still meaningful.
Then, you can revisit a potential umbrella at the next renewal.
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