What is an umbrella policy? How much coverage do I need?

Ever wondered how much umbrella insurance you should own? Wondering what umbrella insurance is and what it covers? You're in the right place! In this video, we unpack the most common questions related to these policies.

This video is part of an interview between Nathan Donohue and Sophie Riley. Look for our five short releases highlighting each section.

Transcript:

What is an umbrella policy? And I think as a follow up to that as well, is there a good rule of thumb for how much coverage people should buy?

A personal umbrella policy is a policy that sits over and above all of your underlying exposures and provides excess liability should you or a family member be found at fault in a catastrophic accident. So, I'll give you some examples. When you're thinking of your property and casualty insurance, your home, your auto, watercraft, young drivers on your policies. All of these policies are going to have a limit of liability, typically 300,000 or 500,000 is what we commonly see on homeowners or auto policy.

Well, what an umbrella policy does is it sits over and above. So actually, think of it as an umbrella going over above all of your exposures, right? So, if you add a jet ski, that would be extend it as well, right? And so, any of your personal assets you want to be protected by this umbrella and as a rule of thumb the more someone is worth the more they may be sued for in our litigious society and what we want to be considering when we're looking at the right amount of coverage is really if someone googles you what would they potentially find?

Interesting.

How much is going to be enough to get a personal injury attorney to settle rather than risking a lengthy court battle where your assets could be exposed? So, I'll give you a few examples. I think it really helps to kind of break it down to some examples, and so, this umbrella policy is going to come into play after the underlying coverage has been exhausted on a policy.

So, I'll give you an example. Let's say an auto. Let's say you're driving or a family member is driving and is considered at fault is found at fault in a very large accident. Maybe multiple vehicles are totaled, lots of bodily injury and so on. Well, the first step is going to be your auto policy, right? And the liability component on that auto policy is going to pay for damage to others. Well, oftentimes that's not enough to get a claim to settle.

Right.

So, if you have 500,000 of liability, but one person has a severe injury, let's say they're paralyzed, right. Or there's a brain injury. Sure. A couple of high value vehicles are totaled, right? Well, the first limit, typically our clients have about 500,000 of underlying liability on their auto policy. Once that has paid out, the umbrella will pay the remaining amount and so, what we want to do is we want to have enough to get them to settle. So, we want to somewhat think about your net worth and your assets and your perceived net worth.

So, somebody who sells a company might be perceived as even having a higher net worth than they have, right? Or your property is also going to be something that is public record, right? and so if you own lots of homes, those are other things that you want to protect. So, it's just a really great tool to protect your assets and your net worth in the event of a tragic accident.

Another example that I like to mention is, you know, auto is a common one that people would think about, but your homeowner's liability actually follows you worldwide. And when I say you, and homeowner's insurance contract defines an insured and that does include all of your family members.

 Your household members are included for coverage and so let's say you and your family are on vacation and you fly to Aspen in your skiing. Well, one of your children decides to go in that country and has an accident. Let's say they injure someone who's maybe a child and they're tragically injured while they're skiing. And it's an accident, but accidents happen. Well, your homeowner's liability would actually pay out in the event that you or a family member accidentally causes harm to another person, even when you're not at your home. All around the world, that's going to pay out.

Really?

It does, yeah.

Interesting about that so that I think someone has a if someone has a problem with their acting like I don't care about my contents I don't need renters insurance well it's not about the contents that's most important the liability can write that's important so yeah that is interesting and as another one could be like if you're golfing and you accidentally hit someone in the head with a golf ball and they have a brain injury any kind of mishap that can happen we want to make sure you're protected from illicit

Yeah, my golf swing, that's probably going to happen. So that makes a lot of sense. The car accident example is the one I oftentimes use with clients because it just seems more real and more possible. But I wasn't aware. I actually was not aware of that with our homeowner’s insurance policies. That's really, really good to know.

OK, so this to just reiterate, this umbrella policy sits over all of your underlying individual policies to provide supplemental or secondary coverage in the event of I'm held to be liable in certain types of accidents. And as a good rule of thumb, I want it to be probably roughly equal to my net worth. And as I understand it as well, Sophie, there are some limitations on this as well. Like, you know, Jeff Bezos isn't going to get an umbrella policy for a hundred billion dollars, right?

Right.

Exactly.

Yeah, and so what we typically say is as a rule of thumb, we want to somewhat mirror your net up until about that 10 million range. Then you don't need to continue to increase it as your net worth increases over 10 million. There's some benchmarking data that we can look at. We do have some clients that might have a 20 million or a 30 million umbrella but I would say Chubb Insurance, for example, they offer up to 100 million in excess liability in some situations.

Typically, you can't get higher than that in a personal insurance portfolio but usually 10 million is kind of that sweet spot where we want to get a personal injury attorney to settle and somebody who's worth 20 million, for example, the chances of them settling for that 10 are extremely high.