Imagine that a man or women executive owns a nice car and a home that are both paid off. In addition, this person has a robust retirement account. Total assets for this individual is a bit over $1 million. All in all, their life seems almost perfect.
One morning this executive is driving to work and is in a car accident. The executive has no injuries and the cost of repairs to the car is within their auto policy limits.
Unfortunately, the other car involved in the accident was a Bentley, a very expensive car. In the car were three executives from an established pharmaceutical company. Their injuries were more extensive and all of them lost time from work and one of them needs ongoing therapy for injuries.
The total cost of medical expenses, lost current wages, and repair of the Bentley is about $1 million. The three of them sue, and a judge awards them $950,000. The auto liability coverage held by the driver who is at fault, has a liability limit of $300,000 living them responsible for an $600,000.
To pay the balance, the responsible driver will have to cash out their retirement fund, and take a second mortgage or sell their home – in other words, they are faced with a financial disaster – one that could have been prevented if the responsible driver had an umbrella policy.
What is Umbrella Insurance?
Most homeowner’s insurance has liability insurance amounting to around $100,000, and most drivers have insurance liability limits of $300,000. Should someone be injured in the home and sustain damages of more than $100,000, or a driver has an accident where damages exceed $300,000, an umbrella policy kicks in to pay the excess, including legal fees.
Umbrella insurance is a kind of liability insurance. It protects liability insurance policyholders if an award exceeds the policy holder’s liability limits. Liability limits for auto insurance policies are usually $300,000 with some being as high as $500,000. However, a car crash can create liability of millions of dollars – which an umbrella liability policy can cover.
What Does Umbrella Insurance Cover?
Umbrella insurance offers a policyholder robust protection from several types of liability. These liabilities are:
1. Property damage. If damages caused by the policyholder exceeds the limits of auto insurance or homeowner’s insurance, their umbrella policy comes into force and pays the excess. It also covers things not covered by other policies. Some incidents that are included in this coverage includes your child breaking an expensive vase while visiting in another home, a pet cat destroys a pricey painting when using it as a scratching post, the policyholder rents a boat on vacation and crashes it while trying to dock it. So, in addition to extending liability limits, it also covers things that other insurance policies do not.
2. Personal Injury. Just as with property damage limits, an umbrella liability policy comes into action if someone is injured in the policyholder’s home (slips on a patch of ice on the front walk is an example) or is in an auto accident where the cost of medical care, current wages lost and future wages lost as well as ongoing care that exceeds the limits of the policy. Umbrella policies also cover injuries not covered by other personal liability policies. These coverages include things such as dog bites not covered by other liability policies.
3. Other Types of Legal Damages. Umbrella policies also protect policyholders from other issues not covered under auto or homeowner’s insurance. These include: libel or slander, false arrest, malicious prosecution, and violation of privacy
4. Legal fees. When a person has an umbrella policy they might want to hire their own litigation attorney. Sometimes, insurance companies and the insured have different objectives so being able to hire a private attorney, paid for by an umbrella policy is a real benefit in protecting assets.
What Won’t Umbrella Insurance Cover?
Umbrella insurance only covers you for injuries to other people or other people’s property, it cannot be used for expenses related to their personal or property damages. In addition, many umbrella policies won’t cover workers compensation claims against employers, malpractice lawsuits, intentional damages, or business-related activities.
In general, an umbrella policy costs about $1 per day for a $1 million policy. Experts agree that most folks need a policy that offers $3 million in coverage, and higher-net-worth individuals should buy $5 million in coverage.
Bankrate says that umbrella insurance is “the absolute best buy in the insurance business.”
Regards,
Ethan Warrick
Editor
Wealth Authority
