What is an Umbrella Policy?

Most businesses, homeowners and automobile drivers carry liability insurance. In fact, such coverage is often mandated by local jurisdictions. These policies, however, have maximum limits which they will pay out. An umbrella policy is liability insurance that kicks in to pay a claim which exceeds the maximum payout under a home, auto or workman’s compensation policy.

In the United States, coverage under an umbrella policy is sold in increments of $1 million US Dollars (USD). Premiums are generally much lower than those for auto and home insurance because claims are not paid by an umbrella policy until the other limits have been maxed out. In many cases, premium discounts are offered to clients who use the same insurance company to purchase all of their liability coverage.

An umbrella policy often expands the types of coverage offered by other liability insurance. All such policies cover property damage and personal injury due to accidents, pets or the acts of a juvenile. Umbrella coverage also provides protection against charges of libel, slander, invasion of privacy and false arrest. The costs covered include actual damages, attorney’s fees and court fees.

While this type of coverage may seem excessive, it is a practical and cost-efficient way to protect a person’s assets. For example, if a driver is found liable for a multi-car accident, he may be subjected to multiple liability claims. It is very likely that the maximum liability limits will be reached before all these claims are paid. In this case, the driver is still personally liable to pay all claims, and may stand to lose his personal assets and future earnings. An umbrella policy would pay those claims, leaving him solvent.

A claim against a homeowner can result not only from an injury occurring on the property, but also from an act of nature. If a large tree falls during a storm and lands on a neighboring house, killing an occupant, the claim against that homeowner can be significant. If the case is made that the tree was dead or diseased, and should have been removed by the homeowner prior to the storm, the award could very likely exceed the homeowner’s liability insurance. Because a lack of coverage does not excuse an award, the homeowner will be expected to pay the entire amount. If the award is for $1 million USD, and the homeowner’s insurance has a $300,000 USD maximum, then the umbrella policy will cover the remaining $700,000 USD.

A home business is not covered by homeowner’s insurance or by a homeowner’s umbrella policy. In order to cover a home business, the owner needs to carry business liability insurance. Umbrella policies are also sold for businesses and offer the same basic type of coverage as personal policies.

There are some coverage exclusions under an umbrella policy. This type of insurance does not indemnify against deliberate criminal acts such as assault, battery, trafficking in illegal substances, etc. Businesses are also not covered against deliberate acts of corporate malpractice.

Society has become very litigious. It is no longer unusual for court and jury awards to greatly exceed the normal limits of coverage under auto and property insurance. If a person has assets of any significance, then he is a much more likely target for a lawsuit. An umbrella policy is a relatively inexpensive coverage which offers substantial protection to both individuals and businesses.