Don’t forget your umbrella

Steve Merrell |

Q: What do you know about umbrella insurance policies? I just bought my first house and my insurance agent is telling me I should get an umbrella policy. Does that make sense? My homeowner’s policy already has a lot of liability coverage and the policy isn’t cheap.

A: I don’t know anything about your situation, but I can tell you that an umbrella policy makes a lot sense. In fact, if you own real estate or if you drive a car or operate a boat or do almost anything else that has potential liability, you should have an umbrella policy. Umbrella policies backstop the personal liability coverage of your other insurance policies. Here’s how it works.

Let’s suppose someone comes to visit you in your new home and suffers a catastrophic fall. They will likely file an insurance claim to cover their medical bills. In order to cover that claim, their insurance company will probably turn around and sue you. If they win a judgment against you, your homeowner’s policy will step in to cover that liability. However, if the damages exceed your coverage limits, you will be personally liable for any judgment beyond your policy limits. That is where an umbrella policy comes in. It will be there to protect you if your base policy is not enough.

Umbrella policies are extremely flexible in the kinds of risks they cover and will even cover risks that your underlying policies do not. For example, if you get sued for liable or slander or false imprisonment (I know…that sounds kind of creepy), your umbrella policy will be there. If you get in an accident while driving a rental car in a foreign country, your umbrella policy will help protect you from ensuing liabilities.

Your umbrella policy covers not just you the policyholder, but also other members of your family or household. And the liability doesn’t even have to involve your property. So, if your daughter gets in fight at school or if your son crashes and injures another skier on the slopes and you get sued, your umbrella policy protects you, including paying your defense costs.

Keep in mind that umbrella policies protect from liability. They do not cover your own injuries or damage to your own property. Those risks are covered by health insurance or collision insurance for your car or boat. Umbrella policies also do not protect you if you are sued for breach of contract or if you intentionally harm someone or commit an illegal act.

There may be other exclusions, as well. For example, unless you also have separate boat coverage, your policy may not cover boats. And if you have a personal umbrella policy, it may not cover liability related to a business property. That may require separate business umbrella coverage.

In any case, it is a very good idea to read the fine print on your policy before you buy it to make sure are getting the coverage you need. You may also want to consider adding a rider for excess uninsured/underinsured motorist coverage. This additional coverage is designed to protect you not only as a driver, but also as a passenger, bicyclist or pedestrian in the event you are hit by a driver without adequate liability coverage.

The nice thing about umbrella policies is that they are relatively inexpensive. According to the Insurance Information Institute, a $1 million policy should cost between $150 and $300 per year. Coverage can be increased at a rate of approximately $75 per year for each additional million. You will usually get the best rates from the insurer who also carries your homeowner’s or automobile insurance. Stand-alone umbrella policies are usually more expensive.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to: