Umbrella Insurance isn’t coverage on your umbrella if it’s destroyed in a storm. Rather, a personal umbrella policy is additional insurance designed to pick up coverage in the event that a covered loss has exhausted the liability limits of an underlying policy, or to cover popular policy exclusions like personal injury (defamation, false arrest, etc). The term umbrella is used because coverage doesn’t apply to a single policy but can cover nearly all policies owned. These underlying policies such as homeowners’ and personal auto are listed on the umbrella policy, so the umbrella insuring company knows when and how to pick up coverage. An umbrella policy begins coverage at $1M, with larger amounts available with an increase in premium.
There are some requirements for an umbrella policy to be issued. The underlying policy liability must be set to a certain limit, usually $500,000, but this varies by carrier. As an example, if you have an auto policy with a $100,000 liability limit, an umbrella policy would not pickup coverage if limits are reached on that auto policy. Therefore, the auto policy limits must be changed to meet the umbrella’s requirements of a $500,000 limit. The same is true for homeowner’s or any other policy that you would want the umbrella to pick up coverage for.
Here is an example of how an umbrella policy works. Let’s say you have an auto policy that covers up to $500,000 for bodily injury liability, and an umbrella policy for $2M. If there was an at-fault accident and the vehicle you hit had 5 passengers in it, and all five sustained major injures require extensive medical care and admission to the ICU. Your insurance receives a bill from the other party’s insurance company for $1.2M. Your underlying auto policy will pay $500,000 toward those medical bills. Now you have an outstanding amount of $700,000. Normally, litigation would begin, and that money would be recovered through suits that could take any number of your assets including your home. However, you have the $2M umbrella policy, so the litigation would never happen because the umbrella has enough liability coverage to pickup the remaining $700,000 liability. There are small adjustments to be made for any deductibles for the auto policy and the umbrella policy, but for the example we made it easier to understand.
While an umbrella policy is designed to cover many popular exclusions of other policies, there are a few umbrella policy exclusions. Exclusions include: