Overlooked and Underinsured: A Study in Umbrella Insurance

Overlooked and Underinsured: A Study in Umbrella Insurance

Like toting an umbrella on any given sunny day, protection begins with a ‘just-in-case’ mentality. In our daily lives, proverbially changing winds can pick up, and conditions can quickly take a turn for the worst. Put simply, “Accidents can happen, even to careful people.” So protection from the unexpected, unanticipated, even unbearable is a fundamental need that unites us all. Another commonality? No one enjoys worry. But someone of your insurance-savvy ilk knows that informed concern leads to sound decisions, especially when safety and security are in view. So let’s broaden that vista—and our understanding—with a plunge into the wide world of the aptly named “umbrella” insurance. We’ll learn the ins and outs, and come to see both how umbrella coverage reaches further, protects more, and why that’s so very necessary for each one of us.

Objective Viewing

We’ve all seen the hodgepodge “umbrella” graphics, cramming your family and possessions into a space that defies perspective or proportion. But what does that even mean? After all, they’re covered by the policies you currently hold (e.g. homeowners, auto), right? We’d answer with both a resounding yes, and no. For while these more well-known forms of coverage are there to protect your family and possessions in the case of harm, accident, or loss, such policies have very definite coverage limits when it comes to liability.

This is where umbrella insurance jumps out of the shadows and into action, with some very straightforward objectives: 1) compensate victims for loss or injury that was caused by you/your family/your property, or sustained while on your property; 2) pay for legal proceedings in the case of a lawsuit. And as we’ll learn, some accidents cause damage, loss and resulting litigation far beyond what typical policies can handle.

Standard Variation

We’ll readily admit: The insurance industry is rife with confusion. From jargon, obscure terminology and varied exclusions to the wildly different titles assigned to similar policies, your fine-tooth will get a workout going through the details . This fact alone could put umbrella insurance just out of reach. So let’s keep this relatively simple—stripping away coverage limits and prerequisites, this core goal remains: Providing protection that your current policies can’t, and honestly weren’t meant to offer. That doesn’t make an umbrella policy any less necessary though. Instead, we’d call it specialized.

Think of it this way: For the most part, auto and homeowners policies are geared toward replacement of physical objects—tangible, pretty easily valued, and rather standardized. Umbrella coverage takes a different route, focusing on protecting your assets, your good name, and securing your financial future in the event of a lawsuit. What that means, sum and total, is impossible to tell—the variables have variables. Let’s just say we’re well beyond easily assigned value. In umbrella-land, things can get abstract, subjective, and open to interpretation; lapses in judgment or mere happenstance can wreak mind-boggling financial damage. Actually, that sounds a lot like ‘real life.’

Let’s exemplify:

  • Your teenager is involved in a traffic accident with a dentist and his/her luxury vehicle. The fault is your child’s, and costs add up quick: auto replacement/repair, medical fees, “pain and suffering,” lost wages and legal fees—well beyond your auto policy’s liability limits.
  • The family dog is typically laid back, but the neighbor kid sure has a way of getting Fido’s goat. This time, he bites back and doesn’t let go. Medical expenses, “pain and suffering” and legal fees exceed your homeowner’s limits.
  • You’re on that ‘once-in-a-lifetime’ trip overseas. The jet ski lessons were a great idea, until you pretend to know what you’re doing, only to hurl yourself and the jet ski into the instructor and a fellow student. Expensive equipment damaged, both individuals hospitalized, “pain and suffering” all around, lost wages on the part of the instructor, and steep (foreign!) legal fees rack up.
  • Commentary and arguments get out of hand on the online community discussion board you created. There’s name-dropping, harsh words, and shady ‘facts’ galore. Viewing your forum as slanderous libel, a local politician claims “defamation of character.” Legal fees ensue.

Listing the possible catastrophes that could involve you, your family, pets and property is an exercise in long-windedness; we’ll leave that to your vivid imagination. Suffice it to say that in these and oh-so-many other situations, umbrella insurance could quite literally save you. Where traditional auto and homeowner’s limits end, umbrella insurance picks up the tab. So while terrifying and panic-inducing, disasters like those listed above won’t leave you high and dry, even if you’re very far from home.

Here’s a cautionary note: Be sure that the difference between where primary coverage (auto, homeowner’s, etc.) limits end and umbrella coverage begins won’t create a gap that finds itself at home in your pockets. If home or auto liability limits cap at $300K, that’s where an umbrella policy should pick up—not at $500K or higher. Otherwise, you could potentially be left with a staggering bill! Chat up your agent on this one, and you’ll likely be reassured by the fact that umbrella providers typically require applicants to carry prescribed amounts in coverage on primary policies, bypassing that frightening scenario. Ask, too, about exclusions. Those little buggers always find a way in—your friendly agent can spell things out.

Litigation Mitigation

Some folks enjoy the perks that taking risks bring, and are naturally more likely to experience a claim that exceeds typical policy limits. Here are a few indications that carrying an umbrella policy would be a stellar plan:

  • Owning a pool, trampoline or firearm(s)
  • Frequent entertaining, especially of large groups
  • Ownership and use of a boat, ATV, motorcycle or other recreation-related vehicle (Note: primary policies must first be carried)
  • Insuring drivers under the age of 25
  • Frequent travel out of the country

What, though, if your picture doesn’t quite mesh with the one we’ve painted thus far? Remember that umbrella coverage tends to focus on satisfying legal fees, which are exorbitant to say the least. Put pretty simply, “you can’t be overinsured for lawsuits.” On the other hand, some could feel that if they don’t have the assets, opting for extra protection is a waste, as no lawyer is going to chase after non-existent cash. As the saying goes, you can’t squeeze—well, anything—from a turnip. Thinking this way, it would be easy to write the whole thing off. So here’s a reality check: If coverage limits were to end and the amount owed continue, future earnings could be legally garnished. That would mean working long and hard merely to satisfy an arguably unnecessary debt. If you truly don’t have much to call yours in this world, then what you do have—and what you may have in the future—is even more precious, more worth protecting.

If a situation escalates to the point of litigation, even exoneration brings along steep legal fees. So it’s reassuring that while an umbrella policy “cannot prevent accidents or mishaps [it] can make those things less devastating financially.” It can also ensure that a third party gets involved: an experienced, knowledgeable advocate who can be a real help.

Liable to Pay

While we’ve focused on the everyday folks, it’s just as important to have comprehensive coverage if you have an abundance. Common sense says that the more we have, the more we can lose, and that’s all the more protection that’s necessary. Regardless of whether you have little or lots, you’ve worked hard for what you do have. Then why not respect your hard work, protecting against the big scary things—those daunting ‘what-ifs’—in life?

Some use this rule of thumb: If your net worth—sum of assets, liabilities deducted— is less than liability limits on your auto or homeowners policies, you’re safe. Well, we’d have to disagree. In what’s likely an effort to save a few upfront dollars, potentially thousands, even hundreds of thousands of current and/or future assets are put at risk. When you step back and survey that scene, it’s clear that the decision to get by with ‘just enough’ coverage doesn’t make a lick of sense. Because sadly, in today’s litigious world, some just aren’t satisfied with ‘enough.’

On the plus side, for all the peace of mind that umbrella insurance provides—we’re talking a million big ones or more—the cost is remarkably down-to-earth. Not to mention, if you’re looking to secure coverage through a provider you already deal with, you may be eligible for a ‘bundle’ or other relationship-based discount. And for the most part, umbrella coverage extends to multiple residences, and to children living on campus. Shelter, security and protection at every level—that’s an umbrella we’d get under.

Facing Loss, We Gain

By now, the situation is clear: catastrophic, unexpected losses often cause financial ruin. Another undeniable fact? They don’t have to. So when figuring on our insurance ideal, let’s get imaginative when thinking of possible scenarios, realistic when estimating how far a policy will go to protect us. That way, we’ll close gaps and be assured of shelter when the storm hits. Here’s where awareness is a good thing, and informed, purposeful action is even better. After all, the goal is a positive one: Protection—both of our life’s work, and the people that make it all worthwhile.

Want more? Subscribe.