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Don't think you need Umbrella Insurance? Think Again

from Brodbeck Porter Insurance Agency

Nov 18, 2015

Large personal lawsuits and resulting judgments are one of the five major risk areas facing individuals and families today. The others are major medical bills, long-term disability/long-term care, major damage to or destruction of your home and death.

What happens when an individual is sued for $2 million for their personal liability in causing serious injury or death to someone else? Is it covered by insurance?

Many lawsuits are covered by basic auto or homeowners coverage. Some are not. Those lawsuits not covered represent coverage gaps created by exclusions in the policies.

If the lawsuit is covered by one of your policies, the second question to ask is, is the liability limit high enough to cover the lawsuit? In the case of a $2 million lawsuit, the answer is no.

Both of these problems can be solved in most cases with the right personal umbrella policy. Umbrella insurance picks up where your auto insurance and homeowners insurance policies leave off.

All umbrellas have one thing in common: They will continue to defend you and pay any excess judgment against you after the primary policies pay their limit. In short, if the primary auto or homeowners insurance policy covers a loss, the umbrella in most cases also will cover it.

Umbrella policies differ in the coverage that they provide for the types of lawsuits that aren't covered by primary insurance. The higher quality umbrella policies cover many of the gaps not covered by underlying insurance.

1. Does the policy cover libel, slander and other reputational-related injuries?

And if it does, does it also cover the most likely type of lawsuit in 2015 for those with teenage children -- reputational harm through social media? Or cyberbullying?

2. Does the umbrella insurance provide coverage for alleged parental negligence involving one's children, such as when your teenagers have a party at your home when you're out of town where there's drinking and you get sued for vicarious parental liability for a resulting injury?

3. Does the policy provide true worldwide coverage?

Some umbrella policies won't cover lawsuits brought in other countries outside the U.S. and Canada. It's not a limitation you want your umbrella policy to have, especially if you are going to be traveling abroad in the future. Fortunately, the majority of umbrella policies do provide true worldwide coverage.

4. Does the policy cover other locations for which you are responsible, such as co-signing a college apartment lease because the landlord owner wants a financial guarantee that the rent will be paid?

By co-signing the lease, you are not only guaranteeing the payment of rent but also making yourself responsible for injuries at a college party, for example, held on the premises. Caution: Most umbrellas probably won't provide coverage unless you have primary homeowners liability insurance extended to the apartment.

5. Does your policy cover your liability for injuries to others when renting cars, boats or recreational vehicles?

Car insurance liability policies generally will cover your rental cars but not outside the U.S. or Canada. Homeowners insurance policies usually provide coverage for rented recreational vehicles. Homeowners insurance policies do provide some watercraft liability coverage for renting smaller boats like sailboats and canoes. But they typically don't provide coverage for motorized watercraft that have more than 25 horsepower. So if you rent a pontoon boat with a 75-horsepower outboard motor, as I did last summer, there is no insurance coverage. I had to rely on my umbrella policy to cover me.

6. Does your umbrella insurance cover your responsibility for damage to rented vehicles, boats and recreational vehicles?

Cars rented in the U.S. or Canada are covered for liability for injuries but not necessarily collision damage. Yet, most rental agreements you sign make you responsible for any damage to the rented unit itself, no matter how it was caused. That means you're responsible for hail damage, windstorm damage and hit-and-run damage.

7. Does your policy include at least $1 million of excess uninsured and underinsured motorist coverage?

This covers you and your family for injuries caused by another driver who has no liability insurance or less liability insurance than you.

8. Does your policy include contractual liability coverage?

This is liability of someone else that you assume is in a contract. It often occurs in facility rental contracts, such as renting a cabin at a resort for part of the summer or the hotel or restaurant you rent for your daughter's wedding reception. Buried in the fine print of these contracts is your promise to defend and pay any judgment against the facility for personal injuries that occurred during your event. A good umbrella policy will pay for that defense and, if there's a judgment against the facility, pay that, too.

9. Does your policy cover punitive damages awarded against you by a jury?

Even if you live in a state that doesn't allow punitive damages, you still can cause an accident with serious injuries in a state that does allow them. If you are required to pay them, your umbrella policy should cover them.

10. Does your policy cover you or a family member's use of an unowned vehicle that you have regular access to, even if you don't use it regularly?

A personal auto insurance policy does not cover that type of vehicle. Yet it happens all the time. For example, a driver with a company-furnished car; roommates who have access to the keys of other roommates' cars; or adult children of recently deceased parents, driving their car until the estate can dispose of it. Although the car owner may have his or her own car insurance, it wouldn't cover you driving their car. And if your car insurance doesn't cover it, your umbrella may not cover it either.

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