How Umbrella Insurance Helps Keep You Covered

By Diane Ferber

Image courtesy of Max Pixel

Whenever I mention Umbrella Insurance to my friends, they look up as though expecting to see a thundercloud.  While umbrella insurance doesn’t keep you from getting out of the rain, it can help keep you from sinking into debt should an accident occur.  Allow me to explain.

While most of us protect ourselves with auto insurance, homeowner’s insurance, and possibly even liability insurance, all these policies come with built-in limits.  For instance, let’s say you wind up in an at-fault auto accident where the other car's driver is injured.  And let’s also say that your auto insurance policy has a $100,000 liability limit.  As long as the injured party’s injuries are less than $100,000, all you will have to pay is your deductible.  However, what if the injured party or parties wind up suing you for $1 million for injuries as well as lost income.  Who would have to come up with the additional $900,000?  Not the insurance company.  You would be required to make up the difference, plus court costs.

The same goes for professional liability.  Just as you face certain risks as an individual, so does any business you have an interest in.  That’s why most businesses carry several liability policies, including those for general liability, worker’s compensation, and errors & omissions.  Now, let’s say your business has $1 million in liability coverage.  Suddenly, the business is sued, and the plaintiff is awarded $1.2 million.  Your insurer pays off $1,000,000.  That leaves the business and its principles to come up with the other $200,000.  Ready to stroke a big check?  Probably not.  That’s why you should consider purchasing umbrella insurance. If the business also had an umbrella policy, the insurer would pay the additional $200,000.  Got it?

1.      How does umbrella insurance work? – Umbrella insurance works kind of like a parachute.  It opens when you find yourself in financial freefall.  By that, I mean an umbrella policy isn’t meant to work alone.  It’s added coverage that’s only used in an emergency. (Like finding out you or your business is on the hook for damages beyond your existing insurance coverage range.)  Furthermore, the umbrella can cover you or your business's bodily injury, personal injury, property damage, landlord liability, attorney fees, and court costs.

2.      What doesn’t umbrella insurance cover? – Like it or not, even umbrella insurance has limits and exclusions. While it can help you cover damages resulting from a lawsuit, it doesn’t cover punitive damages.  Punitive damages are those awarded by a judge or jury for reckless or outrageous conduct on the part of the plaintiff.  If you are a board member of a for-profit company, while the company may be covered by an umbrella policy, the board members are not. Umbrella policies also do not cover injuries to your person.  They are designed specifically to pay for damages caused to others.

Image courtesy of Max Pixel

3.      How much does it cost? –  For as little as $450 per year, most people can acquire a  million-dollar umbrella policy.  Even better is the fact that if you want to double the coverage to $2 million, this doesn’t double the cost of your umbrella policy. (Talk to your insurance agent to find out more.)

4.      How much coverage should I carry? – When my customers ask me how large of an umbrella policy they should carry, I ask them, “How much are you worth and how risk averse are you?” The bottom line is, the more assets you have accumulated and the higher the risk you take in your personal and professional life, the greater the coverage you need.  Even more important is you need to assess your future income potential, since a lawsuit can target money you have yet to earn.

This is doubly important for business and medical professionals.  If you are a business consultant, an investment counselor, an advertising executive or any other professional whose opinion is valued by others, you could easily wind up being sued for the opinions you render.  Errors and omissions lawsuits where consultants are sued for advice that results in a client loss are becoming more and more prevalent today.

Medical professionals who carry malpractice insurance can also benefit from an umbrella policy.  That’s because malpractice policies have specified limits, which once exceeded can easily wipe out a physician’s savings, not to mention their practice.

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5.      Do landlords need umbrella insurance? – If you have tenants, you have the potential for injury and litigation.  Even worse, you could be held liable for injuries to your tenant’s guests who slip and fall on the property, get bitten by your tenant’s dog or drown in the swimming pool.

6.      Does umbrella insurance cover flood damage? – While an umbrella policy covers property damage, it doesn’t cover flood damage unless the damage was caused by a pipe bursting or bathtub overflowing to damage the property of someone living on the floor below who sues you for damage to their property resulting in a large claim.

7.      Is umbrella insurance tax deductible? – That depends on whether the policy is for personal or business use.  In the case of a personal umbrella policy, the premiums are not tax deductible.  In the case of a commercial policy that supplements your other business liability coverage, the answer is maybe.  (You’ll need to consult your CPA to find out for sure.)

If you still need help determining if an umbrella policy makes sense for you and/or your business, call your insurance agent or call Diane Ferber at (904) 388-6446.

Diane Ferber owns and operates A&B Insurance. To learn more about how you can save money on insurance, visit her site.