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Umbrella Insurance Policies: Why You Might Want That Extra Protection

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Car accident umbrella insurance
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Dan Ramsey, an independent insurance agent with Brandt, Ramsey and Associates in Alexandria, Va., says the most memorable claim on an umbrella insurance policy he was involved in was made by a small business owner who had purchased a $2 million policy.

"After attending a Christmas party, my client got involved in a fatal auto accident where the other driver was killed," says Ramsey. "My client was given a breathalyzer on the scene and exceeded the legal alcohol limit. He was sued for something like $1.25 million by the claimant's family and was legally liable for the damages, which were paid by the umbrella policy. The client was otherwise an upstanding citizen with no past history of these kinds of events."

Protection Beyond the Usual

While its easy to assume that only a rich person could need that much insurance coverage, you'd be surprised at how important an umbrella policy can be for an average member of the middle class. For example, if you have a car insurance policy with liability coverage, you may think you have enough protection in case of an accident. But a lawsuit like the one described above could quickly exceed the $100,000 or $300,000 insurance payout.

An umbrella policy provides an additional layer of insurance, typically $1 million or $2 million, above your auto insurance and your home insurance liability coverage. Consider the following scenarios where an umbrella policy would have been helpful:
  • A $1.2 million settlement in New Jersey where an underinsured driver hit a policeman who was completing paperwork at a traffic stop. The driver had to pay legal fees for his defense as well as the settlement.
  • $1.76 million was awarded to a mother and her 8-year-old child in Florida after a wave runner accident injured both of them. The mother needed corrective surgery after the initial injuries were treated.
Although 85 percent of umbrella insurance claims are related to car accidents, the policies offer protection against accidents that occur at your home, too -- for example, in case someone falls down your stairs and sues you, or your balcony collapses during a party. Many people opt for an umbrella policy because they have a pool or a trampoline on their property and fear the consequences of a child getting injured.

Then there's coverage for incidents you may not have even considered, such as accidents while you're driving in another country, or while you're on vacation and have rented a boat or Jet Ski.

Another important feature of these policies is protection in a lawsuit against you for slander or defamation of character, or for decisions you might have made as a volunteer member of a nonprofit board. If you regularly blog about controversial topics or rant on Facebook, an umbrella policy just might be a good idea to protect your assets from a litigious individual who believes you've damaged their reputation.

That may sound unlikely, but it's not unheard of. In 2009, a high school student sued four other students and their families for $3 million because of derogatory comments the other students made about her on Facebook. While the lawsuit was eventually dismissed, reaching that verdict took two years and required considerable expenditures by the families. An umbrella policy can cover expenses related to such lawsuits.

You Have More to Protect Than You Think

You may be assuming that if you don't have $1 million to lose, you don't need an umbrella policy. Unfortunately, if you are sued by someone who falls down the stairs at your home or whom you injure in a car accident, you can be sued for more than just what you have in the bank.

Your retirement funds, investments, savings and even your future earnings are at risk if a judge allows someone to garnish your wages to pay off a settlement. In some states, the equity in your home can be part of the judgment and you would be forced to sell your home to pay someone who sues you.

If you own a house and have a retirement account or other investments, an umbrella policy of $1 million or more should be part of your financial plan. Most insurance companies offer these plans in increments up to $5 million, and some go up to $10 million.

Insurance companies require specific levels of liability coverage on your auto and home insurance policies before they will approve an umbrella policy, typically:
  • $300,000 per occurrence for personal liability, bodily injury, and property damage liability on your homeowners insurance policy
  • $250,000 per person for bodily injury and $500,000 per accident on your car insurance policy
  • $100,000 per accident for property damage on your car insurance policy
The average cost for a $1 million policy is $200 annually -- which you might find a relatively low price for the peace of mind and security it offers.

Michele Lerner is a contributing writer for The Motley Fool.


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21 Comments

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Sandra Tsai

When my two daughter became of driving age, I took out a one million dollar umbrella policy with State Farm. The extra piece of mind knowing you’re protected incase of an extreme accident was worth the extra few hundred dollars. Plus, the benefit affects all of your family in home or in your automobile.......
If you are really struggling to find affordable car insurance, u should check out 4AutoInsuranceQuote. I got $25/month insurance from them. Insurance Panda is also pretty cheap.. The key is to shop around.

April 05 2014 at 2:54 PM Report abuse rate up rate down Reply
homeimps

Well, I guess the commentators didn't object to my unflattering description of lawyers so I'll finish my original comment. I knew my ex-tenant owed back child support, so when my insurance company informed me about the settlement, I immediately called the Child Support Agency. Next day, my insurance co. called to inform me the back support was $7500, which would be paid directly to the ex-wife and child, and the remainder went to the lawyer. Since the legal and insurance systems will not work for justice, we need to simply do it ourselves whenever we get the chance. Wish I could have been a fly on the wall when those losers found out they weren't getting a penny; I hope they had it all spent beforehand, and hope even more that this will make them think twice before they try to rip off future victims.

July 07 2013 at 6:32 PM Report abuse rate up rate down Reply
homeimps

Yesterday I tried to post a comment about how an ex-tenant of mine sued me for $100,000 and how, although I had proof in writing that it was completely bogus, my insurance company still paid them $10,000 rather than pursue it in court. Maybe it was my use of the word "shyster" lawyer that got my comment bumped so I'll try again. My point was that when extortionists are able to find lawyers like this, and the lazy insurance companies pay them off without even wanting to know the facts, this just creates a continuing career for these bottom-feeders and WE get to pay the price.

July 07 2013 at 6:27 PM Report abuse rate up rate down Reply
lrrgrr

note that the presence of more insurance will assure the final settlement will be greater. lawyer vultures love to see bigger coverage. i spent 40 years in the insurance business; buy the coverage. cost is cheap, and it can save your butt. recommend 2 million minimum--5 million better.

July 06 2013 at 6:17 PM Report abuse rate up rate down Reply
jpict

Umbrella policies are a great thing to have but, just remember they do not cover you in all kinds of lawsuits.

July 06 2013 at 3:57 PM Report abuse rate up rate down Reply
2 replies to jpict's comment
lrrgrr

nothing does.

July 06 2013 at 6:38 PM Report abuse rate up rate down Reply
homeimps

Nothing does, especially since the whole system is set up to encourage people to commit fraud. An innocent victim can't take the chance of fighting a bogus lawsuit on his own, as all it takes is one bad judge and your life is ruined; not worth it, especially after paying premiums all those years. There are times I'm tempted to cancel every policy I have and just let them "make my day".

July 06 2013 at 6:41 PM Report abuse rate up rate down Reply
John Hinckley

It's all about the lawyers, not the insurance companies - if it weren't for the bottom-feeding scum-******* plaintiff attorneys with the 1-800-WeWinForYou phone numbers who file all the flaky lawsuits faster than the county clerks can process them and our court system that allows them to go forward and clog up the dockets for every idiot who spills their coffee or breaks a fingernail and wants a million dollars for pain and suffering, we wouldn't need "umbrellas".

July 05 2013 at 8:27 PM Report abuse rate up rate down Reply
1 reply to John Hinckley's comment
homeimps

You are so right! Best thing to do when you are involved in a case with a shyster lawyer is report them to the Bar Association; maybe if there are enough complaints, these bottom-feeders will be run out of business.

July 06 2013 at 6:45 PM Report abuse rate up rate down Reply
MICHAEL

The autorr missed a MOST important point. Only buy an Umbrella policy that also gives an option of including Uninsured/Underinsured motorist liability because 1/3 of motorists are not insured or are grossly underinsured. Hence if someone's auto strikes and damages you, where do you get $$$$ for your loss. Uninsured drivers usually have no assets and those who carry only minimun liability limits usually have very little in assets so your only recourse is your Umbrella policy plus your auto liability policies. The uninsured/underinsured motorist liability limits on your automobile policy are inadequate even if the amount to $500,000. Call an independant insurance agent for options plus your current agent. It costs about $40.00 annually to include Uninsured/Underinsured motorist liability to a $1,000,000 Umbrella liability policy. Also, remember your attorney's fees will be paid by your insurance company if you are sued for more than the limits of your basic policies.

July 05 2013 at 5:30 PM Report abuse rate up rate down Reply
1 reply to MICHAEL's comment
lrrgrr

agree with your basic point, except there are many other reasons than under/uninsured motorists coverage to buy it. just buy it. its the best investment you can make.

July 06 2013 at 6:21 PM Report abuse rate up rate down Reply
barryaclarke

When my two daughter became of driving age, I took out a one million dollar umbrella policy with State Farm. The extra piece of mind knowing you’re protected incase of an extreme accident was worth the extra few hundred dollars. Plus, the benefit affects all of your family in home or in your automobile..........…...

July 05 2013 at 4:22 PM Report abuse +1 rate up rate down Reply
sam54ct

My policy costs just under $500.00 per year, for 2 million in coverage. It's a deal, when you consider a simple auto accident, or someone slipping on your property can send you into bankruptcy court. Until run away judgements are contained, best to play it safe.

July 05 2013 at 3:28 PM Report abuse rate up rate down Reply
theabob21

My $2 million umbrella policy with state farm is around $220 a year. Call your agent for an explanation.

July 05 2013 at 1:24 PM Report abuse rate up rate down Reply