What is it?
Picture how an actual umbrella keeps the rain off your head and your clothes. This is an apt comparison to how umbrella insurance works as it provides a sense of shelter for your assets and also mitigates the financial repercussions of a legal judgment that exceeds the limits of your existing insurance policies.
Also referred to as an “excess liability” policy, an umbrella policy is a kind of supplemental coverage that is activated when you have liability vulnerability that goes beyond the limits in your existing policies, like your car or homeowner insurance.
Who is it for?
There is really no one who is ineligible for such coverage as this. As a matter of fact, it is common for financial professionals to recommend this kind of coverage for people of all walks of life, rich or more modestly endowed financially. However, it must be said, that for those who are of higher net worth, those who have significant assets are for whom this kind of coverage makes the most sense. Let’s be frank, these folks have the most to lose and are certainly vulnerable targets, in a legal sense, and stand to lose large amounts, all of which exceed one’s typical standard insurance coverage. Business umbrella coverage can also be a very smart choice for professionals whose normal professional practice makes them more vulnerable to lawsuits; doctors and lawyers are good examples.
How it works
Umbrella coverage is activated once a claim goes beyond the liability limits of your normal home or auto policies. For instance, should you have a $300,000 limit for bodily injury liability coverage with your car insurance but an individual hurt by you in an accident takes legal action and is awarded a judgment for $500,000, your auto insurance coverage would pay the first $300,000 with the umbrella coverage kicking in and compensating the rest of the $200,000.
Kinds of policies
There usually two kinds of umbrella policies. One is personal and it pays for liability claims that exceed the homeowner insurance policy limits. The other is a business umbrella policy and it provides supplemental protection when the limits of your malpractice or errors and omissions insurance are exceeded.
The main plus of good umbrella insurance is the protection of assets but there is also the bonus of protection for your future earnings if you were to ever face a court judgment that exhausts your other liability coverage. Another plus of umbrella coverage is its relatively inexpensive cost due to the likelihood of having it use it being slim. One normally can purchase $1 million of umbrella coverage for a couple hundred dollars.