Umbrella Policies: Safety for a Rainy Day

What is an Umbrella? Can both a business and an individual have an umbrella? What all does it do? Why should I consider getting one? How expensive is it?

What is an Umbrella Policy?

The Umbrella Policy is very straight-forwardly named, as it covers the underlying policies. Most Umbrella policies can go over all of your underlying lines of liability coverages. By purchasing an Umbrella policy, you are giving yourself an extra layer of liability coverage in the event of a large loss. It is a very important risk management tool for both businesses and individuals, as the extra coverage picks up where the General Liability, Auto policy, etc. stops, often for no additional deductible/retention. For businesses, they would purchase a Commercial Umbrella policy, and for an individual/household, they would purchase a Personal Umbrella policy. Let’s look at an example with ABC Company’s insurance to illustrate my point:

Let’s say ABC Company has a General Liability policy of $1 million per occurrence, $2 million aggregate, and they also have a Commercial Umbrella policy on top with $1 million coverage. Next, imagine they have a General Liability loss of $1.5 million. Their General Liability will only pay $1 million of that (because of the $1 million per occurrence) but their umbrella steps in and covers the excess $.5 million. In the end, every penny of the loss was paid by ABC Company’s insurance. However, in the absence of that Umbrella policy, they would have had to cover the $.5 million out of pocket.

A liability loss in the millions is not something that only happens to big businesses though. Losses of this magnitude happen to businesses of all sizes, and even happens to households. Also, the biggest risk you take all day will most likely be getting in a car. Huge liability claims come out of auto accidents, and both the Commercial and Personal Umbrella policies can go over your Auto policy as well. A Commercial Umbrella policy can keep you and your employees safe while driving too. Back to the example with ABC Company, most people/businesses could not easily cover that $.5 million on their own. In these situations, it’s always better to have too much insurance, instead of not enough!

Do the Commercial and Personal Umbrellas cover all underlying policies?

No, there are certain situations that the Personal and Commercial Umbrellas won’t cover everything. Sometimes a separate, special Umbrella will need to be purchased to go over certain liabilities, such as a Professional Umbrella policy to cover a business’s Professional Liability. This Umbrella policy was designed to cover the added perils that professionals face, providing extended coverage for their endeavors. Also, Workers' Compensation cannot be covered by an Umbrella policy. Your agent should know when an Umbrella policy is necessary.

Do the Umbrella policies cover anything extra?

Yes, both the Commercial and Personal Umbrella policies broaden coverage. The broadened coverage usually has to do with policy definitions. For example, the Cincinnati Insurance Companies' Commercial Umbrella policy extends the term 'bodily injury' to include "disability, humiliation, shock, fright, mental anguish or mental injury, whether or not they're a result of physical injury." The General Liability policy only covers direct physical injuries. Umbrella policies can also fully reimburse your lost income from appearing in court or gathering information after a claim, where your underlying policies might only provide a fixed amount of coverage. It may also cover supplementary payments (pre-judgement interest, post-judgement interest, bail bonds, etc.) entirely or at higher amounts than underlying policies. Ask your agent for full details.

So What Does an Umbrella Policy Cost?

While each situation is different, a general figure to go by is approximately $250 a year for a Personal Umbrella policy, and $500 a year for a Commercial Umbrella Policy for one million dollars of coverage. Although that might seem like a lot, if the situation arises where you need it, you'll definitely think of it as money well spent!

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.