The other day at a family party, my father joked that since I now have two boys, one day I will become familiar with personal umbrella policies like he had to provide peace of mind from all those fun decisions my brother and I made back in the day! It should come as no surprise that the insurance industry has a product available for when the proverbial muck hits the fan—personal umbrella insurance.
Imagine you go out of town on a much-needed vacation and decide to leave your teenage kids at the house on their own. They have a party and a guest dives into the swimming pool and severely injures him. A jury awards him millions of dollars for the injuries and your homeowner’s liability insurance limit only covers a portion of the damages. You are personally responsible for the remainder and this could mean the court takes your savings and requires you to give up a part of your salary for decades. This is a scary thought. As a New York Times article noted:
For some people such a nightmare could never happen. They have an extra insurance policy, known as umbrella or excess liability coverage, which takes care of their liability for the lawsuits and medical bills of the auto accident victim — or of the teenage guest who dives into the shallow end of the swimming pool or the deliveryman who trips on the front steps.
But many people with major assets either do not buy the extra coverage or do not buy enough. Some do not know about umbrella coverage, which also pays for lawyers and other legal expenses. Others have heard of it but do not understand it. Still others decide that they do not want to pay for it, even though the cost is usually a fraction of the price of a typical package of home and auto insurance.
“This is a neglected area,” said Mark Schussel, a spokesman for the Chubb Group of Insurance Companies, which caters to affluent home and auto owners. “Some people have some coverage. But they haven’t changed the amount in years. Some people have a $1 million figure in their heads, and it just doesn’t make sense anymore.”
Umbrella and excess coverage are extensions of home and auto insurance. Banks make people buy home insurance to get mortgages, and states require drivers to buy auto insurance. But no one mandates buying a policy that could turn out to be the most important part of your insurance package.
Buying such coverage usually does not greatly increase the overall cost of home and auto insurance. For example, in Louisiana, insurance on a $1 million home well away from the coast might run $4,500 a year, Ms. Edmonston, the Baton Rouge agent, said. Two cars could raise the cost of the package to $7,500. And $5 million in umbrella coverage might cost about $600 more, or about 8 percent of the total. In New York, agents say, $5 million in coverage might cost about the same.1
The insurance industry plays a very important role in all or our day-to-day lives, but the industry is extremely confusing for those who are unfamiliar with it. Specialty insurance products like umbrella policies are probably not understood by a large part of the general public. While mortgage companies require homeowners insurance, there is no requirement to carry umbrella insurance, which can be a vitally important coverage to have for fairly minimal cost per year compared to other types of insurance. Who can stand under your umbrella?