Umbrella Insurance 101

Umbrella Insurance. You’ve probably heard of it but do you understand what it is and whether you really need it?
To begin, lets look at the case of Tim and his son, Ben. Ben recently celebrated his 16th birthday and received his driver’s license. Shortly after his birthday, Ben was involved in an accident. He was found to be at fault, as he had run a red light while texting. Ben caused serious bodily injury to the driver and 3 passengers of the other vehicle. The other party sued Tim and Ben in the amount of $1.2M to recover medical expenses and compensate for pain and suffering. The court ruled in favor of the other party and Tim was ordered to pay.

So, will this huge bill be covered by insurance? The answer is yes, at least partially. Tim’s auto insurance policy has a $500,000 liability limit (which is typically the max offered on an auto policy) and will cover up to that amount. Without additional coverage, Tim and his family would be on the hook to pay the additional $700,000 owed.

Luckily, Tim had talked with his insurance adviser about the benefits of a liability umbrella before he added Ben to his auto policy and opted to purchase a $1M umbrella policy. The umbrella policy picked up the remaining $700,000 that was owed, saving Tim and his family from financial ruin.

This is exactly what an umbrella policy is for. It is an extra layer of liability insurance that sits on top of your underlying policies, such as auto or homeowners, and kicks in once their liability limits have been reached.