Umbrella liability insurance is a special type of insurance that protects you when accidents or other unforeseen disasters happen and your existing liability insurance policies cannot cover all the expenses.

Ordinarily, your standard business liability coverage will protect you in most situations. However, there are times when accidents or disasters get so serious that your standard insurance policy cannot cover for all the costs. That is when umbrella liability insurance comes in handy.

An umbrella liability insurance policy picks up where any of your standard insurance coverage stops. A good example is when you lose a lawsuit over a car accident. You would likely have to pay the winning party for costs such as medical expenses and lost wages, which can quickly become very expensive. But an umbrella liability insurance policy can save the day for you in such a situation by providing the extra costs required. This is much better than having the extra costs come out of your personal savings.

In essence, an umbrella liability insurance policy serves three purposes:

  • It provides excess limits when the limits of underlying liability policies (such as auto insurance and homeowners insurance) are exhausted by the payment of claims.
  • It drops down and picks up where the underlying policy leaves off when the aggregate limit of the underlying policy in question is exhausted
  • It provides protection against some claims not covered by underlying policies, subject to the assumption by the named insured of a self-insured retention (SIR).

Umbrella liability insurance should not be confused with excess insurance. Both are similar in that they pay after an underlying primary is exhausted. But the critical difference is that excess insurance policies are “follow form” policies that provide excess coverage only to the underlying policy to which they are attached, while umbrella policies provide broad coverage for a wide range of primary insurance policies.

If you hold an errors an auto insurance policy, for example, an excess insurance policy can only provide excess coverage if it has been attached to the same policy. However, an umbrella liability policy will provide excess coverage for any of your primary policies, since it lacks the “follow form” clause.

What does umbrella liability insurance cover?

An umbrella insurance policy provides excess coverage beyond what is provided by your auto and homeowners insurance policies.

In addition to covering you for accidents on your property or car accidents you are found to be at fault for, an umbrella policy can also protect you against personal injury lawsuits arising from slander, libel, defamation of character, false arrest, detention or imprisonment, malicious prosecution, mental anguish, abuse of process, and possible more.

However, since an umbrella liability coverage is a form of personal insurance, it will not provide coverage for lawsuits related to a business you own. It also does not cover activities like drag racing or any other high-risk, unnecessary use of your vehicles.

Furthermore, an umbrella policy does not provide you with excess health insurance coverage. If you think your health insurance fees are too low, you will need to purchase a more comprehensive health insurance, because an umbrella policy won’t help you.

To get a full understanding of what your umbrella policy will cover and what it will not, ask your insurance agent.

How much does umbrella insurance cost?

Coverage for an umbrella insurance policy typically ranges from $150 to $200 for a $1 million policy. If you decide to increase coverage, your premium will increase. However, if you get twice the amount of coverage and increasing the policy limit to $2 million, this will not usually double the cost of your premium.

Is umbrella insurance tax deductible?

If you hold a personal umbrella insurance policy, your premiums are not typically tax deductible. However, if you own a business and have an umbrella policy that supplements your other business liability policies, your premiums may be tax deductible.

How much umbrella insurance should you carry?

There are three factors to consider when choosing the coverage limits of your umbrella insurance policy:

  1. The value of your assets. These include properties, possessions, stocks, bonds, savings and retirement funds. The more assets you have to protect, the higher the umbrella policy limit you should consider.
  2. The risks you may face. Consider risks as a homeowner or renter, the risk of causing an accident during your work commute, and any potentially dangerous activities you participate in that could put those around you at risk.

3. The potential loss of future income. Because liability lawsuits can result in loss of both current assets and future income, even those with few assets to protect may want to consider the long-term ramifications of a serious claim. Consider your earning potential when reviewing your income.

Ajaero Tony Martins