Umbrella liability coverage is a crucial but often overlooked piece of a financial wellness plan. Its purpose is to protect your assets from major claims and lawsuits by providing liability insurance in excess of the limits of your homeowners’ or automobile policy.  An umbrella policy may also provide initial or additional insurance for circumstances other policies may exclude, including false arrest, libel, slander, and invasion of privacy.

You are likely covered against liability at a basic level through your homeowners’ and automobile insurance policies.  However, many high net worth individuals neglect to take the next step in asset protection. According to a 2015 report by ACE Private Risk Services, one in five individuals with assets at or above $5 million did not carry an umbrella policy for additional safeguards, even though the limits of their homeowners or automobile policies exposed their assets to carried less than $5 million in total coverage.

This begs the question: when an umbrella policy is considered prudent, how much liability coverage is enough?  While your net worth is a good guideline, the decision merits a thoughtful and in-depth discussion with your financial advisor and trusted insurance professional. 

An important first distinction, even before determining the total amount of coverage, is whether your insurance company offers true umbrella or following form umbrella coverage.  Here’s the difference: A true umbrella policy covers specified losses, regardless of whether or not those insured losses correspond with the coverage definitions in the primary policy.  True policies also have fewer exclusions than their underlying primary policies, making overall coverage more comprehensive. An example of true umbrella coverage would be the rental of a personal watercraft while on vacation.  While this sort of coverage is excluded from most homeowners’ policies, certain loss scenarios are likely to be covered under a true umbrella policy. 

The alternative, following form umbrella insurance, operates exactly as it denotes: it follows the coverage contained in your underlying homeowners’ or auto policy. In other words, If a loss is not covered by your homeowners’ policy, it won’t be covered by a following form umbrella policy either.  An example here would be liquor liability. Some homeowners’ policies exclude coverage for liquor-related claims. Yet in the event of such a claim, a following form umbrella policy will also exclude that coverage. Although following form policies are commonplace in the insurance industry, we urge you to consider the limitations carefully before purchasing one.  

Another potential source of umbrella insurance may be your employer, as certain companies offer supplemental insurance as part of a benefits package. Upon review, executive-level employees may find they are already protected by their company’s corporate umbrella policy.  However, these policies must be carefully scrutinized for adequacy, and should the executive ever separate from employment, the coverage should be immediately replaced in full. Conversely, should you become eligible for coverage under a corporate umbrella policy, depending on the terms of coverage it may be appropriate to cancel your personal umbrella. 

Types of coverage will vary significantly between insurance carriers. Because each person’s risk scenario is both unique and changeable, a review of your exposures relative to your current coverage is always warranted.   

In today’s litigious society, making certain your assets are well- protected is simply good financial sense. SYM supports the acquisition of additional liability insurance, and can aid in the process of helping you to choose the appropriate policy or connecting you with a trusted insurance professional.

 

Sources: ACE Insured, “Umbrella Liability Insurance,” Web. March 2, 2016.
Disclosure: SYM Financial Corporation (“SYM”) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM, including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.