What Does Umbrella Insurance Cover and Do I Need It?

Vawter Financial |

Imagine driving home with the family on a dark night after a long day at the amusement park. You turn off the freeway and head through the intersection at the gas station where you buy your coffee every morning. Your light turned green, but a car coming from the other direction just rolled straight through the light. 

Fast forward two months.  You are blessed to have your family safe and are settling into your new car. Then there is a knock at the door, and you are served a summons.  You are now the defendant in a lawsuit filed by the driver of the other car.  They are suing you for $1.1 million in lost wages, pain, and suffering.  You know it is frivolous, but are you protected? 

Most auto insurance policies have a maximum that they will cover in the event of an accident.  The most common coverage limits are around $250,000 per accident.  So, what if they win that million-dollar judgment? 

This is just one example of when umbrella insurance (aka excess liability insurance) comes into play.  The umbrella coverage extends your home and auto (perhaps even boat, RV, & motorcycle) coverages. 

In the above situation, if you lost your court case, and did not have umbrella insurance, the most your insurance company would pay is $250,000 and you would be liable for the remainder of the judgment.  However, by purchasing a $1 million dollar umbrella policy you have extended your coverage to $1,250,000 of coverage.  The judgment would be paid by your insurance company. 

So, who needs this coverage?  We would argue that it makes sense for everyone to have at least $1m of excess liability coverage.  Umbrella coverage is typically sold in $1m increments and can be purchased up to $20m+ in some situations. 

Some people have situations where they should think about increased limits.  If you have a high income/high profile occupation, own vacant property or rental property, have a teenage driver, host large parties, have a pool, hot tub or trampoline, you could be a good candidate for increased coverage. 

By comparison, the cost of umbrella coverage is very inexpensive compared to other insurance coverages because the likelihood of its use is very low. It could, however, mean the difference between a successful retirement and bankruptcy. 

The above situation is one of hundreds of litigious situations that your excess liability insurance could protect.  You should discuss your risk profile and level of coverage with your qualified insurance agent.  If you are not comfortable with your insurance agent, your VF advisor would be happy to give you several resources. 

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