For small business owners, liability coverage policies are the defense that stands between your business and the various risks it faces on an everyday basis. Should disaster strike and an accident occur, the policy takes on the brunt of the damages. But what happens if a lawsuit occurs and the damages exceed the coverage limits of your current insurance policies? Well, this is where an umbrella liability insurance policy would kick in, providing that much needed additional coverage.
You’ve probably heard about an umbrella policy; but do you know what it is, what it covers, and whether you need it? We’ll answer that and more in this quick guide.
What is umbrella liability insurance?
Realistically, few lawsuits pursue damages according to the defendant’s specific insurance policy coverage limits. In fact, in most cases, the sum will far surpass what the existing policy would pay.
This is where an umbrella liability insurance policy would come in.
Umbrella insurance provides extra coverage that can be tacked onto an existing policy, adding further layers of security to those individuals and businesses that are more likely to be sued for damages to third-party property damage or accidental injury.
For an umbrella liability insurance policy to work, you must have a standard policy such as:
- Homeowners insurance
- Auto insurance
- Watercraft insurance
The added umbrella insurance provides supplementary coverage should your original policy not be sufficient in an incident—the equivalent of bringing along an umbrella while you’re already wearing a waterproof poncho.
In the case of a liability suit, the umbrella insurance policy wouldn’t kick in until after the original policy’s coverage limits had been exhausted. This is meant to protect your savings and various other assets, which may be subject to seizure in the case of a liability lawsuit.
Legal fees, bodily injury, and property damages are typical areas that receive more coverage after their limits are exhausted, but umbrella insurance can even offer coverage not encompassed by a basic policy, such as for:
Benefits of umbrella insurance
One of the great aspects of an umbrella policy is that there’s very little risk or investment for a ton of potential rewards. Because you already need substantial coverage in order to purchase an umbrella policy, they tend to be rather affordable. According to Investopedia:
“Most $1 million policies cost $150 to $300 per year; you can expect to pay about $75 more per year for $2 million in coverage, and another $50 per year for every extra $1 million in coverage beyond that. Most insurance companies’ umbrella liability policies start at $1 million in coverage, with higher limits available.”
So, it’s quite affordable, especially for the amount of additional coverage you’re receiving—typically between $1 million and $5 million. But what exactly does an umbrella policy cover?
What does an umbrella liability insurance policy cover?
Umbrella liability coverage is meant to shield you from large, devastating liability lawsuits, particularly in cases where you or someone you’re responsible for caused some sort of damage to a third party. For instance, it typically covers:
- Bodily injury – While you’re out on a walk with your dog, it gets in a fight with the neighbor’s dog and then bites the neighbor when they try to intercede. This results in your neighbor going to the hospital. The neighbor could sue you to cover their hospital bills, wages lost, pain, and suffering.
- Personal injury – Your teenager throws a party while you’re away. One of their friends breaks an arm. The parents of the child could attempt to sue you.
- Property damage – You’re responsible for a 5-car pileup on the freeway, and your auto insurance policy doesn’t have the coverage to replace everyone’s vehicles and pay for their medical bills.
- Landlord liability – You rent your home out for the summer. Unfortunately, you forget about the loose handrail you’ve always meant to fix. The summer renter is unaware of the issue, leans on it, and falls through. You’re sued for property maintenance negligence and damages sustained from the fall.
- Legal defenses – A bodily injury trial stretches on for months, causing you to exceed your homeowners policy coverage limits. At this point, the umbrella liability coverage would kick in and cover the continued legal costs.
In many cases, an umbrella policy will also cover third-party damages resulting from libel, vandalism, slander, and privacy invasion.
What does an umbrella liability insurance policy not cover?
Although there are several instances where an umbrella insurance policy could be a lifesaver, it’s important to note that it wouldn’t cover the following issues, losses, or damages:
- Business financial losses – Damages to your business’ property or losses tied to the operation of the business are typically not covered. And this applies even if you run a home-based business. (Protect your business with business liability insurance.)
- Contracts – Umbrella policies often don’t cover liability from an oral or written agreement you’ve entered. Be sure to read contracts to check whether you’re being held liable for any incidents.
- Personal property – While an umbrella policy may cover the property damages to a third party, that coverage generally won’t extend to damage you cause to your own property.
- Crimes or intentional actions – Most insurance coverage policies will be voided if you’re found guilty of criminal acts or intentionally commit a harmful act. In such cases, if you owe restitution, you’re on your own.
Who needs an umbrella insurance policy?
This question is tied to how much risk you face. The vast majority of people who purchase an umbrella policy will either have considerable assets and savings or engage in activities that significantly increase the likelihood of a lawsuit.
While umbrella insurance is not legally required, it’s highly suggested and popular with individuals who face increased risks, including those who:
- Own property
- Possess a sizable amount of savings or hold valuable assets
- Interact with high-risk variables in their profession (e.g., canines, swimming pools, construction)
- Involve themselves in enterprises that increase the probability of receiving a lawsuit, such as sports, volunteering, reviewing goods, and property management
So, when determining how much to get, you at least want a policy that covers your net worth—including assets, savings, income, and even future income.
What is the right limit for you?
Yes, opting for more coverage comes at a higher cost, but you can select the level of security that you need. Before making your selection, consider these three factors:
- Value of your assets – Pool all your resources and assess their monetary worth. If you have a considerable chunk of change, it’s probably worth the extra property and casualty protection.
- Possible income loss – Should you face a lawsuit, the expenses might not only drain your current earnings but could also affect your livelihood in the future. This could include a cut on any increased salary or raise. Therefore, think long-term and not just short-term about potential consequences.
- Potential risks – Does your occupation or do your hobbies come with more dangers than the average person? Are there any risks as a property owner, renter, or driver? If you’re more likely to experience an accident, you should prepare accordingly.
Note: If you purchase your umbrella insurance policy from the insurer you acquired an auto, home, or watercraft insurance from, then the premium may be less expensive. Additionally, the policyholder often must have a base insurance coverage of $250,000 to $300,000 for their homeowners policy and $150,000 to $250,000 for their auto policy.
What about your business?
In addition to protecting your personal assets, if you’re a small business owner or independent contractor you also want to make sure your business is protected. For each business, there are added risks in certain areas and no need for coverage in others. This, unfortunately, is what can make business insurance so tricky to figure out. However, almost every profession can benefit from general liability insurance or professional liability insurance.
Accidents are called just that for a reason. They don’t happen intentionally or come with a sign that says, “WARNING.” Even the most cautious and prepared can be on the receiving end of a personal or professional lawsuit. Protect yourself and your business with the right insurance policies. The life of your business depends on it.