Umbrella Insurance Policy. What Is It and Do I Need One?

By Hightower Westchester on July 29, 2022

One of the most important parts of the financial planning process is not only looking at one’s overall assets and liabilities, but how to protect them from additional risks.  During the financial planning process, we review a client’s various insurance policies to make sure they not only have coverage, but enough coverage based on their specific circumstances.  If a client doesn’t have an umbrella policy, we make recommendations for the appropriate level of coverage they should have to protect their assets. 

What exactly is an umbrella policy?  It’s a type of personal liability insurance that provides coverage for injuries, property damage, certain lawsuits, and personal liability situations.  Basically, it’s extra insurance coverage for unforeseeable events, accidents, or missteps.  It is designed to protect you from almost everything that your home and auto insurance does not, as well as fill in gaps in coverage when the limits of your regular policies are exhausted. The cost of medical expenses, a lawsuit, and legal fees can devastate your savings, and in some cases, your savings may not even be enough to cover the damages.  Purchasing an umbrella policy can provide millions of dollars in coverage for not a significant dollar outlay.  On average, a million dollars of coverage can range from about $150 to $350 per year. Generally, we encourage our clients to ask their car and home insurance company to provide this coverage as it is most cost effective when it is bundled.

So, in what scenarios would umbrella insurance coverage be helpful?  If you have a household pet and that pet harms someone, they can sue you for medical bills, lost wages, and pain and suffering as a result of their injuries.  Or let’s say you or one of your family members causes a multi-car accident and your auto insurance coverage isn’t enough to cover all of the affected person’s medical bills or repair/replace their cars, that’s where umbrella insurance would come in.  Even just having a young driver in your household increases your risk, which is why auto insurance premiums are so high when you add a teen to your policy.  The benefit of the umbrella policy is that it can pay above the liability limits on your auto insurance policy.  While we’re on the topic of driving, one thing to also consider is to add underinsured/uninsured motorist coverage as well.  This protects your injuries or damages caused by a driver who doesn’t have insurance coverage. This is typically not that expensive. Depending on the amount of coverage, it could range from $100 to $200 per year.

Another scenario to consider, which we’ve encountered with clients, is if you serve on a nonprofit board, you could be exposed if someone sues the group and its directors.  Most nonprofit boards have directors and officers liability insurance, but you should look at the total amount of coverage provided.  If say there are 10 members and the policy provides $1 million (100k each) in coverage, you are exposed for the additional amount above that.  Again, your umbrella policy may be able to protect you beyond those limits if you buy an endorsement to add that coverage to your policy.

One thing to keep in mind about umbrella insurance is it picks up where other liability policies leave off in terms of limitations and coverage, meaning coverage will generally take effect when your other insurance has been exhausted. 

Like all insurance, your umbrella policy coverage is something that needs to be reviewed on an annual basis, or earlier if your financial circumstances change significantly, to ensure that you have enough coverage. Coordinating with your trusted advisors to help perform the review is critical.

Roman Ciosek – Managing Director, Partner – Hightower Westchester

914.825.8633 – rciosek@hightoweradvisors.com