What is an Umbrella Policy?
We often have current clients and potential clients ask us, “what is umbrella insurance”? Explaining it to them is relatively simple and we hope to further examine this type of insurance in this post.
An umbrella policy, or a PCL (Personal Catastrophe Liability) policy, is a blanket liability coverage that covers over your pre-existing insurance. As stated by Wikipedia:
“Umbrella insurance refers to a liability insurance policy that protects the assets and future income of the name insured in addition to his or her primary policies. It is distinguished from excess insurance in that excess coverage goes into effect only when all underlying policies are totally exhausted, while umbrella is able to “drop down” to fill coverage gaps in underlying policies. Therefore, an umbrella policy can become the primary policy “on the risk” in certain situations. The term “umbrella” refers to how the policy shields the insured’s assets more broadly than primary coverage.
Typically, an umbrella policy is pure liability coverage over and above the coverage afforded by the regular policy, and is sold in increments of one million dollars. The term “umbrella” is used because it covers liability claims from all policies underneath it, such as auto insurance and homeowners insurance policies. For example, if the insured carries an auto insurance policy with liability limits of $500,000 and a homeowners insurance policy with a limit of $300,000, then with a million dollar umbrella, the insured’s limits become in effect, $1,500,000 on an auto liability claim and $1,300,000 on a homeowners liability claim.
Umbrella insurance provides broad insurance beyond traditional home and auto. It provides additional liability coverage above the limits of homeowner’s, auto, and boat insurance policies. It can also provide coverage for claims that may be excluded by the primary policies. These may include, but are not limited to: Invasion of Privacy, Slander, False Arrest, and Libel.”
This snippet from Wikipedia helps us understand the broad definition of an Umbrella, or PCL policy. Basically, umbrella coverage provides us with excess coverage that we may not have on our home and auto policies. In an era where law suits are becoming ever more prevalent, we have seen an upswing in the sale of umbrella policies. There are many cases where umbrella policies can come in handy, but we will examine two in particular, one which would apply to your auto and one to your home insurance.
A neighbor’s kid walks down the sidewalk in front of your house. Your dog runs out to the child and attacks him or her. The child suffers physical damages and the parents decide to sue for pain and suffering. In total, the family is awarded half a million dollars in damages, but your home insurance policy only has a $300,000 liability limit. This means, you will owe $200,000 above and beyond what your home insurance liability will cover. In this instance, if you had an Umbrella policy, it would kick in to cover the rest of the damages. If not, you are personally responsible for the excess damages.
You’re driving down the street while on a phone call. You completely miss a stop sign because of being distracted and broadside the car turning in front of you. The driver’s car is totaled and they have serious medical damages. When it is all said and done their medical damages total a half a million dollars, but your auto liability coverage only covers $300,000. As stated in the previous case, this is where the Umbrella, or PCL policy becomes a financial life saver.
In conclusion, the umbrella policy can serve as your last line of defense in the event of a catastrophic loss or a lawsuit. Although many people underestimate the importance of these policies, rising medical costs and lawsuit settlements are helping everyone realize how beneficial these policies can be. For more information please contact us today!