Umbrella Liability Coverage Has Limitations
One of our clients sent me an email last week inquiring about umbrella liability coverage. She wanted to know if purchasing an umbrella policy would benefit her husband and herself as it relates to coverage on their home. As their insurance agent, I know they also own several cars and two investment properties besides dabbling in real estate construction. Their children own and insure their own vehicles in their own names based on advice I gave to them previously.
I told our client that a PERSONAL liability umbrella would include coverage for more than just her house. It would insure her and her husband by name, offering liability coverage for any PERSONAL underlying “exposures” listed on the umbrella policy, which typically includes your residence, your personal vehicles and, if applicable, your boat or rental property. If they want their umbrella to include coverage when they operate their kids’ vehicles, they need to list those vehicles as an underlying exposure on their umbrella. Doing so will increase the cost of the umbrella, but it’s the only way to extend the liability umbrella to those exposures.
In describing what would and would not be covered under the PERSONAL umbrella, I warned our client that it wouldn’t extend coverage to her two investment properties because those properties are considered business exposures by virtue of being insured under business-owner policies. If our client wants umbrella liability coverage for business-insured rental properties, she needs to buy a separate COMMERCIAL umbrella liability policy. On the separate commercial umbrella, we could probably extend coverage to their occasional real estate construction business. The point I was trying to make was that she might very well need to consider BOTH a personal and a commercial umbrella.
Unfortunately, an umbrella liability policy doesn’t have magical insurance powers. It isn’t the safety-net, cover-all policy that many people assume it to be. I think the misconception is based in large part on our visual image of an actual umbrella. We visualize an umbrella as hovering over us, protecting us from all losses, lawsuits or claims that might come our way. It isn’t as simple as that. As my lovely wife commented when I asked her to read a rough draft of this article, “It has leaks.”
In my opinion, it would be more appropriate to call the umbrella policy an Excess Policy because it acts only as a second layer of coverage on top of the first. It won’t pay out a penny until the maximum limits have first been paid from the underlying (primary) policy. If your liability claim isn’t covered by your underlying, primary policy, then your umbrella policy won’t pay either! The umbrella isn’t like super glue, filling in gaps of missing coverage the way many people assume. Although it is a policy worth considering, my wife got it right when she said, “The umbrella has leaks.”