Quick review: Personal umbrella insurance is a type of insurance designed to add extra liability coverage over and above another insurance policy, such as auto or homeowners.
Here’s an example of how the personal umbrella works
Your auto policy has a bodily injury liability limit of $250,000 per person and $500,000 per accident. You’re involved in a serious accident that causes permanent injuries that exceed the $250,000 per person limit. Once the claim hits the $250,001 mark, the umbrella policy “kicks in” and will continue to pay up to its policy limit.
The auto policy limits required for the umbrella are called the minimum underlying requirements
For the auto policy, those limits are usually either of the following:
- $250,000 per person/$500,000 bodily injury liability/$100,000 property damage liability. This means that your policy will pay up to $250,000 per person and up to $500,000 for bodily injury liability for any one accident. The third number means that your policy will pay up to $100,000 for property damage to others. This limit is often referred to as a “split” limit.
- $300,000 single limit liability. In this example, the number means that your policy will pay up to $300,000 for both bodily injury and property damage. There is no distinction between the two- you simply get a bucket from which both bodily injury and property damage claims can be paid. This is often referred to as a “combined single limit.”
Why do insurance companies have these underlying requirements?
First, the umbrella is designed for CATASTROPHE situations. It is not designed to pay for the occasional small bodily injury or property damage claim. Think about it for a minute- if the majority of bodily injury (BI) paid claims average $18,000 and property damage (PD) claims $4,500, the umbrella would be kicking into gear almost nearly every time a claim is paid. The underlying requirements are designed to weed out the small BI and PD claims. You can read a handy table that shows you an average payout for both bodily injury and property damage on the Insurance Information Institute website- Private Passenger Auto Insurance Losses, 2010-2019.
Second, the insurance company wants to make sure you, as the insured, has some “skin in the game”, i.e. that you’re willing to obtain and pay the premium for the higher limits. It shows you’re serious about wanting the coverage.
What if I fail to maintain these underlying requirements?
So the personal umbrella policy has some pretty strict language that basically says this- you are required to maintain the underlying limits. If you don’t, then the insurance company will only be liable to the extent that they would have been liable had the underlying requirements been maintained. Here’s an example that illustrates exactly what this means…….
$250,000 per person bodily injury is the underlying minimum requirement for your carrier’s umbrella policy. You decide to thumb your nose at the insurance company and only carry $100,000 per person.
This leaves a gap of $150,000 ($250,000 required - $100,000 carried = $150,000). The umbrella policy will “kick in” but only AFTER the $250,000 is met. This means you get to pay the $150,000 out of pocket. YIKES!
I’m pretty certain most folks would rather pay the small increased premium for the correct limits than to come up with hundreds of thousands of dollars out of pocket when the catastrophic claim occurs.
So what have we learned?
A personal umbrella policy requires the underlying policies meet minimum coverage limits to eliminate the umbrella being tapped for small claims. Failure to meet those minimum requirements can result in you having to pay the gap that exists between the minimum required and the limits you purchased, which could equal BIG $$$$$.
Our agency has minimum coverage standards we recommend to make sure you are adequately protected in the event of a claim. Those minimum coverage standards include an umbrella. We never know how big the claim is going to be, but we can do our best to make sure you have as much coverage as possible, just in case.
If you want to talk about personal umbrella coverage, call us at (937) 592-4871 or submit an umbrella quote request. Our personal umbrellas are designed to work with your auto insurance and home insurance policies, so we’re happy to look at the entire package and design a program that will work for you and your budget.