Don’t Want to Get Soaked? Get Umbrella Policy
Have a nice house? A hot car? A boat? Or just lots of cash? You may be able to find shelter from both personal liability and high insurance rates with a personal liability umbrella policy.
Umbrella policies, long used by the well-to-do, have been making inroads among the upper-middle class in recent years as civil lawsuits have soared, raising the prospect of losing everything you own on the losing end of a lawsuit.
Doctors, lawyers, accountants and investment bankers--among others--may find these policies to be cost-effective ways to hike their liability insurance without paying a fortune for coverage. Better yet, these relatively inexpensive policies provide broad protection, sheltering the unwary from risks they may never have contemplated.
What are umbrella policies? They’re stand-alone insurance policies that overlie other liability coverage that you have already purchased on your house, car, boat or other assets, and they cover you for almost any kind of suit. The average umbrella policy adds $1 million in liability insurance on top of any (or all) of these other coverages.
In other words, if your auto policy offers $300,000 in liability protection and your homeowners liability limit was $100,000, one umbrella policy would boost your auto liability coverage to $1.3 million and your homeowners protection to $1.1 million. In most foreseeable circumstances, your homeowners or auto insurance policies are going to protect you before an umbrella policy is tapped. Normally, its coverage would only be necessary when you’re sued for more than the uppermost limits on one of these policies. However, it also can protect you from legal liability in oddball, unforeseen circumstances.
For instance, you’re shopping at Nordstrom and think you see a fellow shopper lifting merchandise. You collar the suspect at the door and hold him for security, bellowing “You miserable shoplifters raise the prices for everybody!” Then it turns out you were mistaken, and the suspect, the headmaster of the local parochial school, sues you for slander, defamation of character and false imprisonment. If you are found liable, that’s when your umbrella policy should kick in.
When used to supplement car and house insurance, an umbrella policy doesn’t help you if the house or car is destroyed in a fire or flood. It only kicks in when you’re sued. As a result, it’s fairly cheap, ranging in cost from about $100 to $300 a year.
In Los Angeles, for example, State Farm insurance sells $1-million umbrella policies for annual premiums ranging from $130 to $165. That’s about a third the cost of simply boosting the limits of separate homeowners’ and auto insurance policies to those levels.
Consider a hypothetical 40-year-old man, Michael Smith, who drives a Ford Taurus in a high-insurance cost area and is insured by State Farm. He has substantial assets, so he needs a lot of liability insurance.
If he bought a top-end policy providing $500,000 in liability coverage (that’s BI/PD and uninsured motorist), $100,000 for medical payments and full comprehensive and collision coverage (with no deductible), he’d pay a premium of $3,550 annually.
However, $1,881 of that total would be for the liability coverages. He could slash that portion to $1,330 annually if he cut his coverage to $100,000 per person/$300,000 per accident, according to a State Farm spokesman. He’d then supplement his auto policy with an umbrella policy, which would cost him $190 a year.
In the end, he gets $1,300,000 in auto liability coverage--more than twice as much as before--and he pays just $1,520, a $361 annual savings. And the umbrella policy automatically boosts the liability limits on his homeowners insurance too.
It also would cover suits arising in a host of other situations, such as if he were sued for inadvertently defaming someone’s character or causing them emotional distress, says Jim Orsulak, a State Farm spokesman.
What’s the catch?
Not everyone can get an umbrella policy. If you have youthful drivers, numerous tickets, drunk-driving convictions, vacation homes or a boat, it may be difficult to find an insurer willing to sell you one.
Most insurers also won’t sell them unless the underlying liability limits on your homeowners and auto insurance policies are fairly high.
State Farm requires these limits to be $100,000/$300,000, according to spokesman Bill Sirola. Other insurers may set the thresholds even higher. Finally, some insurers offer “narrowly defined” policies that exclude coverage for the most common claims.
Anyone who is considering purchasing an umbrella policy should carefully review the coverage limits with a trusted insurance agent or adviser to make sure that the policy provides shelter when and where it’s needed.
Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message kristof@news.latimes.com on the Internet.
