What Is An Umbrella Policy and Why Should I Carry One?

Florida residents have access to is additional liability insurance, designed to pay out on top of your existing auto and homeowner’s/renter’s insurance policies. For example, you may only have $300,000 in liability coverage on your car insurance. If you are hit with a claim of $1,000,000, you would be on the hook for $700,000 yourself unless you had an adequate umbrella insurance policy. Here is a diagram explaining this from MSN Money:

In addition, an umbrella policy can also “fill in the gaps” by providing coverage for other incidents like liability for rental properties or being sued for slander or libel. Imagine working and saving for decades, only to have all of it taken away with one incident. Here are my reasons for buying an umbrella policy.


#1. Unlikely, But Actual Scenarios
These days, there are many scenarios where one might be sued for more than $100,000 or even $1,000,000. In my mind, the most likely event is to be found at fault in a car accident. Medical costs alone can exceed $100,000 per person easily. Now imagine if there were 2, 4, or even 6 people in the car. Imagine if some of them were children. Here is one example from a NY Times article on umbrella policies:

One of Mr. Cox’s clients crashed into the rear of a car on a slick highway. A woman and a child were critically injured. After two years of litigation, his client settled the lawsuit for more than $5 million. The client had $15 million in umbrella coverage. The policy paid for the settlement and all legal costs. “Without the umbrella,” Mr. Cox said, “they would have been completely wiped out.”

More recently, I read about a parent chaperone during a field trip being hit with a $700,000 verdict for negligence:

Lauren Crossan, of Randolph, N.J., had traveled to Hawaii in 2004 with Susanne Sadler, Sadler’s daughter, and another New Jersey cheerleader to perform in the halftime show of the Hula Bowl. Within hours of her arrival at the Hyatt Regency Maui Resort, Crossan was seen drinking alcohol. Her body was found the next day on the hotel grounds.
An arbitrator determined last month that Sadler was partially responsible for Crossan’s death and ordered her to pay $690,000 to Crossan’s parents and her estate.

More scenarios to consider:

• A blogger writes something bad about a company and gets sued for defamation.
• A man was asked to cut down a tree from his own yard. He refused, and later a hurricane blew the tree down and injured someone in the neighboring house.
• Your child gets in a fight at school, and injures another student.
• Your dog bites someone.
• You have a pool, and a visitor hurts themselves.
• A handyman or contractor hurts themselves on your property.

#2. Have the Insurance Company Lawyers Take Your Side
Forget even getting a large jury verdict against you. If someone simply sues you for a frivolous reason, you’ll have to pay for a $400/hour lawyer to defend yourself. With an adequate umbrella policy, the money at risk will be the insurance companies instead of your own. That means the big corporate lawyers will be on your side, and your defense costs will be covered as part of the umbrella policy.

#3. It’s Cheap, and Easy To Buy
It cost us about $250 a year for $1 million in coverage for the both of us, including 2 cars and a house. That’s basically $10 per month per person. However, we did have to raise the liability limits of our auto and homeowner’s policies slightly to $500,000 each. So if you are only carrying the bare minimum required by law (not a good idea for most people), your actual additional costs may be higher.

It was really simple to get as well; we had an umbrella policy added to our existing policies with just one phone call. No long application or additional fees. But the low cost also means you may have to look out for your own interests. I guarantee that if you mention that you want whole life insurance to your local agent, they will get really excited (big commission) and get you quotes within 24 hours. They’ll even follow up if you forget. On the other hand, selling you an umbrella policy for $200 a year results in a tiny commission. All I got was a “yeah, I suppose that might be a good idea…” They’ll still sell it to you, but it won’t be heavily promoted like other products.

#4. One Less Thing To Worry About
Some people believe that you may be a bigger target for lawsuits if someone finds out you have a $1 million umbrella policy. Here’s how I look at it. If I really wanted to premeditate a lawsuit against someone, I’d pick someone who is worth a lot more than $1M. More like $10 million and up. In a big metro area like mine, multi-millionaires are a dime a dozen. Even if I was frivolously sued, again the whole point is that I’m still covered. To me, this argument is like saying you shouldn’t earn more money because someone will sue you for it.

In the end, we have a $1 million umbrella insurance policy because this is exactly what insurance is for – to protect me from unlikely yet possibly catastrophic events. The likelihood is low, but so is the cost. We chose $1M somewhat arbitrarily because it covers our net worth and also what I feel is a reasonable amount of likely claims. As inflation (and especially medical costs) rises, I could see upping it to $2M since the additional cost is only about another $100/year.

Now, if you have a low or negative net worth, then perhaps there would be less incentive in getting such coverage. I certainly had no idea what umbrella insurance was in college. I would imagine lawyers are less likely to go after those with “nothing to lose.

********