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Back to Basics - What is a Personal Umbrella Policy?

Personal lines policies offer liability coverage limits that protect your insureds if they injure someone or damage their property. But with today's ever-increasing jury verdicts, it's not hard to see how a minor accident can morph into something that plows through, if you'll excuse the pun, the $300,000 combined single limits (CSL) on your insured's auto policy.

What can happen when your insured's chosen limits of liability do not cover the damages they face after an accident or injury? This can occur if the insured's “primary" limits on their personal lines policies are too low to pay for all the damages.

Let's look at a typical auto accident case study.

Case Study – Auto Versus City Bus

You write the coverage for John Cross and his wife, Amelia. They have two young kids, own a home valued at about $350,000, and John has a successful public sector career as a public works director. Amelia works for a public relations agency. Both have clean driving records and drive late-model vehicles.

When they came to your agency after their neighbor referred them, you carefully described the liability options available under their auto and homeowners policies. You also mentioned the umbrella policy, describing it as “One of the most important and most economical insurance coverages available."

You provided them with a quote for $300,000 combined single limits (CSL) on their auto and their homeowners policy, both quoted by the same carrier. You also supplied a quote for a $1 million umbrella policy, which they declined. They felt that $300,000 was “more than enough coverage for them." You ask them to initial a declination on the umbrella line of the quote, and you bind coverage.

A few years into their coming to your agency, John Cross has an accident. He's heading home after work, talking on his cell phone to wrap up a few work issues that arose that day. Distracted, he changes lanes to get on the freeway entrance ramp and strikes a city bus. The bus strikes the freeway concrete ramp. The impact injures four passengers, two of them seriously, as well as the bus driver.

All of those injured except the bus driver retained attorneys, and quickly filed suits to determine policy limits. The bus driver, covered by workers compensation, files a claim for his pain and suffering, and the comp carrier asserts a lien for his medical and lost wage costs.

The damage to the concrete freeway entry area alone exceeded $100,000. The adjuster determined the bus was a total loss, at a cost to replace of over $55,000. You can see where this claim is headed, right?

What happens now? Given the serious injuries of the passengers, the adjuster sets the claim reserve at policy limits of $300,000. The insurer's adjuster issues a letter to the insureds advising them that their liability limits may be inadequate. This is known as an “excess letter" or “excess ad damnum letter." Your insured calls you, upset, angry and fearful.

In today's era of high “social inflation" impacting both settlement awards and jury awards, it's not hard to exhaust limits on underlying personal lines policies.

Enter the umbrella policy.

How the Umbrella Policy Can Help

The umbrella policy comes in two forms: The umbrella, which can “drop down" to cover some liability claims not covered by the underlying policy, or the excess policy, which usually provides the same coverage as the underlying policy it extends above. The latter is also called a “follow-form" excess policy. Most standard carriers write true umbrella policies rather than follow-form policies. For the purposes of this article, we'll focus on the umbrella policy.

Typical umbrella limits begin at $1 million, which means if your insured has $500,000 CSL, for example, he or she now has $1.5 million available if a covered event exceeds the underlying limit of $500,000.

The umbrella can “sit over" the auto and/or the homeowners policy, and typically covers these types of liability claims.

Bodily injury claims filed against your insured
Property damage caused by your insured
Protection against non-business-related personal injury claims like libel, slander, wrongful eviction, or false arrest, unless excluded

These coverages can be invaluable for insureds with tenants on site or who have teenagers, who may misuse social media

Defense costs for a covered claim, including attorneys' fees and court costs
Worldwide coverage subject to certain limitations

How Does the Umbrella Policy Work?

The personal lines policies – homeowners, auto, watercraft and even motorcycle policies – contain specific liability insurance limits. The umbrella policy steps in, when underlying policy limits are insufficient to protect your insureds.

Homeowners such as those in our case study with ample assets have a lot to lose if the injury or damages they cause exceed their underlying policy limits. Also at risk can be future assets such as retirement income.

Liability limits can start at $1 million and go much higher, so be sure you're offer limits over and above $1 million umbrella coverage when you provide a quote. Rates usually get cheaper the higher the coverage amounts, because of the unlikelihood a claim will “pierce" those limits.

As jury verdicts continue to escalate in today's world, juries may award a run-away verdict that surprises even the seasoned claims handler.

Who Needs an Umbrella Policy?

While any of your insureds can benefit from an umbrella policy, those with significant assets to protect need an umbrella policy. These assets can include home equity, rental properties (perhaps even those “protected" by formation of a limited liability corporation), funds in various accounts such as a 401k and future income such as retirement income.

The umbrella policy provides an additional layer of liability protection that offers your clients security and peace of mind at a minimal cost. According to some insurance experts, the umbrella policy is one of the most cost-effective policies in the industry.

How Much Coverage Does Your Insured Need?

A frank discussion with your insured can help your insured choose an adequate umbrella limit. Here are some questions you can ask.

What assets do you currently own and what is their value?
Can you estimate the value of your future assets, including potential inheritances?
Do you have teenagers who are driving or who are active on social media?
Do you own multiple properties or have a roommate or on-site tenant?
What recreational activities do you take part in?
Do you own a corporation, is your name frequently in the news, or do you have significant social visibility? If so, you may be a “high-target" defendant.
Do you own any dogs the homeowners insurance excludes, or is there a canine liability sublimit?

Don't assume the umbrella policy will “drop down" in the event of a canine liability incident. Check with the insurer.

There is one rule of thumb that some agents use. Ask your insured to decide how much coverage they believe they need, then add another $1 million to that amount. Dollar for dollar, the umbrella policy is one of the best values in insurance.

Keys to Avoiding an Errors & Omissions Claim on Personal Lines Exposure

Here are some tips to avoid an E&O claim from your insureds arising from allegations of insufficient policy limits.

Inform every insured, not just those with significant assets, of the availability of umbrella coverage.
Have your insured sign or initial a declination if they decline obtaining a quote or don't purchase the umbrella policy.
Know the various policy forms. While dated, this spreadsheet is a good starting place to determine coverages available under various umbrella or excess forms.
Ensure you research the minimum underlying liability limit the umbrella form requires. In one claim, the agent allegedly left a $250,000 gap between the auto policy limit and the limit required by the umbrella writer, which was a different insurer than on the underlying auto policy.
Whenever possible, use the same carrier for the umbrella as (at a minimum) the underlying auto and homeowners policies.
Whenever possible, keep the same effective date between the underlying policies and the umbrella policy.
Make sure to list any vacant land the insured owns on the umbrella.
Determine if uninsured/underinsured motorist coverage is available on the umbrella.
Don't rely on the adjuster to notify the umbrella carrier if you write coverage with a carrier that does not cover the underlying policies. Put them on notice of any claim that might hit their coverage layer.

The umbrella policy is a robust coverage at an economical cost to provide that extra layer of protection to your insureds.

First published: November 4, 2022