Umbrella Insurance

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Umbrella insurance is a personal liability policy.

Different from a professional liability policy like your malpractice policy, it’s called an umbrella policy because it sits over the top of your auto policies and recreational vehicle policies, like a boat policy you might have, and your homeowners or renters policy and provides additional liability coverage. Each of those individual policies typically has an amount of liability insurance, and you’re required to have that on your car in every state in the union. But the amount you’re required to have is often ridiculously low, sometimes as low as $25,000 or $50,000, which is really nothing when people are out there driving around in $100,000 cars. If you total their car, that’s $100,000. If you also send them to the hospital, that could easily be hundreds of thousands of dollars, and you need liability coverage or you’re going to be paying out of pocket for that.

In general, the recommendation is to increase your personal liability coverage to a few hundred thousand dollars and then add on an umbrella policy on top of that. The amount of the umbrella policy is typically seven figures. Common amounts are $1 million or $5 million. You can get something in between those two. I hear these days you can even get as much as $10 million, although that was hard to get a few years ago the last time I shopped this around. It’s not about how much net worth you have. It’s about the liability you have, right? Because if you hit somebody and cause them serious damage worth millions of dollars, it doesn’t matter whether you have $300,000 or $3 million or $30 million. Your liability is the same. And so that’s what you’re buying when you’re trying to decide how much umbrella policy to buy.

Now what you will find is that, like with malpractice, when people get a million bucks they feel like, “Okay, I’ve been compensated for the damages. This is a lot of money in my life. This is nice. Me and my attorney are willing to walk away with policy limits on this.” That’s kind of the million dollar mindset that goes on out there. And so typically that’s the amount I recommend people have. Obviously that’s going to pay for your defense, just like with malpractice. It’s also going to pay for any settlement and any judgment that might come out against you.

Now, is it possible to have a judgment against you for more than a million dollars? Yes, it is. But the higher you get, the less likely it is, and the less likely it is that that person decides, even if they get a judgment above policy limits, to go after your personal assets. It’s just much harder to get personal assets than it is to get the money out of a liability insurance policy. But that’s how it works, right? It just gives you additional liability coverage.
You might be surprised to learn that most of these claims are not from people slipping and falling on your walk, from being bitten by your dog, or a kid being injured on your trampoline or your pool or something like that. Most of them are auto related. Eighty percent of umbrella claims are auto related. So if you’re maybe not the world’s best driver, nobody thinks they are, maybe it’s worth having a little more liability coverage. If you’ve got teenage drivers, right, they’re far more likely to get in a wreck than you are. That’s a good reason to have significant umbrella coverage.

You’ll pay for it, of course. As soon as they find out you’ve got a 16-year-old boy in your house, especially once he gets a ticket or two or has a wreck or two, you’re going to find your insurance goes up pretty significantly in price. But in general, lots of people find that they can buy $1 million of umbrella coverage for $300, $400, or $500 a year. It’s dramatically cheaper than your disability insurance. It’s cheaper than your life insurance. It’s dramatically cheaper than your malpractice insurance. It’s not that expensive.

Now, if you decide, “I’m a belt and suspenders kind of person. I want a whole bunch of liability coverage,” and you want to get yourself a $5 million policy, you might be paying $1,500, $2,000, or $3,000 a year for that. And who should get that? Well, if you’re getting to the point where you’re considering expensive, complex asset protection techniques, you’re thinking about an overseas trust or a family LLC or a grantor trust like a SLAT, something like that. You’re thinking about paying thousands of dollars to attorneys to come up with these additional asset protection techniques. Well, at a certain point, you’ve got to go, “Well, maybe I’d just buy more umbrella coverage too.” For a couple thousand dollars a year, it’s way cheaper than setting up a bunch of trusts, and it seems like a reasonable addition if you’re still concerned about asset protection situations.

But it covers all kinds of personal liability, right? You can even cover things like libel. Read the coverage in the policy. Every one is a little bit different, but it’s going to cover damage from car accidents. It’s going to cover people getting hurt at your home. It covers things like libel. It covers all kinds of things you might not expect it to cover. So if you have some sort of a claim against you, make sure you check your umbrella policy. You might be surprised that you do have coverage for that thing.

It’s not, however, going to sit over the top of your malpractice coverage. It doesn’t give you additional professional liability insurance. So if you were thinking you were going to get another million dollars you could pay to a patient if they sue you because you damaged them, that’s not the case. None of them cover that, so be aware of that. Basically, it just sits on top of your auto and home policy limits. So your auto policy pays out its whole amount, and then you go to the umbrella policy. Often it’s with the same company. Sometimes it’s not. That’s how it works. Your auto policy is only going to pay out policy limits, and above and beyond that, it’s up to the umbrella policy.

So I think the main takeaway here is that this is just one of those insurances you need to have, right? You need to have health insurance. You need to have disability insurance or something if you’re not yet financially independent. You need to have some term life insurance if anybody else depends on your income too. You probably ought to insure your house so if it burns to the ground, you can replace it. Most of us can’t afford to self-insure our house. And liability coverage, right, both malpractice and personal liability coverage. So the place people usually start is just to go to whoever’s providing them their auto policy or their homeowner’s policy. Often that’s the same company. But we’ve got a service here at WCI. If you go to our insurance page, we’ll get you connected with that. If you go under the recommended tab, you will find that, and we can help you get not only home and auto coverage, but umbrella coverage as well.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.