Insurance

An Umbrella Policy Brings Peace of Mind in Life-altering Moments

Shelter from the Storm

In the insurance world, an umbrella policy is exactly what it sounds like, sitting atop home, auto, and business insurance coverage and providing excess protection against liability risks. What is less clear, area insurance experts say, is why more people don’t avail themselves of this relatively inexpensive vehicle. After all, life’s storms can strike at any time, and when they do, no one wants to be totally exposed.

Even the best intentions can’t always fend off an expensive lawsuit, said John Dowd, president and CEO of the Dowd Agencies in Holyoke. Take a field trip, for example.

“If you or your spouse has volunteered to chaperone your kid’s school field trip to an amusement park, you both can be held legally responsible for anything that goes wrong on the trip,” he explained. “If a child under your care is injured during the excursion, that child’s parents might try to sue you for damages.”

Which could wind up being a trickier situation than simply loading that child into one’s own car and crashing it — because the driver’s auto-insurance policy covers bodily injury. But what about situations like that field trip — what policy covers that?

It’s just one example, Dowd said, of why an umbrella policy is a good idea for most people. “A personal umbrella policy can provide coverage for such potential incidents, allowing you to chaperone a trip without worrying about potential financial risks.”

An umbrella policy — sometimes referred to as ‘family insurance,’ he noted — essentially sits atop existing auto and homeowners policies to deliver an additional layer of protection, especially against catastrophic liability loss.

“I would like to see anybody who has any net worth — say, more than $100,000, which would include most homeowners these days — to have a personal umbrella,” said Mark Lussier, who co-owns Lussier Insurance in West Springfield.

“The idea behind a personal umbrella is, you want to cover your net worth. When I get a phone call from someone who says, ‘I have this umbrella, but I don’t really need it,’ I say, ‘if somebody were to sue you for everything you were worth, is what you have on your home or auto policy enough?’”

Dowd noted that the coverage from a personal umbrella policy is wide-reaching, providing protection for scenarios not covered by a typical home or auto policy. For instance, if a family member rents a snowmobile on vacation and is involved in an accident, the umbrella policy may help pay for the cost of repairs and medical bills of the injured parties.

Perhaps the most compelling aspect of an umbrella policy, Lussier said, is its cost — maybe $250 or $300 per year for $1 million in coverage, with additional coverage available beyond that, typically in increments of $1 million. “I have a couple of clients who’ve got $5 million umbrellas because their net worth justifies the extra cost.”

“The idea behind a personal umbrella is, you want to cover your net worth. When I get a phone call from someone who says, ‘I have this umbrella, but I don’t really need it,’ I say, ‘if somebody were to sue you for everything you were worth, is what you have on your home or auto policy enough?’”

That’s on top of legal defense fees, which insurers cover as part of any policy. “So, if the unimaginable happens and you’re called by Mark E. Salomone, you have peace of mind knowing your insurance is going to defend you as well as pay anything you’re legally responsible for.”

Mark Lussier

Mark Lussier says the inexpensive cost of a personal umbrella policy, coupled with the many scenarios it covers, present a strong argument for buying one.

In addition, the umbrella is worldwide coverage. “So you can be vacationing in Europe, and if someone is injured because of something you’re responsible for, your umbrella is going to respond,” Lussier said.

Bill Trudeau, president of the Insurance Center of New England in Agawam, said he draws a simple diagram to explain the umbrella concept to customers, with policies like home and auto represented by rectangles, and the umbrella hovering over all of them.

“You can imagine a multi-fatality accident, where the claims might easily surpass $1 million. If an accident is deemed your fault, you may run out of insurance,” he explained. “But if you’ve bought a $2 million umbrella to go on top of a $1 million policy, now you have $3 million in protection in that instance. It’s a policy for excess liability claims — product liability, premises liability, bodily injury, property damage, all kinds of claims. It’s one policy, and you can decide how much protection you want to buy.”

Surprising Circumstances

Lussier stressed that umbrella coverage isn’t technically coverage the policy holder doesn’t already have. “You can’t get umbrella unless you have the underlying policy.”

While some may ask why not just increase coverage on existing home and auto policies, he pointed to the broad nature of umbrella protection, and, again, its cost.

“Many times, to buy more coverage under the basic policy begins to beg the issue of why you shouldn’t have the umbrella. I can have a $1 million umbrella for three cars and two houses for $250 a year. So it’s cheap.”

In Massachusetts, Dowd explained, most umbrella policies provide coverage for the policy holder and their immediate family members living in the same household, with some exceptions. And he listed a few scenarios where that wide net may come in handy.

For example, “if a dog attacks a guest in your home, you may be responsible for any medical bills,” he explained. Even a small bite could end up costing thousands of dollars, and, while some homeowners insurance policies provide liability coverage for dog bites, they typically restrict what breeds are covered. “If your policy excludes your dog’s breed, umbrella insurance may help cover any financial responsibility you have for the incident.”

As another example, if a recently licensed teenager causes a multi-vehicle auto accident, the resulting financial liability could be expensive. “While a single-car accident likely won’t exhaust your auto-insurance policy, a multi-car accident might exceed the coverage,” he said. “Personal umbrella insurance can cover expenses beyond those covered in your auto policy.”

One hindrance to purchasing umbrella coverage, Lussier noted, is that the holder must first increase his or her automobile bodily-injury coverage to $250,000 — and that floor can rise to $500,000 for older drivers. “In some cases, especially with multiple cars, that can be unaffordable. People say, ‘I can’t allocate that risk transfer; I’d rather retain the risk myself and take my chances.’ And that’s really what insurance is all about — it’s a transfer of risk.”

Then there’s something called ‘personal-injury coverage,’ Lussier said, which is different from bodily injury, instead referring to libel, slander, false arrest, and defamation of character. And this has become a minefield in the age of social media.

“Many times, to buy more coverage under the basic policy begins to beg the issue of why you shouldn’t have the umbrella. I can have a $1 million umbrella for three cars and two houses for $250 a year. So it’s cheap.”

“Some people, especially teens, don’t fully comprehend the power of social media,” Dowd said. “If your child makes a disparaging remark or unsubstantiated claim about someone on social media, that person might try to sue for libel.”

An umbrella policy may provide coverage for such situations, with most policies extending coverage to online statements. “Aside from just physical damage, umbrella protection can provide financial assistance if you’re being sued for libel or slander.”

Lussier agreed that this is a significant issue in an era when everyone is quick with a camera, and when images, videos, and statements online can live forever.

“Depending on your means, you can find yourself liable for substantial sums,” he told BusinessWest. “Nowadays, something said innocuously or without much thought can be a big deal. It goes viral, and the next thing you know, you’re saying, ‘I didn’t really mean it the way it was taken, but if I’d have known it would go that far, I would’ve kept my mouth shut.’ And if you put it in writing, you can make it even worse.”

Cost of Doing Business

Clearly, personal umbrella policies cover a wide net of possibilities. But it can be tricky when they cross over into the business realm. Lussier cited the example of a photographer who closes his studio and moves his enterprise into his house. “Now his house is a business exposure, and an umbrella excludes business exposures.”

That’s where a business umbrella comes in, working in much the same way a personal umbrella does, but covering liability risks related to a business.

Bill Trudeau

Bill Trudeau says growing businesses should continually reassess what level of coverage they need from an umbrella policy.

“If you have a relationship with your broker, they’re likely to offer you umbrella liability,” Trudeau said of business owners. “If you’re doing a review of your insurance, it’s something almost any competent broker brings up. As your business grows, it would be part of the basics of insurance coverage.”

The nature of the business would impact the risk exposure and, hence, the level of coverage needed, he noted. While a $1 million umbrella might be fine for a storefront shoe store or florist, a business owner with a fleet of heavy trucks would likely need more.

“We’re hoping not to scare people, but we want them to make realistic choices,” he said. “And a lot of times, those choices are informed by some requirement from the place you’re doing business with, like a contractor taking on bigger jobs, like a casino or office tower or hotel chain. The risk managers for those entities tend to have a requirement for higher limits of liability. So, like it or not, if you want to play in that area and do business with these kinds of clients, you probably have to buy an umbrella of some sort.”

Fame is a factor, too, Lussier said — and often results in higher rates per million of coverage, because famous people are seen as bigger targets for lawsuits.

“If you’re a high-profile person, like a news anchor, you won’t get an inexpensive umbrella, because of the higher exposure,” he explained. “If we’re selling you cheap insurance, we’re basically gambling that you’re never going to use it. That’s really what insurance is all about. The most people participate for the least amount of risk, so we can then price it accordingly.”

In addition, the level of coverage should reflect not only one’s net worth, but future earning potential as well. A doctor who just graduated from medical school and plans a career in brain surgery might have little more than debt to show right now, but a lawsuit could put significant future earnings at risk.

In the end, Trudeau said, umbrella coverage can bring peace of mind in myriad scenarios.

“If something’s gone wrong in your business — someone went through a stop sign, something terrible happened, some member of the public is injured badly, and your company is sued for $5 million — you can take some comfort: ‘I bought insurance, and I’m able to pay what people wanted to negotiate without having to declare bankruptcy.’ It’s still awful, but you have that small comfort, as opposed to sitting there wondering what to do.”

Joseph Bednar can be reached at [email protected]

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