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What is “Umbrella Insurance” and What Does it Cover?

Umbrella liability insurance can be an excellent safety net for businesses, individuals, and their dependents.

If you’re new to the world of property and casualty, you may have heard the phrase “Umbrella insurance” bandied about. Below, we’ve put together a basic Q&A that can help you to familiarize yourself with this category of insurance coverage:

Q: What is Umbrella insurance?

“Umbrella insurance” is a catch-all term for liability insurance policies that are purchased as a backup plan in the event that primary liability policies prove to be insufficient. Umbrella insurance policies are designed to kick in after events that cause truly catastrophic losses that exceed the coverage limits of primary liability policies. Umbrella policies can be thought of as safety nets that fill in the gaps of other policies and offer expanded protection in the face of large claims that would have an extremely negative impact on the financial wellbeing of the insured party.

Umbrella policies can be thought of as safety nets that fill in the gaps of other policies and offer expanded protection in the face of large claims.

Q: Are Umbrella insurance policies available to businesses, individuals, or both?

Both! Umbrella insurance policies can cover a range of situations faced by both individual and corporate policyholders. Individuals can purchase Umbrella insurance policies that cover both themselves and members of their household to reinforce primary policies such as homeowner, auto, and watercraft insurance. Commercial Umbrella insurance is designed to act as a supplementary policy for general liability insurance, commercial auto policies, employer's liability, and some other types of primary liability policies.

Q: Are there Umbrella policies available for all types of insurance, including cyber, life insurance, health insurance, and property coverage?

No, not quite. Umbrella insurance is designed to act as a secondary layer of liability coverage. This means that there are no Umbrella policies for life insurance, health insurance, or cyber insurance.

Q: How expensive are premiums for Umbrella insurance policies?

While specifics will vary depending on the particular details of individual cases, Umbrella insurance policies are more affordable than equivalent primary policies. This is because Umbrella policies are designed to only take effect when primary policy coverage limits have been exhausted or an individual loss exceeds primary limits.

Q: What are some examples of how Umbrella insurance works for individuals?

Individual Umbrella insurance is designed to reinforce existing individual liability policies, only taking effect in the event of catastrophic losses that exceed the coverage limits of said primary policies. These policies often prevent the assets of policyholders from being seized in the event that they are found liable for large damages. Individual Umbrella insurance policies include homeowner policies, auto policies, and policies that protect against lawsuits for defamation, landlord liability, and other types of legal judgments.

For example, for a comparably affordable premium, an individual could secure a $5 million line of Umbrella insurance for their home. If someone is severely injured on the insured premises and the loss exceeds the $1 million coverage limit of their primary policy, their Umbrella policy would kick in and provide additional relief. Some examples of large losses can include such things as an auto accident causing multiple injuries, dog bites, slips and falls, or injuries resulting from a collapsed deck on an insured property.

It's important to note that Umbrella policies, subject to terms and conditions, are specifically written to follow the terms of primary policies. Therefore, anything that’s listed as being covered by the primary policy is also covered by the corresponding Umbrella policy. Umbrella policies also include a condition stating that if there is coverage not covered by the primary policy, but not excluded in the Umbrella, then the Umbrella will respond and pay the policyholder. In such cases, the Umbrella may stipulate that a retention/deductible is owed before the Umbrella pays.

Q: What are some examples of how Umbrella insurance works for businesses?

Commercial Umbrella insurance is designed to reinforce primary lines of commercial liability coverage in the event that said policies prove insufficient to cover catastrophic losses.

For example, imagine that an insured truck is in a multi-car accident that was caused by the insured driver, and that people in the other vehicles were severely injured. This insured driver has $1,000,000 primary coverage and a $5,000,000 Umbrella. In court, the verdict showed that the insured driver was responsible for losses totaling $4,000,000, which is due to be awarded to the plaintiffs. In this case, the primary policy would respond with the first $1,000,000 and the Umbrella would pay the remaining $3,000,000.

Another example could be a manufacturer of a food product that was found to be contaminated, causing multiple injuries. While the primary and Umbrella liability policies would not pay for the product recall, they would pay for the Bodily Injury to the claimants. These types of losses often result in multi-million dollar judgments.

Q: What is *Not* Usually Covered by Umbrella Policies?

Professional Liability is usually not covered by Umbrella policies. Instead, policyholders will often purchase a primary Professional Liability policy and a separate Excess Policy. The same thing holds true for Directors & Officers Liability and Cyber Liability insurance.

It's important to remember that the information and examples contained in this article are only generalizations that are designed to familiarize readers with the nature of Umbrella insurance policies. The exact situations covered by Umbrella policies will vary by insurer and individual policy terms, and it is important to perform due diligence before agreeing to any policy purchase.

Whether shopping for commercial or individual coverage, choosing the right Umbrella policy for your needs is critical in case the worst should happen. OneDigital's Property and Casualty practice can help you navigate the specific requirements in your state and recommend the level of coverage that best suits your industry. Connect with a member of our team today to ensure you are protecting both your employees and your business.

Commercial Umbrella insurance can offer protection that goes beyond your general liability policy. Discover how Workers' Compensation insurance can also help to shield your team and business from risk.