Why Get an Umbrella Policy?

Next in a series on insurance, this article is about why we should get an umbrella policy, what is it, what can it do for us, and how much should we get.

What is umbrella insurance? Umbrella insurance is extra insurance that provides protection beyond existing limits and coverages of other policies. Umbrella insurance can provide coverage for injuries, property damage, certain lawsuits, and personal liability situations.

Randy Karp from Karp Insurance Services explains.

An umbrella policy is good to protect those who have - even reasonable assets or they’re making a good income. The policy coverage is going to go over your life, over your auto, and your home insurance, and over your rental properties up to 8 units. It gives you an additional million dollars up to an additional 5 million of coverage.

And for the longest time liability limits were $100,000 per person and $300,000 were deemed as sufficient. Now I am seeing more clients go to 250 and 500 thousand dollars of coverage.

Why get higher coverages? If you seriously injure a high net worth individual or somebody who’s making a substantial income, having a $250,000 insurance policy isn’t that significant.

So an umbrella policy is still only a couple hundred dollars a year for a million, and two to three hundred dollars a year for a million dollar policy. So in the case of the outer, it would give you $1,250,000 for an injury claim. So let’s say it costs $250/year. I think it’s well worth it money wise.

Clara-

One of the things that I always tell my clients is it’s better to be prepared and prevent problems instead of coming back and trying to fix them when the problem is there already. So if you are versed in this ahead of time, it’s so much better to be preventive.

Rentals: So now what about for people who are renting let’s say I have a number of clients who own income properties and some of them are single family residences.

Some are duplexes. How much insurance should they be getting?

Randy - 

We’re going to be talking from a liability standpoint.

Well the way these claims typically work is that let’s say somebody suffered significant injuries. And let’s say you have that 1 million dollar umbrella.

Okay, 1 million dollar umbrella typically goes over and above the three hundred thousand dollars of liability coverage.

So it gives them a total of 1.3 million dollars.

Imagine somebody gets seriously hurt or passes away inside the unit due to supposed negligence of the landlord, then the insurance company will step up and say hey, we view this as a maximum limits policy. The insurance company may say: We’re ready to sign - to give you a check for 1.3 million dollars right now, but you have to release us of all future claims.

Most of the time, people will accept that and walk. But again, if you’ve got somebody who’s worth ten, fifteen, twenty million dollars, then they should probably just go and get a five million dollar umbrella because I’m seeing five million dollar umbrellas running around 900 to a $1,000 a year.

So if they’re worth 5 million dollars, get a five million dollar umbrella just to be on the safe side.

Clara - 

So basically, get a policy that’s sufficient to cover the assets that the person would have.

Randy - 

Ideally, that is going to be the best way to approach it. Barring that though, get a least a million dollar umbrella because again, the adjuster is going to be willing to write them a check for that full amount. In the case of a serious liability claim, most people won’t walk away from 1.3 million dollars and sue them in court and go through that.

Clara - 

That’s true. And there’s so many cases that are resolved way before litigation, but still it’s so much better to avoid it altogether.

Randy -

And it’s a feeling of security. I mean, let’s face it. For example, there’s a major liability situation at one of the units you own and you’re sitting with five million dollars of liability coverage, you’re feeling pretty comfortable that they’re not going to try to attack and attach everything that you’ve got. Five million in today’s market is still a lot.

Clara -

Insurance for Tenants: How much they should be getting?

Randy - 

Well, that’s a nice thought but most landlords especially smaller landlords don’t want to deal with seeing if the policy is renewed, staying in force and so forth.

If you have a property management company, then they’re usually more on top of that situation. But as a tenant I think most tenants don’t even realize that they have a liability exposure because let’s face it: Let’s say you accidentally cause a grease fire and it does a bunch of smoke damage to the unit.

I mean you can you can be on the hook for that.

And if you say well I’m just going to walk away and it’s the landlords problem, guess what?

That person who has been leasing that unit is not going to have an easy time finding another landlord who will just accept them because it’s going to be on their credit report.

Clara - 

And then here’s the other thing too: If there is a claim against the tenant even if the tenant doesn’t pay it they’ll have a judgement. And there could be attaching of their wages and things like that. And I’m sure it’s certainly something that the tenants don’t want to deal with.

So what would be a good policy for a tenant to obtain?

Randy - 

Well, it’s super cheap - like with Mercury on a multi-line basis, you know, so we’re handling the outrun renter’s insurance policy.

I wrote a renter’s insurance policy with a $500,000 of liability and $25,000 for contents and that was $154 dollars for the year.

That’s a multi-line client. That’s not a standalone client. But yeah, you can see the premiums are like nothing.

And so many people reject it but as you’ve said before, you have to prepare in advance because you don’t know what’s going to happen six months or a year from now and then why do you want to take a chance on having judgement put against you?

Check our first article on insurance. What You Don’t Know About Insurance Can Hurt You . Randy works with Mercury Insurance, but feel free to check out other providers: State Farm, Farmers, AAA, and if you’re with the military or their family, there’s USAA.