Personal Excess Liability or “Umbrella” insurance coverage is a vital element of personal insurance programs and one of the best values in insurance, yet many people do not avail themselves of this important protection. Or, if they do, they do not have appropriate coverage limits or are not with a well-suited insurance carrier. Here’s a rundown on this all-important umbrella protection.

What is Excess Liability Insurance?

As its name suggests, this is insurance that provides liability coverage “in excess” of your primary liability policies, such as for your home, auto or watercraft. Primary liability policies respond first against claims by third parties. Once the limit of the underlying primary policy is exhausted, the excess liability coverage kicks in.

How much does it cost?

The reasonable cost for high limits of coverage makes excess liability coverage the best value in personal insurance. For umbrella policies up to $10 Million in coverage limits, annual premiums generally cost in the range of $220 to $225 per Million, depending on the client’s particular underwriting profile. So, the estimated annual premium cost for a policy with a $5 Million coverage limit would be approximately $1125.

How does it work?

Here’s an illustration. You are involved in a serious auto accident and your auto policy has coverage limits of $250K per person/$500K per incident. If you have an excess liability policy, it will pay any covered claim that exceeds your primary coverage limit.

Assume you have a $5 Million umbrella policy and your lawyer has negotiated a settlement payment from the accident of $4 Million. The umbrella policy will cover the amount that exceeds your $500K primary policy limit, namely $3.5 Million.

To be complete, a wealth management plan must include an appropriate level of personal excess liability coverage. Without the umbrella policy in the example above, the auto accident would reduce your personal net worth by $3.5 Million.

What is the state of personal liability risk in society today?

A phenomenon known as “social inflation” has caused a surge in high-value jury verdicts and settlements in personal injury lawsuits. Potential sources of liability include teenage drivers, dog ownership, swimming pools, home entertaining, domestic employees, social media and online activities, board membership and renting out your property. Damage claims by third parties are not limited by your ability to pay or personal net worth.

Why do many successful people have insufficient umbrella coverage?

Many people who have accumulated wealth and assets seek out top wealth management and investment advisors, yet they may not follow the same approach with their insurance program including their personal excess liability coverage. Remarkably, market research shows that most high-net-worth and even ultra-high-net worth individuals do not have their wealth and assets properly covered with appropriate excess liability coverage.

One reason may be that they remain with their legacy middle market insurance companies for decades, which in general do not offer higher coverage limits. In short, if you are wealthy and have your insurance with a company that regularly advertises on television, you will most likely be underserved on umbrella coverage.

In other cases, a client may have remained for many years with an insurance agent or broker who is not sensitized to the client’s wealth accumulation or does not have access to the best insurance markets for this important coverage.

How are legal defense costs treated?

This an important factor that varies among insurance carriers. The policy language of carriers that cater to successful people generally treat legal defense costs as being outside of your excess liability coverage limits. This can be vitally important, as a protracted litigation could generate seven-figure legal defense costs. You are certainly better served if those costs are paid without eating into your coverage limit.

Questions about your policy? Wondering what your excess liability limit should be? We’re here to help. Please contact the KLR Wealth Management team or your advisor for an introduction.

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