Personal Umbrella Insurance Unpacked: How Umbrella Coverage Can Help Protect Your Personal Assets

As an accounting professional managing others' finances, you appreciate the importance of safeguarding your financial assets. Be aware that in addition to professional liability, CPAs also face a host of personal and lifestyle risks. From unforeseen personal liability claims to unexpected legal battles, the financial repercussions can be substantial, and your personal assets may be at stake. Are you prepared?

With the added protection of a personal umbrella insurance policy, you can be better equipped to help safeguard your assets in the face of a personal liability lawsuit. So, what exactly is umbrella insurance, and do you really need it? We’ve broken down this type of coverage to help you make an informed decision.

What is Umbrella Insurance?

You likely already have insurance coverage for big-ticket items, like your homeowners policy, auto policy, or boat coverage. But in the event of a calamitous lawsuit, your standard policies may not be enough to protect your valuable personal property. Umbrella policies extend your coverage and provide an extra layer of protection, while also adding new coverage for events like false arrest, libel, slander, or rental property damage. Umbrella coverage is triggered when someone brings a liability claim against you that goes beyond the limits of your existing insurance policies.

What Umbrella Insurance Covers

Umbrella coverage kicks in once the coverage from your standard policies has been exhausted, or in the case that they exclude a situation that your umbrella policy covers. Coverage from an umbrella policy may include:

• Bodily injury or harm caused to another person due to claimed actions or negligence
• Non-physical personal injury, including slander, wrongful entry, or invasion of privacy
• Defense costs for legal proceedings related to the case, including attorney fees and court costs
• Landlord liability coverage if something happens to a rental tenant on your property
• Repairs or replacement for property damage caused by your actions or negligence
• International coverage for incidents that occur outside the U.S.

What Isn’t Covered

While umbrella coverage is critical in helping maximize your protection after a covered incident, it may still leave areas of vulnerability. Here’s what is typically not covered by umbrella policies:

• Most personal losses, including expenses for your own medical bills or property damage
• Business-related liabilities, even if you work at the location where the incident occurred
• Damages caused by criminal and illegal actions
• Claims that can be covered under Workers’ Compensation
• Liabilities assumed under contract, whether written or verbal

How Do I Know if I Need Personal Umbrella Insurance?

First, consider your lifestyle risks. In your personal life, you face risk exposures that can lead to significant financial liabilities.

• Personal Liability: Accidents can happen anywhere, and you may find yourself liable for incidents that occur on your property, such as a guest slipping and falling. Umbrella insurance can cover legal fees and settlements that exceed your homeowners' insurance limits.
• Automobile Accidents: Despite safe driving habits, you can be involved in serious car accidents that result in significant injuries or damage. If costs surpass your auto insurance coverage, umbrella insurance may cover the excess liability.
• Recreational Activities: Owning recreational vehicles like boats or snowmobiles, or having recreational activities on your property like swimming pools, can increase the risk of accidents, which may lead to significant financial liabilities.
• Defamation, Libel, and Slander: In today’s digital age, social media interactions and public statements can sometimes lead to defamation lawsuits. Umbrella insurance can help cover the legal costs and damages of such claims.
• Property Damage: You may face potential claims for accidental damage to others’ property. Umbrella insurance can help cover the cost of damages and associated legal fees.

Umbrella insurance is an essential defense that provides an extra layer of liability coverage beyond your standard homeowners, auto, or other primary personal insurance policies. It helps protect your assets and wealth from the potential financial downfall resulting from such incidents or lawsuits.

Who It’s For

Personal umbrella insurance is beneficial for individuals with significant assets that exceed the liability limits of their existing policies. Umbrella policies are also recommended if these high-net-worth individuals also:

• Own homes, boats, or other watercraft
• Own rental property
• Have high-risk features on their property, such as swimming pools or dogs
• Host frequent social events at their homes
• Have teen drivers at home
• Participate in high-risk hobbies and activities
• Serve on boards, including HOA and condo associations
• Maintain a public persona active on social media

How It Works

If a covered incident occurs, there are several steps you would need to take before your umbrella policy kicks in. Here’s the general process for receiving coverage after an incident:

1. First, file a claim with your primary insurance provider.
2. Your standard policy will be the first to pay on covered claims, up to your policy limit.
3. Once those liability limits are exhausted, your umbrella insurance comes into play.
4. Notify your umbrella carrier or insurance agent. Be sure to have your claim number and documentation showing your standard coverage has been exhausted.
5. Work with the assigned adjuster to determine what the umbrella policy will pay of the remaining costs.

An easy way to remember the basics is this: primary insurance pays first; umbrella insurance pays the rest.  A key advantage of umbrella insurance is the higher liability coverage limits it provides, meaning it’s likely to cover the remainder of your costs once a claim is approved.

How Much Coverage Do I Need?

The amount of personal umbrella coverage you need will vary based on many factors. Most often, you want to ensure that the policy is equal to your net worth, plus has enough to cover future income that may be lost. For standard homeowners with a lower risk profile, that may mean a policy around $1 million. For policyholders with higher net worth, a larger income, and a riskier lifestyle, they may choose a policy of $3-$5 million or more.

To calculate how much umbrella coverage you may need, start by understanding your high-dollar assets. Add them all up, then take out any debts you have. This is your basic net worth. Next, calculate five times your annual income to predict potential future losses. Consider your lifestyle and assess your risks. The higher the risk level, the higher the policy limits should be. Check for assets that may already be covered, like 401(k)s or retirement plans. Finally, talk to your insurance agent or a financial advisor for an expert recommendation on coverage limits.

Understanding Minimum Liability Limits

No matter how much umbrella coverage you think you need, you first need to meet the minimum liability limits on your standard policies before you can qualify. The minimum liability limit is the least amount of coverage you can have on your homeowners, auto, or other insurance policy to get approved for an umbrella policy. These limits are often higher than what you might typically consider for a standard policy, generally between $250,000-$500,000. An umbrella insurer may also require liability limits on other types of relevant underlying policies, like RV coverage or boat coverage.

Factors Impacting the Cost

The cost of umbrella insurance is influenced by several factors, including the level of coverage chosen, personal assets, and liability risks. You can also potentially reduce your premiums by increasing your deductible and maintaining a good credit score.

Choosing a Policy

Deciding on an umbrella insurance policy requires consideration of coverage limits, policy exclusions, and claims handling. It’s advisable to speak to a professional risk advisor to help determine the appropriate level of coverage based on your risk profile and lifestyle exposures.

• Coverage limits depend on your current assets and potential lifestyle risks.
• When choosing an insurance provider, seek one with strong financial standing and a proven history of providing reliable coverage.
• Look for a provider that has a history of efficient and effective claims handling

As you evaluate your financial portfolio, consider investing in an umbrella insurance policy as a strategic step to help strengthen your financial resilience, protect your hard-earned assets, and gain peace of mind for the future.

Claims Scenarios in Which Umbrella Coverage Could Help

Most claims covered by personal umbrella insurance aren’t connected to the individual’s profession or business ventures. However, CPAs and other professionals with higher net worth may find that carrying an umbrella policy is a valuable way to protect their assets and their reputation. Here are some hypothetical scenarios in which this type of coverage could be beneficial:

• You own a rental property and one of your renters slips and falls on the front porch, leading to serious bodily injury and ongoing medical bills.
• Your child is a teen driver and causes a multi-car crash with injuries. Your auto insurance won’t cover the total amount owed to the involved parties, but your umbrella policy will take care of the rest.
• Your dog bites a child, whose parent is forced to take time off work to aid in their recovery. The umbrella policy will kick in after your liability limit is exhausted to cover the lost wages.
• You are well-known in the public eye, and a recent social media post has led to a lawsuit for defamation. Umbrella coverage can help cover the court costs and legal fees.

Personal Umbrella vs. Excess Liability Insurance: What’s the Difference?

The primary difference between personal umbrella coverage and excess liability insurance is this: excess liability simply means that you’ve increased the liability limit of a single policy (e.g., homeowners or auto coverage), while an umbrella policy sits over all your underlying policies and pays out the rest of your approved costs once your individual policies have been exhausted. Additionally, umbrella policies cover other types of claims that standard policies may not, like libel, defamation, or invasion of privacy.