Understanding Umbrella Insurance

What is Umbrella Insurance?

There may be somebody out there like me who may be wondering about what the umbrella insurance means and what it covers. The first time I heard about umbrella insurance, I was totally at sea. At least I had little understanding of different types of insurance. I understood that auto insurance is the insurance policy you buy to provide coverage for certain incidents involving your car. I understood that homeowners purchase home insurance to protect their home property. I also understood that renters do buy renters insurance to protect their belongings.

The question now is, Why umbrella insurance and not television or refrigerator insurance? “These insurance companies will always have one product to sell whether it makes sense or not.” Those are the thoughts that were going on in my mind then. I just took umbrella insurance literally to mean buying an insurance policy to provide coverage for umbrella. I guess you are already laughing. I know this is actually funny but that was my thinking then. However, I was very curious. What will make somebody insure an umbrella out of all other valuable assets that a person has? Is it a special umbrella? All these thoughts propelled me to wanting to know about umbrella insurance. So, if you don’t understand the meaning of umbrella insurance, you are alone. But before you are through with this article, you will have a basic understanding of the insurance term.

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Meaning of umbrella insurance

Umbrella Insurance or is the term used to describe the insurance policy that you buy to provides additional liability coverage above the underlying coverage. It protects the assets and future of the insured against major claims and lawsuits. Umbrella insurance is broader than excess liability insurance in the sense that, it does not only provide extra coverage over the limit of the underlying coverage. It also provides additional coverage which are not covered under in the underlying coverage. Example of such coverage includes false arrest, libel and slander, defamation of character, malicious prosecution and false arrest or imprisonment.  However, you need to understand that you cannot buy umbrella insurance except you have bought a specific type of insurance such as auto insurance, homeowners insurance or watercraft liability insurance. It is not a stand-alone insurance. The essence of this insurance is to provide extra protection beyond what your existing insurance policies already cover.

How does umbrella insurance work?

In order for you to fully understand how umbrella insurance works, I will like to illustrate it with an example. Let’s assume that your existing auto insurance policy provides coverage up to the maximum of $500,000. And you get involved in an accident which led to the damage of someone’s property that leads to a liability of $900,000. What this means is that your car insurance policy will only reimburse you to the tune of $500,000. You will then need to pay the remaining balance of $400,000 from your own pocket. What happens if you don’t have this amount? The owner of the property can sue you and you will need to pay him the balance and other legal charges. That is very costly. Even if you have the money to pay, I can tell you that it is still very costly. But if you have umbrella insurance, the policy will help you pay the balance of $400,000 which the underlying coverage could not pay. How umbrella insurance works is that, it sets in after you have exhausted the maximum limits that your underlying insurance policy provides. It is actually useful for people that have valuable assets which they don’t want to lose. Even if you don’t have valuable assets, the insurance can help you escape liability arising from large lawsuits if you are found guilty. Also, the amount of premium that will provide coverage of $1 million is not that expensive.

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The truth is that, if you know that you need insurance coverage, you might equally need umbrella insurance. The normal insurance policies provide you limited coverage. But umbrella insurance will not only provide extra coverage; it also provides extended or expanded coverage which may not be available under the underlying policies. Therefore, whatever is worth doing at all is worth doing well. The extra few dollars you will pay to buy the policy is worth the benefits you stand to enjoy.

One thought on “Understanding Umbrella Insurance

  1. Great topic!

    It’s totally worth paying for umbrella insurance if you’re a homeowner and get any work done by contractors. I’ve heard of people losing their shirt (and their home, and their stash) due to accidents others have had on their property.

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