Umbrella Liability Insurance: Why High Earners Review It Each Year

Umbrella liability insurance is extra coverage that applies after the liability limits on a home or auto policy have been used. High earners often review it because a serious claim can exceed the limits on the underlying policies.

How an umbrella policy works

A personal umbrella policy provides additional liability coverage above the limits of underlying policies, such as homeowners, auto, boat and recreational vehicle liability. When a covered claim is larger than the underlying limit, the umbrella pays the excess, up to its own limit. Umbrella limits are commonly sold in increments of $1 million. The policy generally also responds to certain claims that the underlying policies do not cover, usually after the policyholder pays a stated retained amount. Whether the cost of defending a claim reduces the limit depends on the policy wording.

When a claim is made, the underlying insurer generally defends it and pays up to its own limit first. The umbrella insurer becomes responsible once the underlying limit is used, or earlier for a claim the underlying policy does not cover. Umbrella policies commonly require prompt notice of an occurrence that could reach the umbrella layer, so a policyholder may need to notify both insurers, and the policy conditions describe how and when.

What an umbrella commonly covers

Umbrella policies cover liability for bodily injury and property damage that the policyholder or a household member is legally required to pay. Typical claims arise from an auto accident, an injury to a guest at the home or on the grounds, or damage caused by a household member’s use of a boat or other vehicle. Many policies also cover personal injury claims, such as libel, slander and invasion of privacy. Coverage generally extends to the named insured, to relatives who live in the household and sometimes to others who drive a covered vehicle.

What an umbrella usually does not cover

Exclusions vary by insurer and by policy form, so the written policy controls. Common exclusions include business activities and professional services, which are usually insured under separate commercial or professional liability policies; intentional or criminal acts; damage to the policyholder’s own property, which a property policy covers; liability assumed under certain contracts; and specific items an insurer excludes or limits, such as certain dog breeds, rental properties or watercraft, unless they are disclosed and added.

Underlying limits and premiums

Insurers typically require minimum underlying limits before they will issue an umbrella, such as a stated bodily injury limit on each auto policy and a stated liability limit on the homeowners policy. If the existing limits are lower, the insurer may require them to be raised first. Some insurers offer a lower premium when the umbrella and the underlying policies are placed with the same company, and others do not, so the structure varies. Premiums depend on the amount of coverage, the number of drivers, vehicles and properties, the household’s claims history and the insurer. Premiums for a personal umbrella policy are generally a personal expense and are not deductible on the federal return.

How Texas law relates to the question

Texas gives homestead property strong protection from most creditors under Article XVI, Section 50 of the Texas Constitution and Chapter 41 of the Texas Property Code, and current wages are generally protected from garnishment under Article XVI, Section 28. These protections have exceptions, they depend on how and where property is held, and they do not prevent a lawsuit or the cost of defending it. Other assets, such as investment accounts, non-homestead real estate and business interests, may be treated differently depending on the claim and the type of account. Whether state law changes the amount of coverage a household wants is a question for an attorney and a licensed insurance professional.

Points that shape the amount

• Total assets and expected future income, and how much of each a judgment could reach.
• Specific exposures, such as a swimming pool, a dog, a teen or young adult driver, rental property, watercraft, frequent hosting or service on a nonprofit board.
• Whether the underlying auto and home limits meet the insurer’s requirements.
• Whether the policy covers every property, vehicle and household member, and how it treats additions after the policy begins.
• Whether business activities and professional services are covered under a separate policy.
• Whether the limit applies to each occurrence or in total across the policy period, which the policy declarations state.
• How the retained amount for claims not covered by the underlying policies compares with the household’s cash reserves.
• Changes since the last renewal, such as a new home, a new driver, a change in net worth or a new rental property, since the review is repeated each year.

Only a licensed insurance professional can explain what a particular policy covers and costs. Your adviser can help you list what you own and earn, which is where that conversation usually starts.

This article is provided by Austin Wealth Management for general educational purposes only. It is not financial, investment, tax or legal advice, it does not consider your individual circumstances, and it does not create an advisory relationship. Austin Wealth Management provides advice and services only under a signed advisory agreement, and the terms of that agreement govern. Rules and limits change, so information here may not be current. Consult a qualified financial professional before making financial decisions.