Umbrella Insurance Policies: Why You Might Want That Extra Protection

Dan Ramsey, an independent insurance agent with Brandt, Ramsey and Associates in Alexandria, Va., says the most memorable claim on an umbrella insurance policy he was involved in was made by a small business owner who had purchased a $2 million policy.

"After attending a Christmas party, my client got involved in a fatal auto accident where the other driver was killed," says Ramsey. "My client was given a breathalyzer on the scene and exceeded the legal alcohol limit. He was sued for something like $1.25 million by the claimant's family and was legally liable for the damages, which were paid by the umbrella policy. The client was otherwise an upstanding citizen with no past history of these kinds of events."

Protection Beyond the Usual

While its easy to assume that only a rich person could need that much insurance coverage, you'd be surprised at how important an umbrella policy can be for an average member of the middle class. For example, if you have a car insurance policy with liability coverage, you may think you have enough protection in case of an accident. But a lawsuit like the one described above could quickly exceed the $100,000 or $300,000 insurance payout.

An umbrella policy provides an additional layer of insurance, typically $1 million or $2 million, above your auto insurance and your home insurance liability coverage. Consider the following scenarios where an umbrella policy would have been helpful:

• A $1.2 million settlement in New Jersey where an underinsured driver hit a policeman who was completing paperwork at a traffic stop. The driver had to pay legal fees for his defense as well as the settlement.
• $1.76 million was awarded to a mother and her 8-year-old child in Florida after a wave runner accident injured both of them. The mother needed corrective surgery after the initial injuries were treated.

Although 85 percent of umbrella insurance claims are related to car accidents, the policies offer protection against accidents that occur at your home, too -- for example, in case someone falls down your stairs and sues you, or your balcony collapses during a party. Many people opt for an umbrella policy because they have a pool or a trampoline on their property and fear the consequences of a child getting injured.

 Then there's coverage for incidents you may not have even considered, such as accidents while you're driving in another country, or while you're on vacation and have rented a boat or Jet Ski.

• $300,000 per occurrence for personal liability, bodily injury, and property damage liability on your homeowners insurance policy
• $250,000 per person for bodily injury and $500,000 per accident on your car insurance policy
• $100,000 per accident for property damage on your car insurance policy

The average cost for a $1 million policy is $200 annually -- which you might find a relatively low price for the peace of mind and security it offers.

Michele Lerner is a contributing writer for The Motley Fool.

http://www.dailyfinance.com/2013/07/05/umbrella-insurance-policies-extra-protection/