Understanding Umbrella Liability
By
David B. Gordon, CLU


The following article discusses the reasons why a business or building insurance package policy is not enough. In today’s litigious society, far-fetched possibilities of suits become realities every day.

What an Umbrella is:

An umbrella is a policy that is designed to provide LIABILITY protection above and beyond your UNDERLYING insurance policies. It not only adds additional amounts of coverage in case the claim goes over the amount of your other insurance, but it can also add coverages which may not be covered elsewhere. More on this in a moment.

There are commercial umbrellas and personal umbrellas. They rarely overlap. If you have personal exposures such as cars and homes you would need a personal liability umbrella. If you own commercial exposures such as apartment or office buildings, businesses, etc, you would need a commercial umbrella even though you may have a personal umbrella. An umbrella can cover any number of businesses, buildings, vehicles, etc. for the same owner.

What an Umbrella is not:

An umbrella does not provide property coverage for building or contents. Don’t confuse it with “blanket” coverage, which is to provide PROPERTY coverage for several buildings or locations under one policy. An umbrella does not provide any PROPERTY coverage whatsoever.

It does not replace the underlying insurance you have for your cars, homes, buildings, businesses, etc. It adds to them. You must carry some amount of underlying liability on each property or vehicle covered by the umbrella. That minimum amount varies by the company issuing each umbrella and also varies based on what the underlying exposure is, i.e. a car, home, business, boat, building, etc.

Umbrella Basics

I already have an apartment package with liability, why do I need an umbrella?

A. Following form or “Excess” Umbrella Vs True Umbrellas

A “Following form” umbrella, sometimes referred to as “Excess policy” only adds coverage above the existing perils covered by your basic policy.

A true umbrella can not only provide an additional layer of liability coverage when your policy runs out; It can actually provide coverages that your underlying policy does have.

Example: You are sued for discrimination in not renting an apartment to an applicant. Most apartment building packages exclude liability due to discrimination. A “following form” umbrella would not cover you either because it covers ONLY what the underlying policy does. It would, for example, add another $1 million or more of liability if your tenant tripped and fell on the stairs leading to their unit, but would not cover any peril not already covered under the apartment package policy.

A true umbrella on the other hand, says that it covers any bodily injury, property damage liability or personal injury unless it is specifically excluded in the umbrella policy. Since discrimination is not typically excluded in a “True Umbrella Form”, you would have coverage for the discrimination.


B. Underlying Coverage Requirements

All umbrellas have requirements that an “underlying” policy be in force to pick up the first layer of liability. Commercial umbrellas usually require that there be $1 million of liability on all business vehicles, businesses and buildings. An umbrella is designed and priced with the understanding that it will not cover most losses until the underlying policy limits are exhausted.

Some carriers require the underlying coverage to be with them while others will write an umbrella over any “A” rated carrier, allowing you to keep the auto, home or commercial carrier of your choice.

C. Self Insured Retention

This is the amount (much like a deductible) that you would have to pay towards a claim before the umbrella would pay. It typically only comes into play when there is a claim, which is not covered by the underlying insurance. Personal umbrellas rarely have any self-insured retention. Commercial umbrellas range from $0 to $10,000 or more self-insured retention so it’s important to keep this in mind when comparing.

One of my favorite umbrellas is the Chubb umbrella because it is a true umbrella form (includes things such as tenant discrimination) and has no self-insured retention. In the discrimination example above, it would be covered with no deductible. A following form or “excess” umbrella such as the one State Farm and many other companies sell, would deny coverage because as it was not covered by the underlying policy.

D. What amount of umbrella do you need? How much can you buy?

The limit you need is difficult to ascertain because your risk of suit increases with your net worth, your earnings, whether passive or active, and your exposures. So a young professional earning a high income would be a target for a suit as much as someone who had a high net worth because the earnings could be attached for years to come.

A rule of thumb that I follow, is to suggest that you carry at least as much liability as your net worth plus some excess to account for your earnings capacity if applicable. Liability is cheap. This is not the place to scrimp on your insurance plan. You can often save enough money on just a slightly higher property deductible to pay for some or all of your umbrella. The liability protection is a much better use of your premium dollar.

Personal and commercial umbrellas are usually available in amounts up to $50,000,000 although you may not find this type of limits under the direct writer companies such as State Farm, AAA, Farmers, Allstate, Geico, etc. You would need to go to specialists in the umbrella business such as Chubb, Cigna, Fireman’s Fund or some of the other quality companies that have specialty departments for their umbrellas.

E. How much should I expect to pay for an umbrella?

This will vary widely from company to company. Typical costs for a personal umbrella coverage two cars and a home for $1 million over the underlying policies would be about $200 to $400 per year, depending on driving records, etc. A commercial umbrella covering several apartment or commercial buildings for $1 million would be about $750-$1000 for the first million and $500 per additional million.


Some Final Thoughts

Be sure to keep in mind the important differences discussed above when shopping for umbrella:

• Is it a true umbrella or a following form umbrella?

• If you ask about a hypothetical claim and are assured “it’s covered”, be sure to see where it says so in the policy or get it in writing! Too many dollars have been lost and relationships ruined because of verbal misunderstandings.

• Compare the underlying requirements. Policies with higher underlying requirements SHOULD be less expensive than those with higher requirements, because they don’t kick into action until a higher threshold is reached.

• Does the umbrella allow you to include all of your exposures rather than having various umbrellas for various buildings or businesses you own?

• Compare the self-insured retention. You would be in much different shape with a $10,000 self-insured retention vs.. a $0 self-insured retention. You should pay less for the former. This is usually not an issue with personal umbrellas where the self-insured retention is commonly $0.

• Lastly, be sure that the insurance company has a high rating from AM Best and the other rating companies as well as a good reputation in the industry. Go to www.ambest.com or www.moodys.com, for example. You should accept nothing less than an “A” rating for an umbrella.

David Gordon has been providing commercial and personal insurance products to Bay Area residents since 1981. As an independent broker with one of the largest consortium in the state, he can provide quotes from over 100 of the nation’s largest insurance companies.

Brokers represent the client; agents represent the insurance company.
Mr. Gordon can be reached for questions at 877-877-7755 or 650-654-5555. dgordon@gordoninsurance.com