The personal umbrella policy is flat out the
best value in the insurance business—$1 million of insurance coverage for under
$200 a year. Additional millions are available for less than $100 a year. Most
people buy an umbrella policy for its excess coverage, including defense costs.
It has, however, far greater value as a risk management tool than just excess
by Jack Hungelmann
4 Insurance Agency, Inc.
A properly chosen personal umbrella policy is the single best tool available
to plug liability coverage gaps that fall outside the scope of underlying auto,
homeowners, and other personal policies. Determining what those insurance gaps
are for each client and then recommending to your client an umbrella policy
that provides step-down primary coverage for each of those uninsured exposures,
subject only to the self-insured retention (SIR), is one of the most important
functions of personal risk management.
What makes this task particularly challenging is the lack of consistency
among umbrella policies. Unlike most personal auto and homeowners policies,
which are fairly comparable, umbrella policies vary dramatically in the scope of their coverage. Other than the
territory of coverage being broadened to worldwide, the scope of umbrella coverage
is defined primarily through exclusions in the policy or exclusions in attached
Here are some examples taken from my own client files of coverages normally
excluded by primary policies that are available with the right umbrella policy.
As you look at each of the following coverages, remember every single one will
be provided by a personal umbrella policy unless it's specifically excluded.
Coverage is provided for clients who have no personal auto policy of their
own and thus have no automatic coverage to drive non-owned cars (they either
have no automobiles at all or only have a vehicle furnished by their employer).
For someone in this situation, since underlying drive other car or named non-owner
coverage is either expensive or unavailable, it is best and most economical
to choose an umbrella policy that will provide step-down coverage subject only
to the self-insured retention. About half the umbrellas I've looked at do provide
step-down or drop-down coverage. If you're successful in avoiding the need for
underlying coverage, the money you have saved your client will generally more
than pay for the cost of the umbrella policy for an entire year!
This coverage is especially good for clients who neither own nor drive their
own car (often elderly or disabled people), but who receive rides through the
generosity of their friends or family members to shop, see doctors, etc. Under
principal-agency case law, these passengers can be sued and held liable for
accidents caused by their drivers because the car that caused the accident was
on the road for the sole benefit of the passenger. Here again, it's important
to choose an umbrella policy that does not require underlying insurance for
For those who are either furnished or have access to a company vehicle and
occasionally have coworkers as passengers, this coverage is desirable. If the
driver's negligence injures a coworker, the business auto policy usually excludes
coverage for "fellow employee" lawsuits. The driver's personal auto policy excludes
coverage for vehicles "furnished or available for regular use." If underlying coverage is required by the umbrella, the extended
non-owned endorsement needs to be added to the insured's personal auto policy,
naming all drivers.
This provides coverage for bodily injury and property damage primary liability
when renting cars abroad. The territory of the personal auto policy is the United
States and Canada only. The territory of most personal umbrellas is worldwide.
Thus, step-down coverage is provided without underlying insurance requirements.
This covers damage you cause to a car you rent or borrow, which is excluded
by the "care, custody and control" exclusion of the personal auto policy. Granted,
under most personal auto policies, your collision coverage will transfer on
an excess basis to a rental car, but only if you have collision coverage on
at least one car. And again, there is no coverage outside the United States
and Canada. The right umbrella policy will cover collision damage you cause
to a rented or borrowed car on a primary basis and worldwide, subject only to
the self-insured retention.
This covers the obligation you assumed when you signed the contract to defend
and pay any judgment against the rental car company, even if you weren't personally
driving the vehicle! (An example would be renting a vehicle on a business trip
with a coworker where you sign the rental contract solely, and the coworker
causes the accident with injuries. In this case, your obligation is to defend
and pay judgments against the rental company even
though you had nothing to do directly with the accident.
This provides coverage for damage to rental cars that you did not personally
cause but for which you have agreed contractually to be liable under a rental
contract (i.e., hail damage, theft, etc.)
Bodily injury and property damage liability coverage is provided while operating
hired or borrowed boats that are not covered by primary homeowners liability
coverage (i.e., 30-foot sailboats, houseboats, sometimes jet skis, etc.).
Covers damage to non-owned watercraft either caused by you or for which you
have agreed to be responsible under a rental contract.
Covers your liability to reimburse a rental agency for the lost revenues
from a boat that you had rented that you returned damaged.
This covers your liability for bodily injury and property damage to others
when chartering an aircraft with or without crew. (Does not cover your legal
liability for damage to the aircraft hull. This coverage is only available through
the rental agency.)
Covers the liability for renting or borrowing these vehicles, none of which
normally are covered by primary policies. The properly chosen umbrella will
step down to the self-insured retention and not require primary underlying coverage.
Covers damage you cause to rental units
as well as all other damage you didn't cause
but for which you agreed to be responsible under the rental contract (i.e.,
weather-related claims). The umbrella policy, I think, is an excellent policy
to avoid the nasty care, custody, and control exclusion for damage that you
cause to non-owned property or are contractually responsible for. Choose an
umbrella that provides step-down coverage with no underlying insurance required.
Coverage is provided for liability for property damage and cleanup costs
arising from the in-ground or below-ground heating oil storage tanks. Homeowners
policies, of course, exclude pollution liability claims.
This covers your liability for injuries to those coming on to your premises
for business purposes, such as a courier bringing a package from your employer,
who falls on your premises and sues for their injuries. Homeowner policies completely
exclude business-related lawsuits. These are people that either have home businesses
or bring business home to work.
This exposure exists for probably half the households out there, and is one
of the most commonly overlooked exposures when I review homeowners policies
for new clients. (Be careful with this coverage under the umbrella policy. Sometimes
it's provided only if there is underlying coverage on the homeowners. But sometimes
even if underlying coverage is added to the homeowners, the umbrella will not extend unless you ask for and pay for
additionally a separate incidental office endorsement to the umbrella policy!)
For clients with domestic workers (nannies, handyman, personal care attendants),
this exposure is completely excluded by underlying policies. It is available
through some umbrella policies—sometimes requiring underlying primary coverage
or sometimes as a free-standing coverage not requiring underlying coverage at
all, subject only to the self-insured retention.
This covers bodily injury, property damage, and personal injury claims against
you arising out of your volunteer services on a nonprofit board (i.e., church
councils, charities, condominium associations, etc.). An example of such a suit
would be if a child drowns in the indoor association swimming pool after hours.
The board of directors failed to require that the entry door be locked at all
times, and a lawsuit against board members results. An umbrella policy that
covered service on nonprofit boards should defend and pay judgment against any
unit owner insured by that umbrella policy. Caution: because an umbrella policy
only covers claims arising out of bodily injury, property damage, and personal-injury,
this umbrella coverage clearly doesn't replace the need for that board to carry
This covers the liability of others that you assume in a personal contract
that you sign. This is a huge exposure because hardly anyone reads those "routine"
contracts that they sign, but nonetheless they pick up a lot of liability risk
These are some examples from my files for which I was able to find contractual
coverage in an umbrella policy.
A wheelchair-bound client had an elevator installed in her 3-story home.
The contract with the elevator maintenance company required her to defend
and pay judgments against them even when the cause of the injury was at
least partially caused by the negligence of the elevator maintenance company.
A wedding reception contract contained a restaurant requirement that
the bride and groom defend and pay judgments against the restaurant even if caused by the negligence of
the restaurant (i.e., 50 guests getting seriously ill from food poisoning!).
A group of four friends, all turning 50 years old, rented a huge agricultural
building on the site of the state fair grounds for a big birthday bash.
In the contract, my client agreed to defend and pay any judgment against
the State of Minnesota and the fairground for injuries or property damage
regardless of who was at fault!
Each of these examples above represents a major liability exposure that is
largely uninsured by primary liability coverage. Many of these exposures are
excluded by some umbrella policies but are covered by others. To properly manage
risk, first determine what liability risks your client faces that are not insured
by his primary policies. Then locate an umbrella policy or policies that best
cover as many of these uninsured risks as possible.
The following are the steps I personally take to compare umbrella policies
Keep on hand the most current edition of the umbrella policy for each
insurer you represent or have access to (i.e., surplus lines brokers) including all mandatory endorsements for each
state in which you operate.
Research and discover the differences between the policies and their
endorsements. I find a spreadsheet works best. On the left-hand side of
the spreadsheet I list all the different possible coverages that an umbrella
can offer that are potentially not covered by primary insurance. Then I
list the company names across the top. I then read each company's policy
and endorsements and fill in, under that company's name and across from
the potential coverage, a "yes" or "no." I add footnotes next to any exceptions
that need additional clarification. (If you do a comparison for yourself,
I suggest sending the spreadsheets to the claims managers for each of the
companies for confirmation that your interpretation of the coverage is correct.
It is important to go to the claims manager who interprets policy provisions
at claim time—not the underwriting manager.)
Learn how to read and identify liability exposures in personal contracts.
I always read these contracts for my clients to help them identify risks
that they are unknowingly agreeing to and to make sure their coverage will
respond. If possible, I recommend that they fax me the contract before they
sign it. Then, potentially adverse provisions in some of these contracts
can be negotiated and softened and sometimes even eliminated. For future
reference as well as errors and omissions protection, I scan copies of these
contracts into the client's automated file.
Create a questionnaire from your spreadsheet that will help you assist
your clients to determine which of the "gap coverages" available under umbrella
policies your client needs.
Use your questionnaire to determine where the liability coverage gaps exist
in underlying insurance policies. Use your spreadsheet to select the umbrella
policy or policies that best plug the gaps that you've identified. Then implement
that umbrella for your client.
Sometimes, underwriting requires the underlying coverage be placed with them
as a condition of writing their umbrella. Since covering the uninsured liability
exposures is critical, getting the right umbrella policy often means rewriting
all the underlying insurance, a huge hassle for you and your client. That is
why, for new clients, especially those with some affluence, it is important
to first determine which umbrella policy affords the best "gap protection" before
shopping the underlying insurance. Then you can place the underlying insurance
with that particular company. Catastrophic gap coverage of $1 million or more
is usually much more important for those who serve on boards, rent boats, have
an in-ground heating oil storage tank, etc., than the difference in premiums
on underlying policies.
Over the years, I have evaluated scores of umbrella policies. I have discovered
that the size of the insurance company or its advertising budget has little
to do with the scope and quality of their umbrella policy coverages. The most
comprehensive umbrella policies I've ever seen include the large companies like
State Farm and AutoOwners, but also can come from smaller regional companies
who file their own forms. At one time, I even found a surplus lines umbrella
policy (Evanston) that was broader than almost any primary market policy I had
seen before they withdrew the policy from the market.
Three of the worst I've seen have come from well-known national insurers
often targeting more affluent personal lines clients with comprehensive package
policies. Two of these umbrellas were straight excess policies with no "gap
coverage" at all. The other "umbrella" coverage was even more restrictive than
that company's primary policies. It wasn't even a straight excess!
Don't make the mistake of assuming that because an insurance company has
always had a strong umbrella policy it always will have one. Here is a good
example.We have a regional insurance company with a local home office who, for
years now, has had one of the best umbrellas I've ever seen.But without warning,
without any notice to agents or insureds, renewal policies started adopting
the more restrictive AAIS umbrella form.In addition, it added even more exclusions
for guest passenger liability, punitive damages, and mold liability claims.The
original privately filed form included about 11 exclusions, while the new form
includes about 25 exclusions.In just one day, this insurance company went from
having one of the best umbrellas to having one of the worst. Most states require
insurance companies to notify customers if they have renewed a policy with more
restrictive coverage.Unfortunately, that requirement doesn't seem to apply to
personal umbrella policies.
You can reduce the chance of these kinds of surprises happening to you and
your customers by noting on your comparison form the edition date of the umbrella
policy you're comparing.Then you can compare the addition date and renewal policies
to the addition date on the policy you evaluated to determine if a new assessment
Doing personal risk management requires a great deal of expertise in coverages
and contracts, a commitment to building a risk management framework from which
to operate, and a great deal of additional time for each client. No where is
that more true than the task of selecting the right umbrella policy. Yet risk
management does make such a huge difference in a personal lines client's welfare.
It is extremely professionally rewarding. I wouldn't do it any other way.
For more information on using umbrella policies to plug personal
insurance gaps, see "Creating and Using
a Personal Umbrella Comparison Form" and "Choosing
the Best Umbrella Policy: Case Study." Also, there are two full chapters
on the subject in Jack's book, Insurance for
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