When Umbrella Coverage Won't Keep You Dry

Article excerpt

It's crucial protection-but with the wrong policy, you may still be exposed to financial storms.

Umbrella insurance is a comforting concept: It not only expands your coverage, it protects you in all the areas your policies miss.

That's the idea, at least-if you have a true umbrella, and if it's properly coordinated with your other coverage. But those ifs are bigger than you might suspect.

For one thing, sometimes policies that go "over" other policies don't actually fill any holes in the existing coverage. Certain types only provide extra dollars for risks already covered. That's the case with "excess" policies, which are sometimes loosely called umbrellas, notes James Salisbury, an insurance broker in Walnut Creek, CA. So if the general liability provision of your homeowner policy doesn't cover volunteer work that you or household members do, such an "umbrella" won't cover it, either.

A second point: If you're dealing with more than one insurer, you might unknowingly lack coordinated coverage. For certain risks, you may expect your umbrella to start paying after the underlying policy has paid out its face value. But as we'll see, errors or misunderstandings can cause gaps between the policies. And then? "You might be liable for hundreds of thousands of dollars before that umbrella kicks in," says CPA Sherman Doll of Walnut Creek, CA.

Moreover, your personal umbrella has nothing to do with business coverage. For that, you need a separate umbrella, and there can be big holes in that shield, too.

Chances are, you haven't spent much time thinking about umbrella coverage. Yet large settlements occur for reasons other than malpractice. Someday, an umbrella policy may be all that protects your assets from a hefty judgment.

So here's a review of this essential insurance and the coverage gaps it can fill. Better look it over now-before that rainy day. The good news: You might have to spend only hundreds of dollars to buy millions of dollars' worth of added protection.

The holes that make an umbrella crucial

Let's consider first how your personal coverage can leave you unprotected. There aren't a huge number of holes in most home and auto policies, but those that exist can be significant.

For example, as previously noted, the liability provision in your homeowner policy might not cover you while you're doing volunteer work. That also might mean you're not covered as a board member of a nonprofit organization. Additionally, the policy may not insure you for libel or slander. And while a homeowner policy would typically cover certain boating activities, it might well leave you out there alone if the boat is more than a certain length. The insurance may not apply to other watercraft, such as Jet Skis, at all.

Your auto policy probably has cracks, too, says Ray Williamson of Barusso Insurance in Larkspur, CA: "Often, it won't cover you or family members while you're driving recreational vehicles like dune buggies. It also might not cover uninsuredmotorist risks."

These are certainly reasons to make sure your umbrella is a true umbrella. But there's another kind of gap to be aware of, too. Your second policy typically won't kick in until a certain dollar amount has already been paid off. "In my own auto coverage, I had an umbrella that didn't start paying until a claim reached $500,000,' says Sherman Doll. "But my primary policy only paid to a $300,000 limit. So I would have been liable for the $200,000 gap if I hadn't switched my coverage."

In fact, it's to fill such voids that the "excess" policy has its proper use, explains insurance broker William Ieuter of Secure Futures in Chicago: "In a case like that, you might get an excess policy of $200,000 on the underlying policy, which would then qualify you for the umbrella coverage."

Why you need more than one umbrella

Even a true umbrella isn't universal. A personal umbrella doesn't fit over your malpractice insurance or apply to your liability as owner of a business. …