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What Is Umbrella Liability Insurance and Do I Need It?

Comprehensive personal liability insurance (CPL), also known as umbrella liability, provides a method for individuals to carry additional liability coverage to protect against liabilities that may exceed the coverage limits on homeowners and auto insurance.

The term umbrella liability is used to describe the concept of an umbrella of liability protection over an individual (that extends beyond the auto and homeowner policies).  We are all familiar with the liability coverage we purchase for our vehicles and our homes, a CPL simply stacks additional coverage above and beyond those limits.

As an example, if you have a maximum of $500,000 in liability coverage on your vehicle and you were involved in an accident and were sued for 1 million dollars (and lost), who pays the difference between 1 million and the $500,000 of coverage?  You do.  This is the reason why in today’s litigious society people are carrying higher amounts of liability insurance than ever before.

The great thing about a CPL is that it provides excess coverage on your homeowners and auto policy, plus provides insurance for most other matters of personal liability.  For example, if you accidentally shoot your hunting partner, run out in traffic and cause a multi car pile up, or simply damage other people and/or their property while engaged in personal activities, you would likely be covered under a typical CPL policy (be sure to read your policy as exclusions vary).  The definition of personal activity is somewhat subjective. A bit of trivia; part of the money that Paula Jones received from her sexual harassment suit against Bill Clinton was paid by his liability policy.  I guess his activity was deemed to be personal, perhaps too personal!

So, what we get here is broader coverage than we are able to obtain on our home and vehicles, as well as a much larger amount of coverage and at very affordable rates.  It may only cost a few hundred dollars a year to add 1 to 2 million dollars of umbrella liability to your insurance portfolio.  The strategy would be to lower your homeowners and auto liability coverage to the lowest level that is allowed when combining with a CPL policy.  Since insurance companies know this strategy well, they will most likely make you buy at least $100,000 of liability on your home and $500,000 on your vehicle prior to allowing you to boost your overall liability coverage to say 2 million using a CPL.

The amount you need in liability coverage would be based on your net worth.  If you have a net worth of 2 million dollars, you want to have at least 2 million dollars of coverage so that you would not be exposing any of your assets to loss in the event of a large claim.  Since a CPL is so affordable, I have recommended to all my clients that they carry at least a one million dollar policy (and more if their net worth was beyond that). 

This is a very simple explanation and I would recommend that you sit down with the agent that handles your auto and homeowners and discuss in detail the cost and benefits of a CPL based on your own personal situation.

Agree or disagree, click on comments below.

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James L. Paris
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