Do You Need Umbrella Insurance?

By Erica J. Yount, CFA, CFP®

Wealth Manager, Principal

June 1, 2024

As we head toward the second half of this year, now is a great time to reevaluate your risk and determine if you are prepared for the seasons ahead.

One question to ask yourself is whether you have protected your wealth from lawsuits or large claims that are not adequately covered under your current auto and homeowner’s policies. If you have not, you may want to consider adding an umbrella insurance policy.

Unfolding the Umbrella Policy

What is umbrella insurance? In a nutshell, it is a relatively inexpensive way to protect wealth against low-probability but high-severity financial claims. These claims could result from events caused by you or members of your household, such as personal injury to others, damage to their property, or even defamation of their character.

While the probability of such incidents is low, the potential scenarios where they could happen are more commonplace than people realize. For example, driving your car, inviting people to your home, or even something as simple as commenting on social media could result in a claim against you. Importantly, unfortunate incidents can have significant financial repercussions if they lead a lawyer and client to seek monetary damages in a lawsuit.

Let’s look at some examples using the incidents cited above:

  • Driving Your Car: You drove to work and caused a car accident. While you walked away relatively unharmed, you hit the side of another car, causing serious injuries to both the driver and the rear passenger. The accident impacted another car as well. The medical cost of the injuries totaled over $600,000, but your auto insurance bodily injury limits were set at $200,000. An umbrella insurance policy could cover the difference between the auto insurance coverage and the bodily injury costs in the event of a lawsuit. Without it, you would have to pay the difference out-of-pocket since you were at fault.
  • Inviting People to Your House: You had a house party. One of your guests slid on the stairs and she severely injured herself. Unfortunately, she took you to court to cover her medical expenses that were the result of being injured at your house party. An umbrella insurance policy could offer an additional cushion to cover these expenses should the amount exceed coverage provided by your homeowner’s insurance policy.
  • Commenting on Social Media: You responded to a social media post. The response was stated in a way that, while unintended, presented false information about a popular personality and social media “influencer” as fact. The influencer and his lawyer sued you for defamation of character. Depending on your coverage and provider, an umbrella insurance policy could provide financial protection against any awards that a jury might order in a defamation lawsuit.

Should You Buy Umbrella Insurance?

There are many reasons to own umbrella insurance, though in most cases it comes down to protecting financial assets against unexpected scenarios. As your advisors, we work with you to review your risks, assess your net worth, and evaluate your need for umbrella insurance:

  • Review the limits of your auto and homeowner insurance policies.
  • Assess your net worth, including bank and brokerage accounts, home equity, and other property.
  • Determine if #2 exceeds #1. If so, you may be a good candidate for an umbrella insurance policy.

The difference between #2 and #1 above is also a good barometer for determining the amount of umbrella insurance coverage you should buy. The good news is most umbrella insurance policies come with coverage in increments of $1 million or more and provide a lot of coverage for a relatively small annual premium. This makes umbrella insurance an attractive addition to a comprehensive financial plan.

To learn more about umbrella insurance and whether it is right for you, please contact your Modera advisory team.

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