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Is Umbrella or Excess Liability Policy Necessary?

Updated: Feb 25



When you purchase a general liability policy there is always a policy limit that the insurance company will pay. For example, if you have a liability insurance policy on your vehicle with a $75,000 limit and a judge or jury decides you caused damages of $1,000,000 the plaintiff will take the $75,000 from the insurance company and you could potentially be liable for the rest. Insurance companies assume liability for a variety of perils and circumstances that cause injury. Insurance policies typically cover the cost of legal representation and any award of damages in the event the insured is deemed to be responsible for paying. However, there is a limit that insurance company agrees to assume liability. This limit to liability encourages the insured to be more careful in operating their business. The most severe accidents cause the most severe damage, if an insured never had to worry about paying above the insurance policies there would be less incentive to pay attention to circumstances that could create an unreasonable risk to the public that could result in death or serious bodily injury. Lawsuits for death or bodily injury may have no limit of liability.


Often conditions that create risks that cause death or serious bodily injured can be avoided by paying attention to circumstances and either by investing some sweat working to resolve the issue or paying a little money for safety devices, repairs, signs, etc. Being vigilant has the obvious benefit of preventing injury to employees, friends, and members of the public. Taking reasonable care in the operation of one’s business reduces the risk of the insured being subject to unlimited liability for injuries that occur either on or as a result of business operations. Moreover, if Insurance companies were subject to unlimited liability, Insurance companies wouldn’t be able to guarantee they could pay their customers claims.


The sky is really the limit when it comes to liability for personal injury. In 1998, Philip Morris, RJ Reynolds, and two other tobacco companies agreed to a $206 billion settlement, at a minimum, covering medical costs for smoking-related illnesses to people. While this example does not illustrate the typical personal injury award it does illustrate the extent of liability business face in conducting business. Lets look at a more typical example of an insured incurring more liability than the policy limits of her insurance agreement.


Example:

It’s always been Larissa’s dream to have a beach resort house with units for rent in Miami Beach. She finds the perfect “fixer upper” that currently has tenants occupying most of the rooms and she buys it. She knows one of the problems is that the roof leaks and it’s only going to get worse. She decides that’s the first thing that needs to be fixed. She negotiates a price with the cheapest roofers she can find and they get to work the very next day. They get to work early stripping off the shingles of the old roof. About the time they are finished and preparing to fill the holes and install new shingles it starts to pour down rain that had been forecasted for that day. To make things worse one of the crew falls off the roof and gets severely injured. As time goes by things only get worse. Larissa learns the roofers did not have insurance. (Surprise surprise the cheapest bidder has no insurance!) The water caused extensive damage to all of the current tenant’s property. With all of here tenants threatening suit Larissa had to make claims on her business insurance policy for all of their damage suffered by her tenants. This amount combined with the lawsuit for the personal injuries of the roofer approach the limits of Larissa’s business commercial general liability policy. The sad thing is that she already had to make a claim for the limits of her policy to replace her roof that was ruined by the uninsured roofers.


Umbrella and Excess Liability Insurance Policies Both Provide Protection From Liability Beyond the Limits of the Underlying Policy. Often the two policies are confused. Technically there is a difference between the two.


1) Umbrella policies are a variety of excess liability that provide coverage in excess of the limit of liability of the underlying policy and also provides coverage for perils or circumstances not covered in the underlying policy. For example, an umbrella policy could provide additional coverage to include coverage to your boat if you travel outside the United States.


2) Excess Liability policies provide coverage above the limits of the underlying coverage. It offers no broader protection than that provided by the underlying policy. In fact, the excess liability coverage may even be more restrictive than the underlying coverage.


Umbrella and Excess Liability policies are often unique to individual business needs. It is a good idea to periodically review coverages and make updates if circumstances change or become known. Although there may be a technical difference in the two kinds of policies. The two names are, in practice, used interchangeably in the insurance industry. Ultimately which policy at what amount of coverage depends on the nature and scope of the business operations. Businesses that could potentially cause more economic injury should have the appropriate excess or umbrella coverage to protect their business from potential liability. Business operators should be aware of potential risks associated with the business and select the appropriate coverage accordingly.


Although businesses often need excess or umbrella insurance, individuals often are prudent to purchase excess or umbrella insurance in their auto, home, or life/accident insurance policies. For example, an individual who frequently travels the world may want to get umbrella coverage to include any accidents that occur outside the united states. Excess insurance on a homeowners’ policy is another good way to provide extra security that you won’t lose your home or all of the things you accumulate within it if everything is destroyed or there is an expensive lawsuit. Whether you are an individual or a business it is always a good idea to have excess and or umbrella coverage.