Coverage Corner

WHO NEEDS AN UMBRELLA POLICY?

By Bill Wilson

I used to frequent an online insurance discussion board. Consumers often asked coverage questions that agents or other insurance professionals would answer. However, so many answers were wrong, at least arguably wrong, that I found I was spending a couple of hours a day correcting misleading answers.

For example, when a consumer asked if he needed an umbrella policy, an agent responded to several affirmative answers from other agents with, “Sorry world –most people (99%) DO NOT need umbrellas. It’s just reality.” Someone else agreed, opining that only rich people with a lot of assets needed umbrella policies.

I caught some flack when I responded, “Since we’re discussing reality, here’s a dose: EVERYBODY needs an umbrella policy.” Needless to say, this is especially true for wealthier people, though one might argue that an exception could be someone like Taylor Swift and her new-found billionaire status. On the other hand, even for Ms. Swift, an umbrella could be a great value purchase because, like most liability policies, defense costs are usually unlimited, and she’s probably more likely to be sued by someone than the typical person.

But there are other issues to consider. Just because someone doesn’t have substantial assets or income today doesn’t mean they won’t tomorrow. The inability to pay today doesn’t mean that one’s income won’t be garnished for perhaps the next 20 years. And this income drain may prohibit or limit someone’s ability to pursue a more lucrative career.

Once again, consider the value of unlimited defense costs. An example is the 2020 California El Dorado Fire that was started at a gender-reveal party in a public park. Over 35 square miles were burned in the 71 days it took to get the fire under control, destroying 20 buildings, including five homes, killing a firefighter and injuring 13 other people, and closing a state highway for 24 days. The fire suppression costs alone were estimated to be over $42 million.

The couple that allegedly started the fire was charged with 22 misdemeanors and eight felonies, including involuntary manslaughter. It’s unclear how many civil suits might have been filed, but it’s easy to see how they could be substantial in number and size. Admittedly, it’s the rare insured with a $40M+ limit umbrella policy, but even a $1 million policy would provide unlimited defense and some bargaining position on indemnification.

During this online discussion, one commentator felt he didn’t need an umbrella because he didn’t own a home, just lived in an apartment. Some years ago, I lived in an apartment complex with multiple 16-unit frame buildings. An inattentive tenant allowed his charcoal grill to burn down his building, along with the personal property of 15 other tenants. Fortunately, no one was killed or injured. Don’t you think an umbrella policy might come in handy?

Finally, there is a moral component to this issue. We all have an ethical obligation to protect innocent people from our negligence. The more wealth you have, the easier that is to accomplish without insurance. The less wealth, the greater the need for insurance. Needless to say, there are many people who struggle to make their insurance payments. However, if they own a house or an auto, reasonably adequate insurance is one of the necessary operating costs. And, per dollar of coverage, umbrella policies are one of the greatest values of all insurance products. I own a boat and insure it on a boatowners policy that includes liability coverage. I also cover it on my umbrella. What did it cost to add it to the umbrella? $7 a year.

One last comment that will segue this discussion into my column in the next issue … some time ago, I read that something like 87% of umbrella claims arose from auto accidents. In the April Primary Agent magazine, I’ll give you an example of an auto claim involving a high-profile lawsuit where the celebrity sued did not have an umbrella policy. We’ll also discuss auto policy racing exclusions and their role in how a customer might choose between the auto policies of different insurers.

Bill Wilson, CPCU, ARM, AIM, AAM is the founder and CEO of InsuranceCommentary.com and the author of seven books, including “When Words Collide…Resolving Insurance Coverage and Claims Disputes.” He can be reached at Bill@InsuranceCommentary.com.