In part 2, we continue our discussion of how umbrella policies work.
Umbrella vs. Excess Coverage
A traditional umbrella offers broader protection, supplementing primary policies and handling a variety of other, less common losses. For instance, you may have to go to court after being accused of slandering another person. The liability section of your homeowners policy may not cover this type of loss, called personal injury. An umbrella policy might include coverage for personal injury, so the loss is covered. An umbrella may also handle losses related to hobbies or other activities. For example, you:
- Have an in-home hobby of training guard dogs and a neighbor’s child is attacked
- Publish a newsletter on the Internet covering local or state politicians and one issue wrongly accuses a state senator of committing a crime
- Collect rare instruments and, as a part of the hobby, you also repair and restore such property for other people. One day you drop an antique mandolin which shatters when it hits your garage’s concrete floor
Generally, umbrellas provide coverage for any amount of a loss that exceeds the primary policy’s deductible. However, when handling a loss that is not covered by primary insurance, a special kind of deductible called a self-insured retention (SIR) may apply. An SIR is the dollar amount you have to pay before the umbrella coverage responds to an eligible loss.
Of course, umbrellas don’t always work as named. Your policy may act only to provide additional amounts of coverage to supplement existing protection. This is how an excess policy performs. Excess policies respond the same way as a primary policy. In such cases, they “follow the underlying coverage.” This means that the policy covers ONLY the situations handled by its underlying coverage.
Only a careful evaluation of the actual policy wording will reveal the extent of the additional protection.
The best way to find out if extra coverage is necessary is to discuss your coverage needs with a professional insurance agent.
See Part 1 for other basic information about umbrella coverage.
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