Not sure if this is the place to ask this but I am genuinely curious and have done a lot of research to no avail. First of all is umbrella insurance just a term to describe additional protection for home and auto? That is what I have concluded based on my research. I also have a bigger question that I could not get a solid answer on.
Say for hypothetical reasons, a person has a one million dollar net worth. What is stopping him from just getting the minimum coverage required by law for auto insurance and then just saying "I will need the rest of it in an umbrella policy? Do insurance companies have any requirements in place to get umbrella insurance?
I don't understand how umbrella insurance works….
byu/LopsidedChildhood55 inInsurance
Posted by LopsidedChildhood55
3 Comments
Umbrella policies require a minimum underlying liability limit to have an umbrella policy. Most of them that I have seen it’s 250/500 for auto and 300,000 for home.
You may or may not be able to purchase umbrella insurance from the same company that provides your auto or home insurance — some do, some don’t. But you will not be able to just ‘get the minimum’ coverage, umbrella insurance requires you have adequate primary insurance, every umbrella company may be a bit different but each will have requirements. And you will not be able to ‘require’ any insurance company to issue you umbrella insurance, it doesn’t work that way.
You will likely want to work with an insurance agent for this, unless your auto or home insurance carrier sells umbrella insurance also. If so, ask them what the requirements are.
Also note, if you have a net worth of 1M, and you have auto/home insurance and an umbrella policy with 1M total of liability coverage, you are still not ‘protected’. If a court orders you to pay, say 2M to a plaintiff, then your 1M will be at risk of being taken. Your insurance will pay the first 1M, but then you are on the hook for the rest. Think about that when you choose the amount/coverage of umbrella liability to buy — it really depends on what you perceive your risk of being hit with a liability judgement of various amounts may be. And that is hard to predict.
So umbrella insurance has strict underwriting requirements since the insurance company is assuming a lot of risk. One of those requirements, is the underlying limits that must be in place. During a claim, the umbrella insurance is excess, meaning it will only pay after the underlying insurance has exhausted the required limits.