Basics of Umbrella Policies

[MartinJ]

I'm trying to understand the relevance of selecting a dollar amount for umbrella coverage, whether 1 mil, 2 mil, 3 mil, etc. Let's say for example that someone is worth 3 million, they get 2 mil in umbrella coverage, then they get sued and lose a judgement for 3 million. Does that simply mean that the insurance company pays out 2 million? And do they subtract legal fees defending the lawsuit?

And what if someone is worth 3 mil, have an umbrella for 3 mil, but they get sued, lose and there's a judgement for 4 million or more? Then what happens?

 

[VolAgent]

First, it always pays to read the policy. Not every policy is the same.

In general, defense is not subject to the limits, it is in addition. Therefore it won't reduce the amount of coverage available for a judgement or settlement, generally. It can be written differently so again, it pays to read the policy.

As to your question of if a judgement exceeds the underlying policy and umbrella, then the defendant is liable. So if the judgement is for 3 million and the total limits of the underlying policy and umbrella is 2 million, the defendant is liable for the other million and the plaintiff can go after assets and garnish wages to satisfy the judgement.

 

[InsCommentary]

What VolAgent said. With limits you have to consider assets and future income. That latter can be far greater than the former. Consider actual cases where a medical student negligently killed someone...minimal assets, significant earning potential for the next 20 years. Or the 19 year old who stood to inherit $3M upon turning 21 and basically signed over the inheritance to the family he hit.

 

[imnewhere]

You always want the umbrella to more than cover the client's net worth. That way you avoid the situation described above where the client would be liable for the extra $1M.

Every working adult who can afford it should probably have at least a $1M umbrella policy - especially if they own a home. Once net worth starts getting near $1M, then you should bring that up to cover them.

That's the VERY simple way of explaining it.