First, you need to know I don’t sell insurance. This is important, because 99% of the articles on the web regarding umbrella insurance have some interest in selling it or at least making insurance companies look good.
Seriously, I search for almost an hour and couldn’t find ONE article that talked about ANY problems or drawbacks of umbrella insurance (just to see what was already out there). Seriously!? Of course, what should I expect it’s not surprising that EVERY Wall Street owned media machine isn’t going to say anything bad about Umbrella insurance and they’ll do everything they can to dominate Google search. We’ll see if this article makes a dent.
Where am I coming from? As an attorney, CPA, and small business advisor I have nothing to financially gain by selling you insurance and telling you what I really think. I’m an advocate for my clients to save money, taxes and protect their assets, and furthermore I have a fiduciary duty to give them unbiased, honest and actually helpful advice.
So is umbrella insurance inherently bad, a scam or worthless. No. But, is it for everyone? Another absolutely not! But heaven forbid insurance companies let anyone else say otherwise. Apparently, according to Wall Street, everybody needs an umbrella policy.
But, here’s the truth in my opinion about umbrella insurance and you may not like to hear what I have to say.
- Umbrella insurance is for gaps and excess claims only. Do not think of umbrella insurance as your primary insurance policy. It’s not meant to be. It’s there if your ‘primary’ insurance doesn’t cover all of your claims. That’s it. You don’t buy an umbrella policy to save money and think you have coverage to run wild OR have ‘extra’ insurance. It’s there, you hope, when your primary policy lets you down.
Texting and driving example. You’re cruising down the road texting and driving, which you know you shouldn’t be doing, and you get into a horrific accident causing someone’s death. It’s your fault and there are claims of close to 1M against you. Your normal auto insurance has a policy limit of 500k. You have umbrella insurance with a 500k limit. Your primary insurance settles with the plaintiff(s) for policy limits (500k) and the umbrella insurance picks up the difference for up to the 1M claim. Assuming there aren’t any exclusions on either policy because it’s a felony for vehicular manslaughter or homicide, which is more and more common in many states, your insurance policy should come to your rescue- you hope!
2. A ‘Personal Umbrella’ is different than a “Business Umbrella’. This is a common mistake in the flurry of advertising and advice to get an umbrella policy. Take careful note that if you have rental property or a business, a personal umbrella policy isn’t going to do you any good when there’s a claim from that disgruntled tenant or employee. Make sure to shop for the right ‘type’ of umbrella and quiz your agent specifically and diligently about every possible claim you can think of AND WHAT your policy your buying will cover.
Landlord / Tenant example. You have a rental property at local college hoping for higher rents stuffing multiple kids into the house. But of course, they decide to throw a party the first weekend of the semester and not only end up trashing your place, but regrettably there is a defect with the deck around your pool and a drunk patron falls into your pool and drowns. To your shock (if hearing of the accident wasn’t bad enough), you are slapped with a 1M wrongful death claim from an aggressive personally injury lawyer. But wait, your ok…you have insurance. Not so fast, you quickly discover that your homeowner’s policy that you got such a good deal on was literally just that: a ‘homeowner’s policy’ for YOUR home, not a landlord policy under your LLC. Result- no coverage! But it’s ok…you have umbrella insurance to come to your rescue…or do you? Umbrella policies (as I tried to explain above ONLY pay out for excess claims or gaps, NOT if your initial coverage doesn’t pay at all. Well, thank heavens you had an LLC with that one sheet of paper from that famous online website. Oh, but you cut corners on your company maintenance for the LLC (because you were told by some nut you didn’t have to treat an LLC like a corporation) AND you also never deeded the property into your LLC. Do you think you have a problem? It doesn’t look good. You could be on the hook for 1M!! Recommendation: Get the right type of landlord insurance, get a ‘commercial umbrella’ IF you’re going to get one, set-up the LLC with a law firm that can guide you through all the steps (check us out for less than $800) and do you all of your annual company maintenance (we’re only $150 a year)- NOW you have real protection!
- Umbrella Insurance is cheap because it rarely pays. I know you want to use it as your primary insurance because it’s cheap, but the reason it’s so affordable is because it rarely pays out. It’s built for unlikely and catastrophic claims (as if normal insurance wasn’t enough). I’m skeptical, because in 2014 the average combined payout under auto insurance coverage, for property damage and bodily injury, was under $19,930- combined!! Hence, if you carry a decent policy limit on your auto insurance policy (at least 250k or maybe 500k), the chance of having an excess claim is less than .001% of all those that carry auto insurance.
Vegas & Insurance?? Now I would LOVE to give you the exact citation for such a statistic, but I was only able to extrapolate a very, very conservative estimate because it’s absolutely impossible to get any real statistics from insurance company payouts. Does Vegas publish their odds on winners at the tables and slots? Absolutely not. Do you think insurance companies are any different?! Go watch Mat Damon in Rainmaker. I just couldn’t find a Danny DeVito to go through an insurance company’s dumpster to grab me the stats in time for this article.
Bottom line, the chances of ever, ever having to make a claim under an umbrella policy, and then it paying out after all the litigation is so infinitesimal, I know I would have a far better chance of surviving a swim around a cage with a porterhouse in my mouth during Shark Week© on Discovery Channel©.
Now don’t get me wrong, would you want to have umbrella insurance if you had a claim for seriously harming someone – yes. But again, you carry it on TOP of your standard policy.
- Don’t buy Umbrella Insurance from the same company as your primary insurance. One simple reason why…Lawyers. You want a different, AND additional team of lawyers help fight for you in your lawsuit and with a different insurance company for your umbrella insurance, that’s exactly what you’ll get. However, your primary insurance company will most certainly try and sell you ‘umbrella’ on top of your standard. If they are doing you a favor, they’ll recommend you get your umbrella policy from someone else.
So you may ask…in the end Mark, what do you do? Well, I have a freaking personal umbrella policy AND a commercial umbrella for my rentals!!
I know, I’m a sucker. Maybe it’s because I have teenage drivers (probably my main reason for my personal umbrella), or a tenant who is probably selling meth out of my section 8 low income housing rental (probably my main reason for the commercial umbrella)…or maybe it’s because I’m just paranoid and a borderline ‘prepper’. It’s probably because I’m under the delusion that it’s the only rational thing to do in today’s modern society.
Oh well, hopefully that extra few hundred bucks a year for my umbrella policies will help my insurance company come up with a better Super Bowl© commercial to further brainwash me into insuring my life away.
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Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show “Refresh Your Wealth” and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.