In talking with a client this week, the subject of property and casualty insurance came up and I mentioned umbrella policies. She had not heard the term before. This is an important type of insurance to have in place as you age and your earnings and net worth increases. Let’s cover the highlights below but as always, it’s important to discuss your specific risks and related insurance coverages with your insurance and/or financial advisor.

One of the many rights of passage into adulthood is the need to obtain several different kinds of insurance – health insurance, life insurance, disability insurance, and property & casualty insurance to name a few. Today we’ll focus on property & casualty insurance.

Property & casualty insurance (also known as P&C insurance) is a grouping of policies that covers you and the property you own. P&C insurance may include policies for car insurance, recreational vehicle insurance, boat insurance, home owners insurance, renters insurance, and others.

The “Property” portion of P&C is coverage of the items you own – like your car and your home and its contents. Thinking thru the risks and potential exposures related to the property portion of these policies (in order to obtain the proper level of coverage), is relatively straightforward. You can obtain valuations for your car, your home, and your other belongings and work with your agent to ensure your policies are written to pay out under methodologies you understand and are in agreement with.

The “Casualty” portion is a bit harder to fully understand and quantify. This portion of P&C insurance policies is coverage for liability exposure if you are found legally responsible for an accident that causes injuries to another person or damage to another person’s belongings. (As an example, if you are in a car accident, you may be legally responsible for another party’s car, their medical injuries and bills, and lost wages if they are no longer able to work. The same could be true if someone is hurt at your home).

Since estimating liability exposure is much more of a hypothetical exercise, it can be challenging to ensure your policy is tailored to meet your needs. Many policies are woefully inadequate when people sit down and review them against possible costs, especially today as inflation has spiked the inputs to these legal claims (car repairs, medical bills, lost wages, etc). Even though it is challenging, it is very important to review your liability limits in your P&C policies and assess them for adequacy with your advisors.

When written properly (with your risks in mind), P&C policies will provide some level of liability coverage. However, in some cases, that may not be enough. This is where umbrella policies come into play. Simply put, umbrella policies are protection against the worst case scenario.

Umbrella insurance provides added protection above and beyond existing limits and coverages of your other P&C policies. Umbrella insurance can provide coverage for injuries, property damage, certain lawsuits, and personal liability situations. The umbrella coverage will kick in where your liability limits if your P&C policies end. For instance, if you are in a car accident and your are found liable for $1.5 million of damages but only have $500,000 liability limit in your auto policy, you will be forced to use personal assets and/or garnishment of future wages to cover the remaining $1 million exposure. However, if you had a $1 million umbrella policy in place, it would cover that $1 million and your personal assets and future wages would be free and clear.

Umbrella policies are typically rather affordable, since it is secondary insurance (meaning you have to exceed the liability limits of your P&C policies before they come into play). It is usually more cost efficient to add an umbrella policy versus increasing the liability limits on your P&C policies directly. Please note that in order to add an umbrella policy, certain minimum levels of liability coverage will be required in your other P&C policies but again, you can work thru this with your agent.

As to the level of umbrella insurance, a good starting place it to match your coverage to your net worth (since what you own represents your potential exposure). But again, work with your trusted advisors to address your specific risks and establish coverage that adequately addresses your exposure.