For most people, umbrella insurance triggers kick in when your underlying liability limits have been exhausted. While this statement is generally true, umbrella coverage only responds to certain claims under certain circumstances.
Knowing when your umbrella responds is important because you do not want to assume it provides coverage when it does not.
At Bowthorpe & Associates Insurance Producers, we take time to explain to our clients when their umbrella policies are triggered. Let’s review:
When does umbrella insurance coverage kick in?
When claims exceed the limits of the underlying auto, homeowners, or business liability policies.
As previously stated, umbrella insurance kicks in when your underlying limits have been exhausted. This is often referred to as excess insurance.
If your auto insurance policy limit is $300,000, your homeowners $500,000, and your umbrella policy is $1 million, the umbrella coverage does not respond until each individual policy pays its limit.
Your primary insurance policies respond first, then your umbrella policy responds to excess.
Primary insurance limits must be exhausted
Typically, your umbrella policy’s limit is only triggered when the per-occurrence limit of the underlying policy has been exhausted by a claim.
For instance, let’s say you have $300,000 in primary policy limits. The at-fault party suffered $500,000 in damages. You would be responsible for the first $300,000, and your umbrella policy would kick in for the remaining $200,000.
Keep in mind you must be able to prove the underlying insurer paid or is obligated to pay its full limit.
The aggregate limit is exhausted
Another way your umbrella policy can be triggered is when an aggregate limit is exhausted.
An aggregate limit is the maximum amount an underlying insurer will pay during a policy period.
Say you have two separate claims that occur during the same policy period. Both claims are covered. One claim eats up the remaining aggregate on your underlying policy. Because both claims occurred during the same policy period, your umbrella policy would kick in on the second claim.
Always confirm your umbrella policy follows form with your underlying policy. Some umbrella policies add restrictions to underlying limits which could prevent your umbrella from being triggered after aggregate limits are exhausted.
Self-insured retention
Umbrella coverage can be triggered even if your underlying insurance doesn’t respond. When this happens, it’s typically referred to as drop-down coverage.
If your umbrella policy drops down, you’re normally required to pay your self-insured retention. A self-insured retention is similar to a deductible. You must pay the SIR before your umbrella policy pays on a claim.
Drop-down coverage normally occurs when the claim is not covered under any underlying policies but is covered under the umbrella policy.
Claims that trigger umbrella insurance
Here are some examples of when an umbrella policy will respond:
Bodily injury
Liability claims for bodily injury are a common trigger for umbrella policies.
If someone is injured in your car, and the medical bills and other costs exceed your auto liability limits, your umbrella should respond to cover the remaining liability.
Umbrella policies also respond to bodily injury claims associated with your home.
Let’s say a delivery person falls through your backyard deck. The injuries he suffered require him to be off work for an extended period. He decides to sue you for his medical bills, lost wages, and pain and suffering.
His injuries are significant and require millions of dollars in long-term care. If your homeowners insurance doesn’t cover all of his damages, your umbrella should kick in and cover the remaining liability.
Property damage
Property damage can also trigger your umbrella insurance policy.
Imagine you back over your neighbors mailbox causing significant damage to their home. After an inspection, it is determined that repairs will cost $150,000. Your homeowners insurance covers $100,000 of the damage. Your umbrella insurance policy should cover the remaining $50,000.
Personal injury
Personal injury claims can also trigger your umbrella insurance.
In some cases, offenses like libel, slander, defamation, and invasion of privacy are covered under your umbrella policy. If you are sued for one of these offenses and legal defense costs, and potential settlement exceeds your underlying limits, your umbrella should respond.
Legal defense costs
Coverage for legal defense can also trigger your umbrella.
Once your primary limits are exhausted, your umbrella may provide coverage for legal defense. It’s important to know that some policies pay defense costs on top of the limit while others pay defense costs within the limit. This can make a big difference in how much coverage you have remaining for a settlement or judgment.
Coverage may not apply
There are times when your umbrella coverage will not trigger. Keep in mind that all umbrella policies have exclusions. Two of the most common umbrella insurance triggers that do not apply are:
Intentional acts
Just because you have an umbrella policy does not mean you have unlimited liability coverage.
Umbrella policies will not cover intentional acts or illegal activity. If you cause injury or damage to someone’s property on purpose, your umbrella will not apply.
Business exposures
If you get sued for business related activities your personal umbrella will most likely not apply.
Running a business, offering professional services, and having contractual liability can void your umbrella policy. If any of these exposures apply to you, you should have a commercial or professional liability policy to protect you.
Coverage depends on maintaining underlying limits
If your umbrella policy requires you to maintain underlying limits and you let one of those policies lapse, your umbrella coverage may not apply.
Always maintain the required underlying insurance limits required by your umbrella policy.
Coverage Recap
Umbrella insurance is a great way to protect yourself from large liability claims. Just remember your umbrella policy only responds to certain triggers.
The most common triggers are when your underlying insurance limits are exhausted, when aggregate limits are exhausted, and when a claim is covered by your umbrella but not by your underlying policies.
Review your policy with us. We’ll walk you through when your umbrella responds.
Frequently Asked Questions
Q1: Does umbrella insurance get triggered easily?
A: Explain to your clients how Umbrella Insurance Triggers work
Your umbrella insurance policy doesn’t kick in until your other insurance policies have been exhausted.
Q2: Can umbrella insurance kick in without meeting deductibles?
A: For liability claims, most umbrella policies do not have a deductible.
Your umbrella policy can cover legal defense costs. Whether those costs are paid on top of the policy limit or if they’re paid within the policy limit varies by policy.
Q3: What does retention mean in umbrella insurance?
A: Self-insured retention is essentially the amount you have to pay before a claim is covered by your umbrella policy.
If the claim isn’t covered by your underlying insurance policies and your umbrella policy drops down, you’re required to pay your self-insured retention.
Q4: Will all claims be covered by my umbrella policy?
A: There are certain instances where your umbrella policy will not provide coverage.
Q5: Does having high underlying limits increase umbrella coverage?
A: Technically your umbrella only increases by the amount you paid for the umbrella policy.
If your underlying limits are $1 million and your umbrella is $1 million, your total program limits are $2 million.
If your underlying limits are $1 million and your umbrella is $2 million, your total limits are $3 million.