How to choose umbrella policy coverage limits

A personal umbrella policy adds a layer of liability coverage above the household's auto, homeowners, and sometimes boat, motorcycle and rental property policies. When a claim exceeds the underlying policy's limit, the umbrella pays the rest up to its own limit, and in many cases it also pays for the defence. It can also cover some claims the underlying policies do not, such as libel and slander, subject to a retention. Because the premium for the first layer of umbrella coverage is often modest compared with what it adds, the harder question is not whether to buy one but how much.

The answer depends on what a judgment could reach and how likely a serious claim is. This guide works through both, then covers the underlying limits and exclusions that decide whether the umbrella works as expected. It applies across Arizona, Nevada, Utah and Idaho, where state exemptions for homes and retirement accounts differ.

What to gather

The decision rests on the household's balance sheet and its exposures.

• A current list of assets: home equity, other real estate, brokerage and savings accounts, business interests, vehicles, and retirement accounts.
• Household income, and how many working years remain for each earner.
• Declarations pages for every auto, home, rental property, boat, motorcycle and RV policy, with their liability limits.
• A list of drivers in the household, including teenagers and anyone with a poor record.
• Exposures that raise the risk: a pool, trampoline or dog, rental properties, boats or off-road vehicles, a board seat at a non-profit, household employees.
• Any existing umbrella declarations page and its schedule of underlying policies.

Step one: add up what a judgment could reach

Start with net worth that a creditor could reach. Home equity above the state homestead exemption, non-retirement investments, cash, second homes and rental properties, and business interests all count. Arizona, Nevada, Utah and Idaho each set their own homestead exemption, and federal and state law protect many retirement accounts from creditors to varying degrees, so the reachable figure is lower than total net worth. An estate planning or asset protection attorney can confirm what applies to your situation.

Then add future earnings. A judgment that exceeds insurance and reachable assets can be collected over time through wage garnishment in many circumstances, so a household with modest savings but high income still has a great deal at risk. A reasonable approach is to choose an umbrella limit at least equal to reachable net worth, and to consider a higher limit where income is high or expected to grow.

Step two: weigh the exposures that make a large claim more likely

Two households with the same net worth can have very different risk. A teenage driver in the household increases the likelihood of a serious auto claim. A pool, trampoline or dog brings guests' injuries onto the property. Rental properties bring tenants and their guests. A boat or wake sports on Lake Powell or Lake Mead adds a severe injury exposure. Coaching youth sports, serving on a non-profit board, or posting opinions online can bring claims for defamation or decisions made in a volunteer role. Each of these argues for a higher limit than net worth alone would suggest.

Where several of these exposures stack up, move up by a layer. The cost of each additional layer of umbrella coverage is typically lower than the first.

Step three: meet the underlying limits

Every umbrella carrier requires the underlying policies to carry liability limits at or above stated amounts, for example on auto bodily injury and property damage, homeowners personal liability, and watercraft. If an underlying policy carries a lower limit, the umbrella does not fill the gap; the household pays the difference between the actual underlying limit and the required one out of pocket. Check each underlying policy against the umbrella's schedule, including policies with other carriers, and update both whenever a vehicle, property or boat is added.

Some umbrella carriers also offer uninsured and underinsured motorist coverage at the umbrella level, which pays for the household's own injuries when an at-fault driver carries too little. Whether it is available varies by carrier and state, and it usually requires the auto policy's uninsured motorist limits to match the umbrella's underlying requirement.

Step four: read what the umbrella covers and excludes

Umbrellas are broad, but not unlimited. Check these points.

• Business pursuits and professional services, which personal umbrellas exclude. A home-based business, consulting work or a rental property held in an LLC may need a commercial umbrella.
• Directors and officers liability for board service, which some umbrellas cover only for non-profit boards and only when the board carries its own policy.
• Watercraft, aircraft and recreational vehicles above certain sizes or horsepower, which may be excluded or need to be listed.
• Rental properties, which usually need to be scheduled and insured with liability at the required underlying limit.
• Household members away at school or living elsewhere, and whether they remain insured.
• Specific exclusions some carriers add for trampolines, certain dog breeds or motorised sports.

Common mistakes

These are where umbrella limits and coverage most often fall short.

• Choosing the smallest umbrella limit available without looking at net worth or income.
• Letting an auto or home liability limit fall below the umbrella's requirement.
• Adding a rental property or boat without telling the umbrella carrier.
• Assuming a personal umbrella covers a side business or an LLC-owned property.
• Forgetting to revisit the limit after a large inheritance, a business sale or a new teen driver.
• Not asking about umbrella uninsured motorist coverage where it is offered.

A worked example

Suppose a couple in Scottsdale have $600,000 of home equity, $500,000 in brokerage accounts, $900,000 in retirement accounts, a combined income of $250,000, a sixteen-year-old driver and a pool. Their auto liability is $250,000 per person and their homeowners liability is $300,000. After a rough estimate of the homestead exemption and retirement account protections, reachable assets are about $900,000, and they have twenty working years ahead. They choose a $2,000,000 umbrella rather than $1,000,000 because of the teen driver, the pool and their income, and pay $550 a year. The umbrella carrier requires $500,000 of homeowners liability, so they raise it for $40 a year. Their son later causes a crash in which a pedestrian is seriously injured, and the claim settles for $1,800,000. The auto policy pays $250,000 and the umbrella pays the remaining $1,550,000. The figures are hypothetical; the second million and the raised underlying limit are what kept the settlement off their savings.

How to use this

Send us your declarations pages and a rough picture of your assets and exposures, and we will show umbrella limits against what is at stake, check each underlying limit, and compare umbrella options across the carriers we represent in Arizona, Nevada, Utah and Idaho. If your current umbrella limit already fits, we will tell you so.