Excess Liability Insurance: A Major Protection Explained

You probably have heard of the term umbrella policy or excess liability insurance but, if you are like many, there’s a whole lot you don’t know about this type of insurance. It can be complex and confusing. At the same time, it’s one of the most important insurance coverages to obtain.  It’s fairly essential to be aware of the ins and outs of this coverage to protect your financial well-being. Let’s jump in and learn about excess liability insurance so that you can minimize your unknown and costly exposures.

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Table Of Contents:

• What is Excess Liability Insurance?
• How Exactly Does the Excess Personal Liability Policy Work
• What Does Excess Liability Insurance Cover?
• Underlying Coverage Requirements
• Importance of Underinsured and Uninsured Motorist Coverage Increases
• Who is Covered by Your Excess Liability Policy
• What are Common Exclusions in an Excess Liability Policy?
• How Much Does Excess Liability Insurance Cost?
• FAQs about Excess Liability Insurance
• Conclusion

What is Excess Liability Insurance?

Navigating the world of insurance can be complicated and not always fun (for most people!), but excess liability coverage is nonetheless important to grasp. Essentially, an excess liability insurance policy provides extra protection beyond your typical policy limits. This added layer of security can be invaluable in protecting you from costly lawsuits that may lead to substantial financial losses.

The Purpose of Personal Excess Liability Insurance for Individuals

With an increase in lawsuits and, large verdicts more particularly, having personal excess liability insurance can protect you from potentially devastating lawsuits. There are of course many different types of incidents, such as accidents on your property or unexpected events involving your personal vehicles, which can result in damages that exceed the liability limits of your primary insurance coverage. This is where personal excess liability insurance steps in. Here are some specific examples:

1. If an accident occurs and causes $1.0 million in damages, but the underlying auto insurance policy only covers up to $500k, this type of policy will provide coverage for the remaining amount, subject to the excess liability limit.
2. In cases where your negligent actions in your backyard, for example, lead to bodily injury that is not fully covered by the personal liability coverage provided by a homeowners insurance policy, a personal excess liability policy can help compensate for the shortfall.
3. In situations where lawsuits result in very significant settlements that surpass the liability coverage limits of underlying policies, it is possible to rely on the extended and larger limits of liability provided in the excess policy as a safety net to effectively handle and support these circumstances.

An Expansion Beyond Basic Coverage Limits: The Role Of An Umbrella Policy

It’s important to see personal excess liability coverage as an essential safeguard in today’s constantly changing risk landscape, rather than just an added bonus. While your regular home or auto insurance policies may be sufficient in most cases, there are times when they won’t provide enough compensation for legal disputes involving large-scale injuries or property damage. That’s why it’s crucial to have umbrella-type policies that offer broader coverage and peace of mind. Even if your current policies usually suffice, it’s wise to have these extra provisions in place to protect your finances and ensure you’re fully insured in the event of a serious incident.

How Exactly Does the Excess Personal Liability Policy Work

To comprehend the functioning of an excess personal liability policy, it is essential to distinguish between follow-form policies and umbrella policies. These two types of insurance coverage have different objectives and provide varying degrees of protection.

Difference Between Follow Form Policies and Umbrella Policies

A follow-form policy is a type of excess liability insurance that increases the coverage limits of your underlying insurance. If you reach the maximum limit on your standard homeowners or auto insurance due to a claim, this additional layer of coverage will kick in and provide protection for additional costs up to its own limit. In contrast, an umbrella policy may go beyond simply increasing limits like a follow-form policy does; it may expand the range of situations that are covered beyond what your primary insurance covers. This means it can help protect against financial loss in a wider variety of scenarios.

Four Examples Where Coverage Can Be Broadened By An Umbrella Policy

The power behind a personal umbrella policy lies in its ability to provide broader protections across various situations not typically addressed by basic home or auto insurance:

1. Defamation claims: If someone sues you for damaging their reputation through spoken (slander) or written (libel) words, an umbrella insurance policy may cover legal defense fees and potential settlements.
2. Liabilities as a landlord: If tenants take legal action against you for injuries caused by negligence at rented premises, some umbrella policies might provide coverage that typical homeowners insurance policies do not include.
3. Harm caused by certain pets: If your pets cause injuries either at home or outside that exceed the normal liability limits of your homeowners insurance, certain umbrella policies may offer extended coverage in these situations.
4. Unusual vehicle incidents: Some umbrella policies may cover accidents involving non-auto vehicles like riding lawnmowers, which are typically excluded from traditional homeowners and auto insurance plans.

What Does Excess Liability Insurance Cover?

The limits associated with excess liability insurance are often in the millions of dollars. They serve to supplement your primary policies when their limits are exhausted due to severe and unexpected events.

This additional layer of protection extends over a variety of underlying insurances. Let’s delve into four specific examples:

Auto Insurance

Auto insurance comes with certain restrictions pertaining to bodily injury and property damage liabilities. In scenarios involving serious accidents causing widespread damage that exhausts these limits quickly, you can rely on an excess liability policy for financial aid against these high-cost incidents.

Watercraft Coverage

If you’re someone who owns watercraft like boats or jet skis, they fall under separate coverages, each having their respective claims payout caps. When unfortunate instances occur leading to substantial damages beyond those limits, again it’s here that excess liability proves invaluable, providing robust financial support.

Investment Properties

Owning investment properties means holding landlord insurance, which protects against structural damages and potential legal issues arising from tenant disputes, etc. But what if liability costs go beyond covered amounts? Assuming your landlord insurance is set forth on personal lines policies (for example, a common form called a DP-3 policy), then the solution lies in securing a personal excess liability plan, which kicks in to increase underlying liability limits under the landlord insurance policy, providing coverage that may be essential to continue the business operations related to the rental home.

Underlying Coverage Requirements

To truly benefit from an additional insurance policy like an excess liability policy and ensure higher policy limits when you need them most, certain underlying requirements must be met first.

Minimum Liability Limits

Your primary insurance needs to have a specific minimum limit before you can add on an excess liability plan. This is because the purpose of such a plan is not to replace but rather supplement your current coverages – providing extra protection where needed without duplicating what already exists.

This means if your auto or homeowners’ policies fall below these set thresholds – typically around $300k-$500k for both types – then increasing those amounts would become necessary before obtaining any form of excess coverage.

A.M Best Rating Requirement

In addition to maintaining high enough limits on all relevant insurances, another key requirement by many insurance companies includes having each respective insurer hold at least a B+ A.M Best rating. The importance here lies in ensuring financial stability; reliable companies should back up every base-level coverage so that payouts under supplementary plans remain less risky overall.

You may want to check out A.M Best’s official website, which offers comprehensive details about their rating system and how they evaluate different insurers’ performance over time.

Maintaining Underlying Policies

One aspect that is often overlooked but important to consider is the maintenance of insurance coverage after purchasing it. It is crucial to continue with the original coverages throughout the entire term of the contract. Any changes, such as missed payments leading to lapses or reductions in coverage levels, can potentially affect eligibility conditions and subsequent payouts under the personal excess liability policy. While this may seem like common sense, it’s worth emphasizing due to its potential impact — a denial of a large claim under the excess policy! Unexpected scenarios could arise down the line, and maintaining consistent coverage will ensure its reliability when it’s vital to have.

Importance of Underinsured and Uninsured Motorist Coverage Increases

A personal excess liability policy goes beyond just increasing the limits on your current core insurance policies like auto and homeowners insurance. It can also boost your underinsured and uninsured motorist coverage, if you already have it in your primary auto insurance policy. This enhancement can be extremely valuable when dealing with high medical expenses or property damage costs after an accident caused by another driver who either doesn’t have enough coverage or has none at all.

Decoding Underinsured and Uninsured Auto Coverage

Underinsured motorist coverage refers to situations where drivers have some level of car insurance but not enough to cover damages incurred during accidents they cause. This could leave you out-of-pocket for any remaining expenses that exceed their liability limit. In contrast, uninsured means there’s no auto insurance whatsoever from the other party involved in the accident, or perhaps due to a hit-and-run, leaving you entirely responsible for covering any resulting costs.

Your standard auto policy likely includes protection against these scenarios up to a certain extent; however, escalating healthcare fees coupled with potential property damage involving high-value vehicles might render those limits insufficient.

The Role of the Excess Liability Policy In Increasing These Limits

An excess liability policy steps into such gaps if it contains provisions for increasing underinsured and uninsured motorist protection – something that isn’t always guaranteed – extending them beyond what’s offered by your primary auto insurance. For instance: If someone hits you while driving without adequate coverage (or none), causing $800k worth of medical bills & property damage – but their liability limit was only $300k (or nonexistent), then having additional layers through a personal umbrella policy could mean the difference between financial stability versus significant debt post-accident.

A Look At Typical Limit Amounts For Underinsured And Uninsured Motorist Coverage Within An Excess Liability Policy

Oftentimes insurers provide amounts mirroring base-level plans’ figures although exact numbers vary based upon factors like geographic location along individual risk profiles including age plus driving history etc. But generally speaking, one might expect somewhere around $1 million worth of extra protection, as a maximum, per occurrence due to either underinsured or uninsured motorists.

Who is Covered by Your Excess Liability Policy

The protection that an excess liability insurance policy provides extends beyond the named insured. Generally, it protects other members within your household, including both relatives (of any age) as well as non-relatives under 21 years old who are in your care or that of a household resident. In the context of extending limits under an excess policy, however, the underlying insurance coverage must first provide the coverage at issue. Assuming the base policy provides standard coverage on typical policy forms, let’s take a closer look at who may be included:

Coverage for Household Relatives

In terms of insurance, “relatives” encompass anyone related to you by blood or marriage residing with you. This can include a spouse, children living at home, parents sharing your residence, or siblings staying over long-term (i.e. their mail is delivered to the household, etc.).

Coverage for Non-Relatives Under 21 Years Old

Beyond covering immediate family members living with you, excess liability policies also extend coverage towards unrelated individuals under 21 currently living in your house and being cared for by yourself or another relative therein.

If such individuals cause damages surpassing their own underlying policy limits while driving one of your cars, then once again the value proposition behind having purchased an ‘excess’ layer becomes evident.

Extra Note About Age Requirements For Students Living at School:

• A student who is a relative: Typically, as long as the relative is no greater than 24 years of age and they remain enrolled full-time at university/school. Be careful, students who are no longer full-time, as defined by their school, may lose coverage under your excess liability policy (and other coverages like your homeowners insurance, etc.).
• A student who is a non-relative: He or she must also remain a full-time student while the lower age requirement (under 21 years of age) typically applies. In some cases, there are limitations altogether for non-relatives who are attending school.
• All these key points should be carefully verified directly with each respective insurer since different companies might interpret rules slightly differently based on various factors, including state laws, etc.

What are Common Exclusions in an Excess Liability Policy?

If you want to safeguard your assets, as discussed earlier, an excess liability insurance policy can be an incredibly valuable asset. However, it’s crucial to understand that this type of policy still has limits. There are specific situations and conditions that most personal excess liability policies won’t cover. Here are some of the most frequent exclusions that you should be aware of (and remember to review your specific policies with a licensed insurance professional!).

Intentional Acts

The first exclusion to be aware of involves intentional acts. If harm or damage occurs as a result of deliberate actions on your part, don’t expect your excess liability insurance to provide coverage. This includes situations where physical harm was inflicted upon another person or property intentionally.

Business Activities

Your personal excess liability policy doesn’t usually cover business activities unless explicitly endorsed otherwise. For instance, if you operate a home-based business over your garage and face legal action related to this work-from-home venture, chances are high that your personal excess liability insurance won’t offer protection against such claims.

Liquor Law Violations

If damages arise due to violations of liquor laws – say someone gets drunk at one of your parties and then causes an unfortunate accident – liabilities stemming from such incidents may fall outside the scope covered by typical excess policies.

Vehicles Used for Racing

Another typical exception pertains specifically to vehicles used for racing purposes. Auto accidents generally qualify under extended coverage provided by personal excess policies beyond basic auto insurance limitations; however, those involving racing often do not because they’re considered high-risk and potentially in violation of law.

How Much Does Excess Liability Insurance Cost?

Determining the cost of excess liability insurance isn’t always straightforward. The premium can fluctuate significantly based on several factors such as your desired coverage amount and risk profile. With this warning in hand, here are a few generalizations that may be helpful.

Premium Costs for Personal Umbrella Policies

The cost for a $1,000,000 excess liability policy typically ranges from $400 – $600 per year. If you have several drivers in your household and you’re looking at more comprehensive protection, including the maximum limits available for underinsured and uninsured motorist coverage, with an overall limit of up to $5,000,000 in place, then premiums could be in the few thousands of dollars annually. However, remember these are just estimates; actual rates may vary due to individual circumstances.

Factors Influencing The Cost Of An Umbrella Policy

Your premium is calculated by insurers taking into account various elements that contribute towards your overall risk factor:

1. Age of Drivers: If there are younger drivers within your household or named on auto policies, this might increase costs since they tend to pose higher risks due to their lack of experience behind the wheel.
2. Prior Claims History: Those who have previously made claims are often seen as potentially higher-risk insureds, which could result in increased premiums. This history provides insight into potential future liabilities the insurer needs to consider when calculating the rate.
3. Total Number Of Investment Properties Owned: Owning multiple properties implies additional exposure possibilities leading to an increase in cost for liability coverage.
4. Total Acres of Land Owned: Larger landholdings represent greater exposures, especially if used for activities like farming or renting out space for events, ultimately hiking up premium prices.
5. Total Drivers In Household: If numerous people drive vehicles insured under underlying policies, this increases the chances of accidents, thus raising umbrella policy premiums.
6. Prior Accidents And Violations: A track record filled with traffic violations or accidents signals risky behavior and thus increases premiums.
7. Ownership of Watercraft: Owning boats can increase your overall risk and certain vessel lengths and motors (e.g. outboard) that generate high horsepower often create outright exclusions from coverage.

FAQs about Excess Liability Insurance

What is excess liability insurance?

Excess liability insurance provides additional coverage beyond the limits of your primary policies, safeguarding you from major financial risks.

Is excess liability worth it?

Yes. Excess liability insurance can protect your assets in case of a lawsuit or claim that exceeds the limit of your primary policy.

Why is excess insurance important?

Excess insurance offers vital protection against large claims and lawsuits, ensuring you don’t exhaust personal savings to cover costs exceeding standard policy limits.

Do individuals need excess liability insurance?

For anyone who has significant assets of any sort, or high-risk factors such as owning property or having young drivers, then acquiring excess liability insurance is very valuable.

Conclusion

Excess liability insurance is a powerful shield that expands the limits of your underlying insurance, like homeowners and auto policies. It can even increase limits for watercraft and investment properties, but it’s important to meet underlying coverage requirements first. Once met, excess liability insurance offers incredibly important protection against big unexpected risks (which unfortunately occur!) that can have unfortunate financial consequences.