What is umbrella insurance exactly and who needs it? CLH President, Chuck Hembree unpacks how this particular type of insurance works and why it may be worth adding it to your policy.
Below is a transcript of the episode, modified for your reading pleasure. For more information on the topics discussed in the episode, see the links at the bottom of this post.
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Grant FINLEY: Welcome and thank you for joining us on this edition of Your Insurance Connection Podcast. I'm your host, Grant Finley and with me again today, we have the President of CLH Insurance, Chuck Hembree. Chuck, how's it going?
Cuck HEMBREE: Going well.
FINLEY: Good deal. Glad to have you on here again. Today I wanted to talk to you a little bit about umbrella insurance. And, what exactly is umbrella insurance and how does it work?
HEMBREE: I'm glad you brought it up because it's a questions a lot of people ask. It's a great word-picture isn't it? An umbrella, it opens up, it covers all that's underneath it and if you take that same application and apply it to insurance, that's exactly what umbrella liability does. So in the insurance world, it's a policy that opens up and adds extra coverages to all the underlying coverages that are needed. So, let's think about our average person, just like you and I. We may have home insurance, we have auto insurance and they have limits of insurance. Well, what if any of those were exhausted? Well, if we don't have an umbrella over it, we get rained on, we're all wet and have some real problems. An umbrella is what goes over those underlying insurance policies so if they're ever exhausted we have additional liability limits that we can tap into that protect the assets that we worked so hard, whether our homes or autos and our savings, from being depleted.
FINLEY: So, is that to say if I ever found myself in a legal battle and my auto insurance covers "x" but the legal fees and everything's going to end up costing "x", then "y" on top of it, the umbrella insurance is going to be able to cover some of that "y"?
HEMBREE: Well, yes and no. Most all the products that we sell have unlimited deference. There's two ways you can think about it. Defense is probably the most expensive part of having to go to a trial or having to be working in a suit. What does it cost to have an attorney come in and defend us? Hopefully, we don't pay a penalty because of it - a fine or something that the court imposes. But, both of those things are in that limit but we say defense is unlimited, so ideally, if we have $500,000 worth of coverage in liability, the court says we have to pay off $500,000, it'll go ahead and pay off that $500,000 even though there's a lot of attorney fees outside of that $500,000 that lead up to that point. Those are all excess and they'll be paid. Now, let's talk in the real world though. If an insurance company feels like we're really at fault and there's no way we can avoid fault, what is the insurance company going to do? They're going to pay their limit and cut their losses as far as defense. Well that's great for the insurance company but what if we still need some defense beyond that? Maybe they don't sue us for $500,000, they sue us for $1,000,000 even though the court may say $500,000. We don't know where that suit's going to end up. So what happens in the mean time? Well, insurance pays their $500,000 and we're still on the hook for $1,000,000 until the court decides whether we owe that or not. So in the real world, the courts go in and they freeze our assets. So, now we don't have access to our savings account. We can't just spend money like we want to without approval of the courts because we know if there's more than that $500,000 that's got to be paid, it's going to come out of our personal assets. We're going to have to sell our house. We're going to have to do other things - have our earnings garnished until we can pay that out. So, in the interim, until we find out what that final court judgement is, we're in limbo. Having an umbrella just eliminates that totally. Because we know we have excess limits that the courts are going to look at and say "Hey, they have enough here to pay that, so we're not going to freeze their assets." and it takes all that stress away and these are not expensive products.
FINLEY: So, it sounds like anybody would be well-served to have one of these.
HEMBREE: From an insurance stand point, you would think so. Now, there may be somebody that has so few assets and they're at retirement age where garnishing their wages is not going to be very beneficial to a court to look at where they may not need it. But for the vast majority of us, and particularly for our younger insureds who have their whole earnings future ahead of them, an umbrella makes sense. And even if they're wrestling with whether it makes sense or not, doesn't it make sense to an insured to find out what that cost is so that they can make an intelligent buying decision. If you knew that you could buy an umbrella for $100-200 a year, isn't that worth considering? In the law of spectrum that's a cheap cost of protection.
FINLEY: Yeah, I've seen some scenarios where somebody gets caught up in the grinding legal system and it can ruin you. So, I would think for just one or two hundred dollars a year to be able to have that extra protection, that makes a lot of sense to me.
HEMBREE: Particularly in the litigious society that we live in, it kind of makes sense. We would never force someone to buy an umbrella but it sure makes sense in many many situations.
FINLEY: Absolutely. So, I'm curious then, is this different somehow from personal liability insurance ?
HEMBREE: Not generally. There are two types of umbrellas. There's an umbrella that we call follow-form, so it doesn't cover anything differently then what you've got in your underlying policy. So, whether it's a commercial policy or whether it's a personal lines policy, all the terms that are underneath it is what's going to be covered by the umbrella and no more. But there is what's called a true umbrella that may have extra definitions of personal injury or something that our underlying insurance does not. But it is all liability, so this is not giving you extra protection on your home, or extra protection so that your car is worth more, it's only on liability - what a third party can sue you for, bodily injury or property damage that you cause to someone else.
FINLEY: Okay, it sounds like there's a lot there. Certainly makes sense to me. Is there anything else about umbrella insurance that you think is worth throwing out there that maybe we haven't touched on?
HEMBREE: Well, a discussion with your agent is just always advisable because you need to know that these are low cost. Because, the underlying is where most of the exposure is and very rarely do we get into the umbrella so they aren't expensive. Have we seen cases where they go into the umbrella? Absolutely and with broader coverage than what you have in your underlying, sometimes this is a great protection to have. So, it ought to be a consideration on anybody's commercial or personal lines insurance protection portfolio.
FINLEY: Good advice as always, Chuck. I'm sure there's a lot more that we can get into on the next episode but I think that's going to do it for this one, so thank you very much again.
HEMBREE: Thank you, Grant.
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Show Notes - Where you can learn more about the people and ideas discussed in this episode.
For more information or if you have any questions regarding umbrella insurance or any other topic, contact CLH Insurance at 636.391.0700 or email firstname.lastname@example.org to connect with our insurance agents.