How Does an Umbrella Insurance Work

Question

So many in here seem to like Umbrella Insurance compared to an LLC.

I'm an LLC guy, but I have some questions about your experiences with Umbrella Insurance.

Both owners and Insurance Sales Experts are invited to comment.

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Dr. Advanced Degree in private practice, buys a 4 plex looking to build generation wealth (or just a bigger Mercedes), decides to use an Umbrella Policy vs an LLC for this investment.

Scenario 1

Ms. Clumsy Renter falls though a broken stair tread cuts her leg and bleeds to death before help arrives. She leaves behind 11 crying children (all now orphans), and one Slip and Fall Attorney.

Dr. Degree faces a BIG lawsuit, but less than the Umbrella Policy. The Doctor loses this case due to negligence, unrepaired stair tread.

Will the insurance company handle the lawsuit (at zero cost to the doctor), and either fight it or settle, and then drop the good Doctor as a customer, or raise his rates to the sky forever after.

Will the Doc never have to pay anything out of pocket—ever.

Scenario 2

Mr. Nuisance Suit pretends to trip over a piece of heaved sidewalk he notices near the front door of the place, has a Slip and Fall Attorney on speed dial.

Dr. Degree faces a BIG lawsuit, but less than the Umbrella Policy. Insurance company settles for $10,000 (less than the cost to fight it).

Will the insurance company handle the lawsuit (at zero cost to the doctor), and either fight it or settle, and then drop the good Doctor as a customer, or raise his rates to the sky forever after.

Will the Doc never have to pay anything out of pocket—ever.

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It being a given that if the Doc had the apartments in an LLC that he would have had to foot the bill for all attorneys fees, vs the insurance company paying those attorney bills.

What about getting your personal and (other than real estate business) bank  accounts unfrozen after being served compared to an LLC—which takes some time and extra attorney fees.

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What are your experiences and thoughts about this?

Tom Gimer · Answer

I can't answer your questions because the fact patterns are missing the details of the primary insurance.

You need underlying liability insurance in place and then you add another policy on top. There are a couple of different types of policies that are both (incorrectly) referred to as "umbrella". An excess liability policy would respond to covered damages in excess of the primary. An umbrella policy would respond to certain claims that fall outside the coverages of the primary (and perhaps limits).

Excess --> Extends up. Umbrella --> Extends out (and perhaps up).

Excess and umbrella policy terms are unique to each insurer and the issue of whether defense expense is included and/or is included within limits is unique to each policy.

Jason Bott · Answer

@Tom Gimer is right on with his explanation.

@Scott Mac If a claim does not exceed the limits of the Umbrella, you will not pay anything out of pocket.

In all of the lawsuits we have seen come through, I have never heard of someone's bank accounts being frozen.

Lastly, the insurance carrier defends a LLC the same they would defend an individual.  You would not need to retain an attorney for claims that would be covered under your policy.  If you have a claim that is not covered by your policy, such as a Fair Housing or Discrimination claim, you would need to pay for an attorney out of pocket.

Steve Vaughan · Answer

Yep, my umbrella was with my auto / home carrier since driving represents the most risk.

Prior to offering an umbrella, I was required to max my liability limits on all policies.

Whatever claim exceeded those liability limits would theoretically be covered by the umbrella up to that max.

So easy numbers on your scenario.  $2500 deductible out of pocket, $500k liability on the quad, $1M protection above that under your umbrella policy.

Tom Gimer · Answer

@Scott Mac I can only respond to the insurance-related question... give notice early and often.

I don't see how you "file a claim" against an excess or umbrella policy without having already violated the policy terms. Prompt notice of a potential claim (and certainly a claim) is required of the insured. If the primary limits have been extinguished by a settlement or judgment or the primary carrier has disclaimed coverage, and the insured decides only now to give notice to the excess or umbrella insurer, that gives rise to a potential late-notice defense. The insurer could disclaim coverage on the grounds that it has been prejudiced by the delay in notice.

However, if the insured does give notice of a potential claim asap and that situation plays out but the excess or umbrella are not eventually implicated, I don't think that would affect future rates. Sure it's an underwriting decision but a potential claim is not a loss.

Scott Mac · Answer

Thanks guys,

What about filing a claim, do they jack the rates out of sight if you file a claim?

Anyone have any experience with that?

Also, is there a trick to being able to write it off as a business expense.

It seems like covering your personal residence and vehicle would mean no write off for the policy payment?

And if you are sued personally I've always seen them lock up all of the bank accounts. With an LLC it takes time and money, but I've seen personal accounts unlocked, and other LLC accounts never locked.

Meaning if it takes 8 weeks to unlock a personal account for an LLC and you fall into past due on your personal stuff, as well as the property payments and possibly the property insurance payment, does that happen with the Umbrella insurance.

Because it seems all of your properties will be account locked, you cannot pay the mortgage and your personal account is locked...which might be the business/personal account.

Anyone have any experience with this.

How Does an Umbrella Insurance Work

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