Myth: A personal umbrella policy is the best way to cover my investment properties. 

We hear this on daily basis. Insurance agents collectively do a poor job explaining to their clients what an umbrella policy is and isn’t. An umbrella policy is not a “magic bullet” that covers everything. In fact, it extends zero coverage to your structure – or any property coverage – at all! Umbrella policies are a way to garner additional liability coverage above and beyond what your underlying or primary liability policy provides to you. Meaning, if your underlying liability policy provides you with $1,000,000 per occurrence and you purchase a $5,000,000 umbrella, you have increased the per-occurrence limit of coverage to $6,000,000.

Your Personal Umbrella Policy May Not Cover Your Business

Personal lines umbrella policies are underwritten very differently than commercial lines umbrella policies. Many personal lines umbrella policies contain a “Total Business Venture Exclusion.” Because of this exclusion, even if you pay to include your investment properties on your personal lines umbrella policy, it’s possible you have no additional coverage through your umbrella. This is because your investment property is or is intended to be a revenue-generating asset.

Umbrella policies also do not provide you with first-dollar coverage. You must exhaust your underlying liability policy limits in order for your umbrella policy to provide coverage. In over nine years we have only seen one umbrella carrier willing to drop down and provide first-dollar coverage for a limited number of excluded coverages on the underlying liability policy. The kickers to this are:

  • These options are much more expensive and you are better off just purchasing a more comprehensive underlying policy.
  • These also come with a $10,000 – at a minimum – Self-Insured Retention for any loss excluded by the underlying liability policy that is picked up by the umbrella policy.

Watch out for exclusions

In addition, do not purchase an underlying liability policy that could have exclusions. Standard exclusions in a personal lines liability policy that can do more harm than good are Pollution and coverage for dog bites. The Pollution exclusion could harm you in the event of carbon monoxide poisoning on your property. Many personal lines policies list 12-15 of the most “vicious” breeds to exclude from coverage. If a dog bite occurs on a property you own, this is a liability exposure for you. Your umbrella will not save you if coverage is excluded from your underlying liability policy. Your umbrella policy almost always “follows” your underlying liability policy. If something is excluded on your underlying liability policy, your umbrella also excludes it.

Last point on the umbrella policies. The underlying liability and umbrella policies you have should be the same type of policy for them to work together. A commercial umbrella policy will not go over a personal lines liability policy and vice versa. It’s important to remember that commercial insurance policies are best utilized to cover all types of commercial real estate from single-family dwellings to large apartment complexes.