An umbrella policy is an additional liability insurance coverage above and beyond the limits of the insured's regular insurance for home, auto or watercraft. It is used to ensure an extra layer of security for people at risk of being sued for damages done to others’ properties or physical injuries caused to others as a result of an accident. The "umbrella" nomenclature is used as in referring to the broader coverage provided by the policy.
These policies generally provide broader coverage on risk factors over one or more primary policies. Hence, these policies may have defined the covered risk factors on quite broader terms than the definitions as present in the primary policies. Sometimes, they skip exclusions used in the underlying primary policies. These policies may also provide protection against vandalism, slander, libel and invasion of privacy.
Thus, certain risks may be covered by an umbrella policy from the very first dollar of loss or incurring the liability, which would never be taken care of by the primary policies.
The umbrella insurance comes in very handy when the policy owner is sued in such a condition that the monetary limit of his original policy is already exhausted. Also, individuals who are owners of a lot of assets or possess very expensive assets and who are at significant risk of being sued oftener than a common man may need the Umbrella policy.
Without umbrella coverage, the owner would have to make the payment out of his own pocket for any costs over the limit of his home or auto insurance, or he could have a lien on his home and his savings/other assets could be badly affected by the transactions. If the above situations were to happen with respect to business properties or business level interactions, then the asset pool and the money reserve of the business would be impacted, even drained. That is when umbrella coverage becomes critical.
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