"Let's say you get into a lawsuit. The insurance company pays out the first $100,000. The umbrella policy says: 'Well, you had to have $250,000.' So instead of paying out the $900,000 difference between the $100,000 and a million, you're only going to get $750,000. So there you have a $150,000 gap in coverage. You pick up $150,000 out of your own pocket and the insurance company picks up the remaining $750,000."
It can happen with a car, says Boak, or with something like an uninsured condo-something the clients sometimes don't even get primary coverage for. Suddenly that uninsured pretty pink stucco condo is standing between you and your umbrella payout if something happens.
"I've seen it on many reviews that I've done," Boak says. "Either they don't add it onto the policy or the insurance broker forgets to ask them for the declaration page so that they make sure they have proper coverage. I've had lots of people say, 'I bought a condo because I want to save money on residency for my son to save money on in-state college tuition.'
"You bought it six months ago? Were you ever going to tell me?"
How Much Is Enough
According to Wheeler, price is driven by the number of houses and cars and toys the client has-where someone with one home and two cars for $5 million might pay $300, the person with three homes and five cars may pay $800 or a $1,000. But in the vast scheme of things, umbrella coverage is still cheap to $5 million. However, $5 million is where a lot of insurance companies stop, he says, which is when you go to the higher end players-the Chubbs, AIGs, Fireman's Funds. These carriers will likely require that all of your primary insurance switch to them as well. And beyond that level, the insurance will start to climb back up in price, because that's when reinsurance costs become more part of the process.
"The price of the second $5 million typically is double, if you will, because there is the cost of that reinsurance sneaking into the limited market of those who provide it," Wheeler says. "So if the first $5 million costs a thousand bucks, the second $5 million might cost another $2,000. It's counterintuitive, but it's all about reinsurance and availability."