An umbrella cannot stop the rain, but it can keep you from getting soaked. As the name implies, an umbrella insurance company broadens and extends your existing coverage. Drop-down coverage is simply a way to structure your coverage so that your umbrella insurance policy picks up after the limits of other polices have been exhausted.
In some cases, umbrella insurance might provide greater amounts of coverage than existing policies. Common types of existing coverage are auto and homeowners insurance policies. In other cases, it may cover claims that your other policies omit. For example, an umbrella policy might cover you and your family against slander claims, and these are not typically covered by home policies. The drop-down feature refers to the fact that your basic coverage will pay first for covered claims. If these policy limits are exhausted, you can make a claim against your umbrella insurance policy.
Sometimes drop-down coverage is also called horizontal coverage or extra insurance. To understand how it works, consider a simple example of an individual who purchased a minimum required liability insurance policy for his vehicle in Colorado. In this case, the policy would only provide $15,000 of property liability insurance. For this example, imagine that the covered individual caused an accident that resulted in the destruction of a new car worth $70,000. The minimum required coverage could be woefully lacking, and it is possible that the injured party or his insurer could sue the at-fault driver for the difference. If that driver had sufficient umbrella insurance, this policy would pick up the tab after the basic auto policy covered the first $15,000. This is an extreme example, but many fairly new cars are worth more than $15,000: According to Market Watch, the average recent new car transaction was over $30,000.
No Basic Coverage
In some cases, umbrella insurance covers incidents that are not covered by basic policies. For example, your policy might cover slander or liability. In this case, there might be no basic policy to pick up the initial claim. Drop-down coverage would not apply.
Who needs to consider purchasing umbrella insurance? Consider the limits of liability on your other policies. If you get sued for more than these amounts, you could lose your earnings and even have judgments attached to future earnings. These policies also help pay for legal defense. At any rate, drop down coverage starts picking up the tab after your other insurance is exhausted. These policies are fairly inexpensive, maybe only a couple of hundred dollars a year for a million dollars of coverage, and can protect your financial life.
Based outside of Houston, ML Katz has been writing financial articles since 2000. During that time, she also worked as a financial professional and website developer. She received a Bachelor of Business Administration with a concentration in information systems from the University of Texas, Austin in 1981.