Full disclosure: I'm an insurance underwriter. I work for one of the larger carriers in the US, dealing with commercial insurance. Personal lines is different, though a lot of the basics are the same.
We just bought an umbrella policy. Here's what I found weird. Say you purchase a $1M policy. You're not actually getting $1M extra coverage. It is added to your existing insurance to bring the total insurance coverage to $1M. I haven't figured out all the details, but I found this to be quite misleading. Anyone here who can explain this to me in small words and tell me why I shouldn't feel pissed/ripped off/mis-led?
Your umbrella limit should be in addition to the underlying insurance limits. For example, if you have a $300k liability limit on your auto, and a $1m umbrella, you'd have $1.3m available to pay for your liability arising from an auto accident. I've never heard of any umbrella working like that. Are you willing to share more details?
I talked with my insurance broker this week about a liability. He corrected a common misunderstanding about "umbrella" liability policies: in his experience, such policies increase only existing coverage.
For example, if I have an existing auto coverage, but no coverage on my rental property, then an umbrella policy would increase the amount of liability coverage on my existing auto policy, but not liability on my rental.
This is correct. Generally speaking, your umbrella will include a schedule of underlying coverage. If you don't have Auto, it'll probably include an Auto exclusion.
If you have a reasonable amount of money, you probably want one. If you're broke, you probably don't care because they can't get blood from a stone.
If you get one, don't tell people you have one, since it means there are deep pockets for litigants to pursue.
The idea of deep pockets is more or less why I don't have an umbrella. I've seen time and time again how having lots of insurance makes you a more likely target for lawsuits. If I get sued, the plaintiff is going to ask for my insurance policy in discovery, and is probably going to be willing to settle for less if my limits are lower. Granted, this is more about non-economic damages. I do have higher-than-standard primary limits that are enough to cover likely economic losses.
If we'd gone umbrella, I would have lost some coverage points in exchange for the higher overall coverage. One specific example: Under my auto insurance, tour rally events are covered as it's not racing. The umbrella redefines the word "racing" to include tour rallys, so I would NOT be covered on those events anymore even though I'd be shelling out more cash for supposedly "better" insurance...
Did the terms of the underlying primary auto coverage change? An umbrella is generally a separate policy, and can be more or less restrictive than the underlying policies. So, your umbrella might define tour rally events as racing, but as long as the underlying auto policy retains the original definition (which seems likely), you have the same coverage you had prior to purchasing an umbrella in that respect, you just wouldn't have a higher limit available for tour rally events.