A homeowner has a standard Homeowners Policy (HO-3) with a personal liability limit of $300,000. While hosting a party, a guest slips on a wet floor, breaks their leg, and sues for $500,000 in medical expenses and pain and suffering. The homeowner also has a Personal Umbrella Policy with a $1,000,000 limit and a $10,000 self-insured retention (SIR). Assuming the HO-3 policy pays its full limit, how much would the Umbrella Policy pay?
- A$200,000
- B$1,000,000
- C$500,000
- D$190,000
Show answer & explanationAnswer & explanation
Correct answer: A. $200,000
The HO-3 policy pays its $300,000 limit. The total loss is $500,000. This leaves a remaining liability of $500,000 - $300,000 = $200,000. The Umbrella Policy provides coverage above the underlying policy limits. Since the underlying policy (HO-3) has paid its full limit, the Umbrella Policy will cover the remaining $200,000, up to its own limit, and the SIR does not apply when an underlying policy pays.
Why the other options are wrong
- B. This is the total limit of the Umbrella Policy, not the amount it would pay for this specific loss.
- C. This is the total loss amount, not the Umbrella Policy's payout after the underlying policy contributes.
- D. The SIR (Self-Insured Retention) only applies when the Umbrella Policy is providing primary coverage (e.g., for a loss not covered by the underlying policy but covered by the umbrella). In this case, the underlying HO-3 policy applies and pays its full limit, so the SIR is not triggered.
Personal Umbrella Policy (PUP) Function
An excess liability policy that provides additional liability coverage above the limits of underlying policies (e.g., auto, homeowners) and may also cover some exposures not covered by those underlying policies, subject to a self-insured retention.
- Provides 'excess' coverage over underlying policies.
- Provides 'drop-down' coverage for gaps in underlying policies, subject to an SIR.
- High limits (e.g., $1M to $5M or more).
Memory trick: Umbrellas cover 'above' other policies, or 'drop down' for gaps (then SIR applies).