A couple of times in my career, I’ve discovered an insurance gap. An insurance gap occurs either when two insurance companies (one for auto and one for home) do not coordinate the coverage or one insurance company is careless in their work.
Most people work with one insurance company and get all their property and casualty (P&C) insurance. There are financial and other advantages to using one insurance carrier for your P&C coverage needs. When you add an umbrella policy, the company will require certain minimums on the underlying auto and homeowner’s policies.
Let’s say you wish to add $2MM policy as I ask you to consider in my previous post. The insurance company may want you to have $500k on your underlying auto and homeowner’s policies. That would give you a total over $2.5MM on each your home and auto ($500k + $2MM). They will usually make this change right away when you add your umbrella policy. However, sometimes mistakes happen and you could end up with what may be your normal $300k on your auto. If this is the case, you have $300k on your auto and a $200k gap until your $2MM umbrella kicks in and picks up the remaining liability (up to your policy limit). Because your umbrella won’t kick in until you satisfied the first $500k liability. Got it? You are self-insuring the $200k gap between the underlying auto $300k maximum coverage and the $500k minimum required on the umbrella.
This gap occurred with the same insurance provider when a client moved residences. They got new coverage and of course, the insurance provider didn’t consider the umbrella limit requirements when they issued the new coverage. Fortunately, the independent and objective, holistic fee-only financial advisor caught the oversight and the proper coverage was added. Do you have someone that can catch things like this in your life?
I also notice insurance gaps occur when the auto and homeowners’ insurances are provided by different companies. You may find better rates on the pieces of your coverage with different companies. However, because your insurance companies are not seeing the complete picture, you need to be responsible and ensure the converges mesh together with the appropriate underlying requirements.