Protection from a perfect storm of lawsuits and liability.
© andersphoto/stock.adobe.com; Photo illustration EncyclopÊdia Britannica, Inc
If youâre concerned that your current auto or homeownerâs policy doesnât have a high enough liability limit to cover the risks youâre exposed to, you might consider umbrella insurance. An umbrella liability policy comes with higher limits than most standard insurance policies, offering additional protection should you be sued or involved in incidents with potentially high medical or property costs.
An umbrella kicks in after youâve reached the limits of your primary policy, covering the difference. Whether itâs a lawsuit stemming from an injury on your property or an unexpected liability claim, umbrella insurance can reduce the financial impact and offer peace of mind in high-risk situations.
Key Points
- Umbrella coverage offers additional liability coverage beyond the limits of regular homeownerâs and auto insurance policies.
- An umbrella policy kicks in only after you reach the liability limits of your primary policy.
- Individuals who face a higher risk of costly lawsuits because of the value of their assets or the nature of their activities might consider getting umbrella insurance.
What is umbrella insurance?
An umbrella liability policy provides extra coverage beyond your regular policy limits.
For example, your homeownerâs insurance might cover up to $300,000 in coverage to pay hospital bills if someone is injured on your property. But what if the costs exceed that amount? Or perhaps youâre found at fault in a car crash and sued for more than the $150,000 your auto policy covers.
In these instances, umbrella coverage makes up the difference. Once regular insurance reaches its limit, your umbrella policy steps in to take care of the rest.
What does an umbrella policy cover?
Umbrella insurance is sometimes called excess liability insurance. Itâs designed to help cover high costs if youâre found liable for injury to someone else.
- Medical bills: If someone is injured on your property or youâre found responsible for someone elseâs injuries, umbrella insurance can take care of medical costs above your regular policyâs limits.
- Damage to othersâ property: An umbrella liability policy also covers any property damage you may have done. If repairs exceed your policy limits, umbrella coverage bridges the gap.
- Legal defense: Umbrella insurance can help with legal costs if youâre sued, particularly if your activities or rolesâsuch as being a landlord, volunteer board member, or sports coachâput you at greater risk.
How primary policies and umbrella insurance compare| Type of coverage | Primary policy | Umbrella policy |
|---|
| Liability coverage limit | Within set policy limits | Extends coverage beyond primary policy limits |
| Medical costs (othersâ injuries) | Up to policy limit | Covers costs exceeding primary policy limits |
| Property damage liability | Covers damage to othersâ property | Covers excess damage costs not covered by primary policy |
| Legal defense costs | Included up to policy limits | Covers additional legal costs beyond primary policy |
| Personal property coverage | Your own property | No coverage for personal property |
| Annual cost | Included in standard premiums | Typically $200 to $400 annually for $1 million in coverage |
|
What isnât covered by an umbrella policy? Some situations arenât covered by an umbrella policy. Umbrella insurance is specifically designed to protect you against personal liability. As a result, your possessions arenât covered. Umbrella coverage wonât pay for your own car replacement or repairs to your own home. Additionally, punitive damagesâamounts a court orders you to pay as punishment for harmful actionsâarenât usually covered by an umbrella policy. For example, if you drive under the influence of alcohol or drugs and cause harm, punitive damages wouldnât be covered because the act would be considered intentional and reckless.
How much does an umbrella policy cost?
Minimum liability requirements for umbrella insurance
Many insurers wonât sell you an umbrella policy unless you meet certain liability requirements in your other policies. For example, you may be required to have at least $250,000 in liability coverage on your auto policy and $300,000 for your homeownerâs policy before youâre allowed to purchase liability coverage.
The cost of umbrella coverage varies based on factors such as the types of risks you face, how much coverage you need, where you live, and whether your career increases your likelihood of being sued.
Costs vary by insurer and other factors, but you can usually expect to pay $200 to $400 annually for $1 million in liability coverage under an umbrella policy.
Should you get an umbrella liability policy?
Not everyone needs an umbrella insurance policy, but it can be valuable in certain situations:
Common misconceptions about umbrella insurance
- Itâs only for the wealthy. Not trueâumbrella insurance can protect anyone with assets or activities that could lead to lawsuits.
- It covers everything. No, it wonât pay for your own property or punitive damages.
- Itâs too expensive. In fact, coverage is often affordable compared to the financial risks of going without it.
- Frequent visitors to your property. If you regularly have visitorsâespecially with potential hazards like a swimming pool or trampolineâumbrella coverage can offer extra protection in case of injury.
- Business risks. Certain professions increase the risk of lawsuits for libel, slander, or professional advice. If you review products or provide public commentary, umbrella insurance can help cover legal costs and damages.
- Contract disputes. If youâre party to contracts involving large sums, valuable property, or significant obligations, umbrella insurance can help cover your liability if a breach results in a lawsuit.
- Community involvement. Coaching your childâs sports team, volunteering with a local charity, serving on the board of a nonprofit, and certain other activities can increase your likelihood of being sued for perceived wrongdoing. Even if youâre found not liable, attorney fees can be expensive. Umbrella insurance can be one way to protect yourself.
- Significant assets. If youâre a high-net-worth individual, you may be more likely to be sued. Umbrella insurance can provide a way to defend yourself and your assets and ensure youâre able to make any required payouts.
The bottom line
Umbrella insurance offers an added layer of financial protection when your standard policies arenât sufficient. It can be especially valuable if you have significant assets, frequent visitors to your property, or engage in activities that increase your risk of being sued. The relatively low cost for significant additional coverage can make it worthwhile if your primary insurance limits wouldnât fully cover a large liability judgment or costly medical expenses. Understanding how an umbrella policy fits into your overall financial plan can help you decide if itâs worth the additional modest cost.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by David Schepp
