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What is umbrella insurance?

Fact-checked with HomeInsurance.com

    Article Highlights

    The unexpected happens. Life can be dangerous and lawsuits are all too common. Standard insurance policies cover most unexpected disasters, but umbrella insurance can cover the rest for extremely high-cost or dangerous situations. All insurance policies have limits. Umbrella insurance is a type of personal liability insurance that kicks in once you’ve exceeded the maximum on your standard personal liability insurance.

    But what is umbrella insurance? How does it work, and what does it cover? In this article, we’ll delve into these questions and more. 

    What is umbrella insurance?

    Umbrella insurance is a type of personal liability insurance that covers costs that exceed the limits of your underlying insurance policies. Generally, these are homeowners, auto or watercraft policies. If someone gets injured or has their possessions damaged on your property, an umbrella insurance policy will cover the excess costs. As a liability insurance, umbrella insurance can include family members, so that if you or someone in your family gets sued, even if it’s unrelated to your properties and vehicles, your umbrella insurance may cover it.

    Most insurers have requirements that must be met before they offer umbrella insurance policies. For example, Geico states that customers must first have at least $300,000 in liability on their homeowners policy and the same amount per person or occurrence on their auto insurance. Boat requirements with Geico range from $100,000 to $300,000 in liability. 

    Laura Adams, personal finance expert, explains, 

    “Getting a personal umbrella insurance policy can be an affordable way to get high amounts of coverage. It covers liability claims that exceed your other policies, such as homeowners, auto, motorcycle and boat insurance.

    For example, let’s say your auto insurance has $100,000 of bodily injury liability protection. If you’re found at-fault in a $500,000 lawsuit for injuring someone in a car crash, your auto insurer will pay $100,000, and you’d be responsible for the remaining $400,000. But if you had a $1 million umbrella policy, it would pay $400,00, and even cover your legal defense costs.”

    Adams says,

    “Having umbrella insurance gives you more liability for the money than if you raised the limits on your auto, home, or renters insurance. Plus, it can provide you with peace of mind that if you or anyone in your household got involved in a lawsuit, it wouldn’t devastate your financial future.”

    How does an umbrella policy work?

    Umbrella policies don’t kick in immediately. First, any basic liability insurance coverage that applies to the situation is filed. Only when that coverage has been exhausted does the umbrella policy come into effect. 

    For instance, if your son gets into a car accident while on your insurance and is at fault for the destruction of property damage that exceeds your coverage, a personal umbrella policy would kick in and take care of the rest.

    Another example. A friend visiting your home trips over your rug and falls. Due to injuries, your friend won’t be able to work or get around for some time. An umbrella insurance policy would cover the costs in this case.

    Umbrella policies are a final line of financial protection. It is an insurance designed to wrap around home, auto or watercraft insurance policies and provide extreme levels of personal liability protection.

    What does umbrella insurance cover?

    Let’s take a closer look at what is covered by umbrella insurance policies. We’ll start with broad categories and narrow it down to some specifics of each.

    • Certain types of lawsuits
    • Damage to others’ property
    • Injuries
    • Personal liability situations

    Lawsuits can be tricky when trying to get them covered by an umbrella insurance policy, but some situations qualify. If the suit relates to your liability for property damage or physical injury, then there is a good chance that umbrella insurance will help with the costs. However, this is only after other forms of liability insurance have been maxed out.

    Property damage is one of the primary reasons to get umbrella insurance. As a personal liability insurance, it is specifically designed to cover property damage and physical injury. If you are liable for property damage and the costs exceed your basic liability insurance, then umbrella insurance (if you have it) will kick in and cover the rest.

    Injuries are the second of the main two purposes behind umbrella insurance. Whenever you are liable for an injury and the costs exceed your basic liability maximum, then an umbrella insurance policy (if you have one) will cover the rest. Whether someone falls at your house or your kids hurt someone in an accident elsewhere, injuries that exceed your basic liability coverage are often covered.

    What doesn’t umbrella insurance cover?

    • Personal belongings
    • Business losses
    • Contracts
    • Criminal activities

    Personal belongings aren’t insured under umbrella insurance. Personal liability is for financial protection, and since you own your belongings, the only person you owe when they’re lost or damaged is yourself. Other insurance types do cover personal belongings. Most homeowners insurance policies will include a fair degree of personal property protection.

    Business losses are another type of loss that isn’t covered by umbrella insurance. There is a form of umbrella insurance for business entities, known as commercial umbrella insurance, but this is still a form of personal liability insurance. Business losses are not a financial obligation to another, so they are not in the purview of umbrella insurance. It won’t make up for the sales you haven’t made. Still, it will protect you if an employee or customer gets injured, and the costs exceed your business’s basic liability insurance.

    Breach of a contract or other forms of liability placed upon you by a contract will generally not be covered under umbrella insurance. For example, you cancel your internet contract a few months early and get charged with a steep cancellation fee. Umbrella insurance would not help pay for this, even though it is a financial liability to another.

    Umbrella insurance won’t cover acts of crime. This can be confusing as it will cover numerous lawsuits that can stem from what might be a criminal act, up to the point that they result in legal action. Once it gets to that point, the insurance ceases to apply.

    What umbrella insurance coversWhat umbrella insurance doesn’t cover
    Lawsuits Business losses 
    Damage to propertyPersonal belongings
    InjuriesCriminal activities
    Personal liability situationsContracts

    Who needs umbrella insurance?

    Umbrella insurance is an extra layer of protection for extremely high-cost situations. The most common place to see umbrella insurance is as commercial umbrella insurance for businesses. However, it is often recommended for individuals that have a net worth of $1 million or more.

    One way to look at whether or not you should get umbrella insurance is to look at your financial risks. If you’re likely to be in situations where an accident could cause you to exceed your basic liability protection, then umbrella insurance can be a wise precaution. However, for most people’s day-to-day life, this added protection would do very little. Basic liability coverages are already designed to handle the average financial risks of daily life.

    Still, there are situations where you might want umbrella protection even if you are not a business owner and have less than $1 million in net worth. If you host large gatherings on your property, the risks of exceeding your basic liability in the face of an accident could make umbrella insurance useful.

    Landlords can also benefit by having this extra cushion on their liability insurance. If anything happens on their properties that they are financially liable for, they can be sure they’re covered. Imagine a situation where tenants at a rental property throw a party that gets out of control, and numerous guests end up injured. The landlord will likely be liable, and the associated bills may exceed their basic liability coverage. Umbrella insurance would cover the rest of the costs.

    Finally, umbrella insurance can be especially useful for those who face regular lawsuits without facing actual legal action. Whether defamation, injury to others, damage to others’ property or other policy dependent types of lawsuits, umbrella insurance can provide a strong financial cushion to protect against the financial ruin that lawsuits can cause.

    How much does umbrella insurance cost?

    According to the Insurance Information Institute (iii), umbrella insurance costs around $150 to $300 per year for the first $1 million in coverage, and then another $75 per year for the second million in coverage, and another $50 per year per added million in coverage after that. Keep in mind, though, that most insurance companies have strict requirements regarding who may qualify for coverage.

    To qualify for umbrella insurance, customers will need to already have $300,000 of liability coverage on their homeowners insurance and $250,000 liability coverage on their auto insurance, according to the iii. 

    Umbrella insurance is cheap, as liability insurance goes. Two of the main reasons for this affordability are that it doesn’t kick in until underlying liability coverages are exceeded, and it requires that you already hold a substantial liability policy with the insurance company. The first factor means that the insurance company doesn’t expect to pay out on these types of plans as often. The second one relates to the fact that any customer paying for umbrella insurance is already a high-paying customer.

    The takeaway

    Umbrella insurance is specialized for high-cost situations, and it can prevent financial ruin when other forms of liability coverage run out.

    • Umbrella insurance is a form of personal liability insurance that supplements existing liability coverage.
    • Most personal liability situations can be covered by umbrella insurance.
    • Umbrella insurance covers damage you are liable for, not damage to your own property.
    • As a form of personal liability coverage, umbrella insurance is concerned with financial risk and liability.
    • Umbrella insurance requires having a sufficient amount of liability coverage on your underlying policies.

    When it comes to personal liability, most people will be able to get enough through their basic homeowners and auto insurance. However, high-cost and high-risk situations can result in accidents or occurrences exceeding that coverage. In these situations, umbrella insurance can step in and cover costs that exceed the basic liability plan.

    To qualify, you must first have around $250,000-$300,000 in liability coverage on your auto and homeowner’s insurance policies. In part because of this high entry requirement, umbrella insurance is relatively inexpensive.

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