Umbrella insurance: What it is and how it works

High limits on car insurance and home insurance might not be enough to protect all of your assets. In that case, you may want umbrella insurance. 

Umbrella insurance kicks in when the limit of your auto or home insurance policy has been reached and there still are damages to pay. For example, if someone falls on your walkway and sues you for an amount of money that exceeds your policy’s coverage, your umbrella insurance will kick in.

What is umbrella insurance?

Umbrella insurance is a type of personal liability insurance that provides additional coverage beyond the limits of your existing insurance policies, such as your homeowners or auto insurance. It is designed to protect you in case you are sued for damages that exceed the liability limits of your primary insurance policies.

How does an umbrella policy work?

An umbrella policy provides an extra cushion of insurance protection.

An umbrella policy covers damage claims caused by you, your dependents, and even your pets. It starts paying out after your auto and homeowners liability limits run out. For example, if you have a home insurance policy with liability coverage of $300,000, the umbrella policy will pay claims above $300,000, up to the limit you select, such as $1 million.

Or if your liability limit on your car insurance policy is $250,000 of bodily injury protection per person and $500,000 per accident, your umbrella coverage kicks in after you exhaust that coverage. 

Let’s say you caused severe injuries to one or more people in an auto accident, and the medical expenses add up to $400,000. If your auto insurance liability coverage tops at $250,000, you’re still on the hook for $150,000. Without umbrella insurance, your hard-earned assets are at risk. Instead, if you have an umbrella policy, it will pay the $150,000 for you. 

What does umbrella insurance cover?

A personal liability umbrella policy guarantees you more than just higher liability limits. You’re paying for broader coverage in case you’re sued. It also covers you if you cause bodily injury, property damage or personal injury.

Some policies also cover you if you face liability due to your service on the board of a civic, charitable or religious organization. 

Umbrella policies also covers attorney fees that may not be covered by your primary auto or homeowners policy. Coverage is generally provided if you are sued for the following:

• Slander
• Libel
• Defamation of character
• False arrest, detention or imprisonment
• Malicious prosecution
• Mental anguish
• Other personal liability situations

What doesn’t an umbrella insurance policy cover?

As with any insurance policy, an umbrella policy won’t cover intentional acts that cause damage, nor will it pay for punitive damages in judgments against you or restitution you owe if you’re convicted of a crime.

Umbrella policies also don’t cover damages from any businesses you own. You’d need a business insurance policy for that. 

It’s also important to note your own property is not covered by an umbrella policy. It is there to help cover expenses if you’re found responsible for damages to someone else.

Check your umbrella policy for specific exclusions.

Who needs umbrella auto insurance?

An umbrella auto insurance policy can benefit various individuals in different situations. Here are some cases where you may need an umbrella auto insurance policy:

• High-net-worth individuals: If you have significant assets, such as a valuable home or investments, an umbrella policy can provide extra liability coverage that exceeds the limits of your standard auto insurance.
• Business owners: If you use your vehicle for business purposes or own a business, an umbrella policy can protect you from potential liability claims resulting from accidents or incidents involving your vehicle.
• Drivers with a history of accidents or violations: If you have a record of accidents, traffic violations, or DUI convictions, you may be considered high-risk and could benefit from the additional coverage provided by an umbrella auto insurance policy.
• Families: Families with multiple drivers or teenage drivers can benefit from an umbrella policy, as it can offer additional protection against accidents involving family members.

How much umbrella insurance cost?

Personal liability umbrellas are inexpensive because your primary auto or home policies pay most claims. According to the Insurance Information Institute (III), you can buy a $1 million umbrella policy for about $150 to $300 a year. The next million will cost about $75, and about $50 for every million after that. Typically, you can buy a personal umbrella policy of up to $5 million.

Many insurance companies require that you purchase both your auto and homeowners insurance policy through them to buy an umbrella policy. Furthermore, your insurer may require you to buy auto or home liability limits at a minimum amount. 

According to III, most insurers will require you to have $250,000 per person and $500,000 per incident of liability insurance on your auto policy. For homeowners insurance, you’ll be required to have $300,000 of liability insurance before getting an umbrella liability policy for $1 million of additional coverage.

Where can I buy umbrella insurance?

Many insurance companies offer umbrella insurance as an add-on to your existing policies, such as auto or homeowners insurance. You can contact your current insurance provider to inquire about adding umbrella insurance to your coverage.

Final thoughts on umbrella insurance coverage

Before buying a personal liability umbrella insurance policy, ask your insurance company about the cost of raising the liability limits in your current auto and home policies. You may even consider offsetting the premium increase by raising your deductibles.

At any rate, in our litigious society, it’s smart to protect your assets. If you have more than $500,000 in assets, umbrella insurance can protect you.