Why You Need an Umbrella Policy

What Is Umbrella Insurance?

Umbrella insurance is a form of liability insurance that will supplement your basic liability policies, such as your auto, home or renters insurance. An umbrella liability policy covers a much higher limit and goes above and beyond claims directly relating to your home and auto. The main purpose of your umbrella policy is to protect your assets from an unforeseen event, such as a tragic accident in which you are held responsible for damages or bodily injuries. If another party files a lawsuit against you, your umbrella coverage will pay for the damages you’re legally responsible for up to the policy limit.

What Does Umbrella Insurance Cover?

An umbrella policy provides additional coverage or “excess liability” above the limits of your basic policies. It can protect you from bodily injury liability claims and property damage liability claims. Umbrella policies also provide a broader form of coverage and can help cover legal fees, false arrest, libel, and slander.

Examples:

•  Your dog attacks somebody at the park. The victim sues for pain and suffering, as well as the cost of reconstructive surgery.
• A tenant has a visitor who trips and falls down the stairs of your rented property.
• You collide with another car at an intersection, pushing it into the path of a pair of cyclists.
• Your child uses social media to bully and harass a classmate online.
• While texting and driving, your teenager loses control of the car and crashes into the entrance of a local business.
• While your pool is unlocked, a neighbor’s child walks onto your property, falls in, and drowns.

In situations like these, the cost of your liability can easily exceed the liability limits of your homeowners or auto policy. Umbrella insurance covers your liability costs in the event that they surpass those limits.

How Does Umbrella Insurance Work?

Your umbrella insurance can come into play if you are found liable and need to pay damages, or if you are sued and need to pay for your legal defense – even if the result is that you are not found to be responsible. An umbrella policy only pays once your basic liability limits have been exhausted or the claim is excluded from the basic liability coverage. The claim will be made against you, the policyholder, on behalf of the wronged party. Then your insurance company may pay the settlement amount up to the limits of your coverage. If the settlement amount exceeds your coverage limits, you are responsible for paying the remaining amount out of pocket.

How Much Umbrella Insurance Should I Carry?

When choosing your coverage limits, consider three things:

1. The risks you may face. Consider risks as a homeowner or renter, the risk of causing an accident during your work commute, and any potentially dangerous activities you participate in that could put those around you at risk.
2. The value of your assets. These include properties, possessions, stocks, bonds, savings and retirement funds. The more assets you have to protect, the higher the umbrella policy limit you should consider.
3. The potential loss of future income. Because liability lawsuits can result in loss of both current assets and future income, even those with few assets to protect may want to consider the long-term ramifications of a serious claim.

When you review your future income, consider your earning potential. You may not have many assets now, but if you’re on track for a high paying career, you could be involved in a lawsuit that can target money you haven’t earned yet.

How Much Does Umbrella Insurance Cost?

Coverage for an umbrella policy typically starts in the range of $150-$200 for a $1 million policy, but may cost more depending on your exposure. Your premium will increase if you decide to increase coverage. However, getting twice the amount of coverage and increasing the policy limit to $2 million will not usually double the cost of your premium.

Information provided by Trusted Choice. 

Updated February 13, 2024.