Chances are slim that you will lose a lawsuit for a sum greater than what your existing insurance will pay. But if you ever did find yourself in that situation, you could lose all your savings and other assets. A good umbrella policy can prevent that nightmare from happening.
Umbrella insurance is a type of personal liability insurance that can cover claims in excess of the limits of your regular insurance policy. Below, we’ll take a closer look at this extra liability coverage: how an umbrella policy works, who needs it, how much it costs and what it won’t cover.
- Umbrella insurance is a type of personal liability insurance that covers claims in excess of regular homeowners, auto, or watercraft policy coverage.
- Umbrella insurance covers not just the policyholder, but also other members of their family or household.
- Umbrella insurance covers injury to others or damage to their possessions.
- It doesn’t protect the policyholder’s property or liability due to injury or damage caused on purpose.
- Umbrella insurance is quite cheap compared to other types of insurance.
What Is Umbrella Insurance?
Umbrella insurance is a type of personal liability insurance that can be indispensable when you find yourself liable for a claim larger than your homeowner’s insurance or auto insurance will cover. If you own a boat, umbrella insurance will also pick up where your watercraft’s liability insurance leaves off.
Umbrella insurance also covers certain liability claims that those aforementioned policies may not, such as libel, slander, and false imprisonment. And if you own rental property, umbrella insurance provides liability coverage beyond what your renter’s policy covers.
How Does an Umbrella Policy Work?
Here are some examples of incidents where an umbrella policy could provide financial coverage if your homeowner’s insurance or auto insurance isn’t enough:
- Your dog runs out of the house and viciously attacks a neighbor who was going for a walk. Your neighbor sues you to cover her medical bills, lost wages, and pain and suffering.
- Your daughter gets into a fight at school and punches another girl, breaking her nose. The girl’s parents sue you.
- You cause a 10-car accident and your auto insurance property damage coverage isn’t high enough to replace all 10 accident victims’ vehicles. Nor is your personal liability coverage high enough to pay for their medical bills.
- You send sandwiches to your son’s school for a field trip lunch. Several students develop food poisoning and their parents sue you.
- Your teenager throws a party at your house while you’re out of town. Someone brings alcohol to the party, and one of the guests is arrested for driving under the influence on the way home. You are sued.
As you might have gleaned from these examples, umbrella insurance covers not just the policyholder, but also other members of their family or household. So if your teenager isn’t the best driver, you can sleep better at night knowing your umbrella policy will cover the injured parties’ medical bills if your kid is found liable for a major accident. That being said, make sure you understand how your policy defines a household member so you’ll actually have the coverage you need.
You might have also noticed that, even though umbrella insurance acts as coverage above and beyond your homeowners and auto insurance, the incident doesn’t have to involve your property or your vehicle for your umbrella insurance to cover it. You’re also covered worldwide, with the exception of homes and cars you own under other countries’ laws.
| Quick Reference for Umbrella (Personal Liability) Coverage | |
| Usually Covers | Usually Does Not Cover |
| Claims beyond coverage provided by home, rental, auto, watercraft policies for injury/damage to people/property | Damage to policyholder’s own property (e.g., home, car, possessions) |
| Policyholder plus members of household | Damage/injury that policyholder causes intentionally or criminally |
| Malicious prosecution, wrongful entry, invasion of privacy | Damage/injury from or during business or professional activities |
| Libel, slander, false imprisonment | Liability assumed contractually |
| Attorney fees/other expenses related to lawsuits | Liability related to armed conflicts |
Do You Need Umbrella Insurance?
There’s certainly a fear factor involved in the decision to buy umbrella insurance. Many insurance companies say you need it because of the lawsuit-happy world we live in, where anyone can sue you for anything and ruin you financially.
You can find plenty of personal liability horror stories in the news, where juries awarded multimillion-dollar judgments to the victims that individuals had to pay. But how likely are you to find yourself in such a situation? Do you really need umbrella insurance?
Extra Coverage That Protects Your Assets
You might hear that you should purchase umbrella insurance if the total value of your assets, including ordinary checking and savings accounts, retirement and college savings and investment accounts, and home equity is greater than the limits of your auto or homeowner’s liability. The idea behind this advice is that you want to have enough liability insurance to fully cover your assets so that you can’t lose them in a lawsuit.
However, jury awards can easily exceed insurance policy limits. The real question you should ask yourself is, am I at risk of being sued? Everyone is, so in a sense, umbrella insurance makes sense for everyone. It’s a small price to pay for the extra peace of mind.
Option for Those With High Risk Potential
Some people are more likely to need an umbrella policy than others. If you engage in some activity that puts you at greater risk of incurring excess liability, then you’re a good candidate for an umbrella policy. Personal liability risk factors include owning property, renting it out, employing household staff, having a trampoline or hot tub, hosting large parties, and being a well-known public figure.
Having a teenage driver in the family also puts you at increased risk, as does owning a dog or owning a home with a swimming pool. Basically, the more likely you are to be sued, the more strongly you should consider purchasing umbrella insurance. But anyone who is risk-averse will sleep better at night knowing they’re protected by an umbrella policy.