How Does Umbrella Insurance Work?

We are all aware that having adequate insurance coverage is critical for protecting ourselves, our families, and our assets. However, each type of coverage has its own set of limitations. So, what about situations that your auto or homeowners insurance will not cover?

If you inadvertently cause significant bodily harm or property damage to others, you may be held financially liable—risking losing your entire future savings.

Fortunately, this is where umbrella insurance comes in. This type of liability coverage acts as an add-on to your other policies, assisting you in avoiding financial ruin in the worst-case scenario.

Stay with us as we explain everything you need to know about umbrella policies, from what they cover (and do not cover) to who needs them and how much they cost.

What Is Umbrella Insurance?

Umbrella insurance is a type of liability coverage that extends beyond the limits of your existing insurance policies to provide additional protection. If you are at fault for injuries or property damage to others and your primary policies—auto or homeowners insurance—are insufficient to cover the costs, your umbrella policy will assist in covering the costs.

A lawsuit against you is an example of this type of disaster (even if the charges are groundless). For example, if you cause a car accident, liability auto insurance will pay for a defense attorney as well as any legal rulings or settlements. Libel, slander, and false imprisonment are also covered by umbrella insurance.

If you own rental property, umbrella insurance extends your liability protection beyond what your renter's policy provides. Consider umbrella insurance to be a safety net for your savings and other assets when you need it the most.

What Does an Umbrella Insurance Policy Cover?

Umbrella insurance protects you and your family from lawsuits involving the following:

  • Personal injury to others
  • Damage to other people’s property
  • Defamation
  • Landlord liability
  • False imprisonment
  • Malicious prosecution
  • Invasion of privacy
  • Wrongful entry
  • Other risks, depending on your insurance policy

In the aforementioned circumstances, umbrella insurance will pay out any damages up to your liability limit, as well as any associated legal costs in excess of that amount. For example, if your umbrella policy includes $2 million in liability coverage and you are sued for the full amount, your insurer will pay the $2 million in addition to providing legal defense or covering your fees. However, keep in mind that a "retained limit" may apply, which is similar to a deductible in that you must pay it before your coverage kicks in.

What Does Umbrella Insurance Not Cover?

Umbrella policies are a wise choice for anyone because they pay for situations that other policies do not cover. However, just as a standard auto or homeowners insurance policy does not cover everything, an umbrella policy does as well.

Here are some things that your umbrella policy is unlikely to cover:

  • Damage to your own property. Because it is a liability policy, it will only cover you if you are held liable for someone else's property damage. Make sure you have enough homeowner's insurance to protect your own property and possessions.
  • Damage caused on purpose by you or a covered member of your household. Acts of criminal or malicious intent, such as intentionally injuring another person, will not be covered by umbrella insurance (or your homeowner's insurance, for that matter).
  • Liability incurred in business or professional activities. You'll need business liability insurance to cover injuries or property damage that occur in the workplace or in a professional setting.
  • Liability resulting from contracts you've entered into. If you are sued for failing to pay for work performed under a contract you signed, for example, your umbrella insurance policy is unlikely to assist you.

Do You Need Umbrella Insurance?

Umbrella insurance isn't required by law, but some people are more likely than others to require it. It's typically purchased by people who have a lot of assets to protect or who are at risk of being sued.

Because 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, you should consider purchasing umbrella insurance. In this manner, you will have enough liability insurance to fully protect your assets in the event of a lawsuit.

If your lifestyle puts you at risk of excessive liability, you should also think about purchasing an umbrella policy. Personal liability risk factors include the following:

  • Property ownership or rental
  • Having a boat
  • Employing household staff
  • Having a swimming pool, hot tub, or trampoline
  • Having a young or inexperienced driver in the family
  • Owning a dog
  • Participating in high-risk sports in which you have the potential to injure others (such as skiing, surfing, or hunting).
  • Hosting large or frequent parties at your home
  • Being a well-known public figure

No matter how cautious you are, a serious accident can be financially crippling, especially if a lawsuit is involved. Even if legal action is unlikely to be brought against you, knowing you're covered by an umbrella policy can provide peace of mind.

How Much Does Umbrella Insurance Cost?

The cost of an umbrella liability policy is determined by the amount of coverage purchased, the state in which you reside (because insurance rates vary by state), and your level of risk to an insurance company. The more homes or cars you own, as well as the number of household members covered by your policy, the more it will cost. Still, when compared to other types of insurance, umbrella insurance is relatively inexpensive, especially when considering the amount of coverage it provides.

Umbrella liability policies from most insurance companies begin at $1 million in coverage, with higher limits available. The annual cost of a $1 million policy ranges between $150 and $300. Expect to pay about $75 more per year for $2 million in coverage, and $50 more for each million above that.

However, there is a catch when it comes to purchasing an umbrella policy. Because it is supplemental insurance, you must have the maximum amount of coverage available on your other liability policies before purchasing an umbrella policy. Typically, insurers will require you to have at least $250,000 in liability coverage on your auto policy and $300,000 in liability coverage on your homeowners policy before selling you an umbrella liability policy for $1 million in additional coverage.

If you don't already have this much coverage, your auto and homeowner's insurance premiums may rise, making an umbrella policy more expensive.

Check to See How Much You Can Save on Umbrella Insurance

Umbrella liability insurance is much more than a monthly premium—it gives you peace of mind that you'll have financial protection when you need it the most. Best of all, we're here to make it easier than ever to obtain comprehensive and affordable umbrella liability insurance. You can choose a plan and get coverage in minutes thanks to our quick and low-cost quotes.