What is umbrella insurance?

Personal umbrella insurance provides additional liability coverage that picks up where your other policies leave off. When a claim exceeds the liability limits of an underlying policy, an umbrella policy can cover the difference.

Most people think of auto insurance when they hear the term liability coverage because most states require you to carry a minimum amount of liability coverage on your car. But plenty of other policies come with liability coverage, including homeowners insurance, landlord insurance, and condominium insurance. 

Liability coverage protects you when you or a covered family member are responsible for property damage or physical injury to another person, but every policy has coverage limits. When a claim reaches that amount, the policy stops paying, and you’re on the hook for the rest. 

That's where personal umbrella insurance comes in. It takes over paying for a liability claim when the limits on the applicable underlying policy have been exhausted. 

What does umbrella insurance cover?

Umbrella insurance usually covers the same risks and pays for the same financial losses that the underlying policy takes on, namely bodily injury and property damage claims. That means it pays for repairing or replacing the other person’s damaged property, an injured person's medical expenses, or both, depending on the circumstance. Your insurer may also help in your legal defense if you're sued.

For example, let’s say you purchase home insurance that includes personal liability coverage, and your son accidentally starts a kitchen fire that spreads to your neighbor’s home. Chances are your homeowners policy can pay for the damages, but what about your neighbors? Or what happens if the incident results in a lawsuit. In those situations, your personal liability insurance may come up short, but an umbrella policy can cover the remainder.

A personal umbrella policy may also offer broader coverage than the policy it lays on top of by:

• Including circumstances that the underlying policy doesn’t, allegations of  libel, slander, and false imprisonment. 

• Offering worldwide coverage. 

Keep in mind that you need to have home or auto insurance before you can purchase an umbrella policy. Moreover, you’ll need a certain amount of coverage on the underlying policy. Plus, some insurance providers require you to have both your auto and home insurance policies with them before they’ll issue an umbrella policy. 

What does umbrella insurance not cover? 

Umbrella insurance doesn't cover everything. For example, most umbrella policies don’t pay for:

• Damage caused by intentional acts.

• Punitive damages in judgments against you.

• Restitution you owe if you're convicted of a crime.

• Damages related to a business.

• Damage to your own property.

Your policy's exclusions will be explained in your policy documents.

Benefits of umbrella insurance

Umbrella insurance can be invaluable if you're faced with a negligence claim and particularly if you're sued. Multimillion-dollar judgments are not out of the question in a serious liability claim. 

Here are a few simplified examples of how umbrella insurance can provide huge benefits in a worst-case scenario. 

Scenario 1: Your neighbor’s injury is your fault

In this first situation, your neighbor falls on your slippery sidewalk while visiting your home. He suffers a serious injury that requires a visit to the emergency room and days away from work. Not only does your neighbor sue for his medical bills and lost wages, but he also seeks compensation for his pain and suffering. The total cost of the claim hits $200,000. 

Let’s assume you have home insurance with liability coverage of $100,000 and an umbrella policy with a $1 million limit. Here’s a breakdown of how your umbrella insurance protects your finances:

Without an umbrella policy, you’d have to pay the remaining $100,000 out of your savings.

Scenario 2: Your neighbor’s property damage is your fault

Now let’s say you accidentally drive your car into your neighbor’s home. Luckily, no one was hurt, but you caused extensive damage to the tune of $50,000. Also lucky? Your neighbor decides not to sue.  

But here’s where your luck runs out. Your auto insurance covers $25,000 in property damage per accident, but you didn’t think you needed umbrella insurance. Let’s look at how your accident impacts your finances

In this scenario, you’re on the hook for $25,000 in property damage.

While these types of scenarios may seem rare, liability lawsuits against homeowners happen all the time. And even if a claim is frivolous, you may still have to pay for attorneys to defend yourself.

Who needs umbrella insurance?  

A myth about umbrella policies is that they’re only for people with big houses or a lot of personal assets. While it’s true that people who have more assets to protect may be more vulnerable to lawsuits and could use umbrella insurance, anyone who wants to be sure they're protected from the financial impact of a lawsuit should at least consider purchasing a policy. 

One way to get a handle on whether umbrella insurance is a good idea for you is to assess your lifestyle and assets. Doing this can help you understand if you might be susceptible to a large liability claim. Some questions you might want to consider include the following:

• Do you have a long daily commute or drive frequently during rush hour? These increase your likelihood of being in a car accident.

• Do you have teenagers? Making mistakes is part of growing up, but in our litigious society, poor judgment can turn into costly lawsuits.

• Do you have a swimming pool or trampoline? Attractive nuisances like these are common sources for accidents and injuries, so they can require additional liability insurance.

• Do you own a dog? In 2023, the average cost of a dog bite liability claim was $58,545.

• Do you entertain and frequently have guests in your home? People in your home increase the likelihood of accidents. 

Answering yes to these questions may make you a great candidate for umbrella insurance. And even if you are not a high-risk individual, you can still be sued at any time and million-dollar judgments are not uncommon. Umbrella insurance can offer the financial lifeline you need. 

How much umbrella insurance do you need?

Once you’ve decided that you need an umbrella policy, the next step is determining how much. That answer depends largely on the value of your assets you want to protect. Let's say you have assets of $1 million, but your homeowners liability coverage is limited to $500,000. You may want umbrella insurance that at least covers the gap. 

Umbrella insurance is typically sold in increments of $1 million. An insurance agent or financial advisor can help you decide the right coverage amount for your needs. 

How much does umbrella insurance cost? 

The premium for a $1 million umbrella policy can range from around $200 to over $400 per year, but your premiums won't be the same as your neighbors. Instead, umbrella insurance costs fluctuate depending on several factors, including:

• The amount of coverage you want.

• Your net worth.

• Your history of liability claims.

• Your driving record.

• Your line of work

Generally speaking, an umbrella insurance policy is a relatively inexpensive way to get an extra layer of financial protection.