What is umbrella insurance?

Millions of car accidents happen every year in the United States, and they're the No. 1 source of personal injury claims.

“You can be sued for a variety of things, but the most common cause is a car accident,” says Tim Gaspar, owner of Gaspar Insurance Services, an independent insurance agency in Woodland Hills, Calif.

The legal expenses involved in a lawsuit can pile up quickly. Auto and property insurance policies often cover some liability coverage, but if the suit is a large one, you may need additional coverage.

What is umbrella insurance?

This extra liability coverage typically is called umbrella insurance. Here are three key elements of umbrella insurance:

insurance umbrella

Extra protection. The average home insurance policy offers liability protection of about $300,000, and auto liability protection can go up to $500,000, says Rakesh Mishra, vice president of Farmers Insurance in Los Angeles. Umbrella insurance fits over your existing policies, kicking in when costs involved in a lawsuit exceed the established limits of your current coverage.

Reasonable cost. For an additional $1 million in coverage, you may need to pay only $200 or $300 in premiums each year.

Varying options. Policies usually are sold in million-dollar increments, and range from $1 million to $10 million in coverage, Mishra says.

“Umbrella insurance policies can be an effective financial management tool,” Mishra says.

Here are five guidelines to help you decide whether an umbrella policy is right for you:

1. Consider “on the road” risks. If you spend a lot of time driving or have a large number of drivers in your household, your family’s chances of getting into a car accident automatically increase. Auto insurance will cover most claims, but if a lawsuit goes over the established limit of a policy, the driver can be held responsible for paying the settlement.

Even if you consider yourself a cautious driver, an accident that appears to be a mere fender-bender can turn into more – quickly.

“If you hit a neurosurgeon and his hand is broken, you may have to pay not only for personal injury but loss of income as well,” Gaspar says. If the doctor earns a six-figure salary, you’ll be facing a pricey settlement.

2. Think about your image. You may not fit into the "rich and famous" mold, but appearances matter to the outside world, Gaspar says. The type of home you own, neighborhood you live in and car you drive could give the impression of being well-to-do -- and increase your risk of being sued after an accident.

3. Take into account rental properties. When Robert Farrington started renting out his home, he grew concerned about issues that could arise from having tenants on his property. In early 2011, the San Diego resident and owner of TheCollegeInvestor.com took out an umbrella policy on his home.

“I wanted insurance in case I got sued, and was able to get $1 million in coverage for a net increase of $9 a month,” Farrington says.

4. Don’t overlook “outside” causes. If you have a teenage son or daughter who writes something unkind on the Internet about a peer, the child’s family could file a lawsuit accusing the teen of slander. The case would fall under your current homeowner’s policy, Gaspar says. If the suit seeks a hefty sum of money, umbrella insurance could give you the extra coverage you’ll need to pay for damages.

5. Consider policy gaps. Start with the value of your home, Mishra says, then add in other assets like cars, boats, recreational vehicles, motorcycles and jewelry. If the total value of those assets is greater than the current liability coverage you have, you essentially have a gap. A lien could be placed on those assets if the costs involved in a lawsuit against you exceed your current coverage. Umbrella insurance would help close that gap, giving you extra coverage for legal fees and any judgment in a liability case.

“Umbrella insurance is a good idea for anyone with assets to protect,” Gaspar says.

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