Nobody wants to think about financial liability, but if you are in an accident or sued for something you did, an umbrella insurance policy might be just the thing for your financial rainy day.
An umbrella policy is is an extra layer of personal liability insurance. Umbrella coverage protects you beyond the coverage limits of your other personal liability coverage found in your other policies.
In other words, umbrella insurance steps in when you have some form of personal liability, but after you have exhausted your auto insurance, boat insurance, or homeowners insurance.
What is an umbrella policy?
It is especially important to understand what is umbrella insurance if you are a high-net-worth individual, or you own assets that someone else might find as attractive targets in a lawsuit.
Say your home is worth $750,000, but your auto insurance liability limit is only $100,000. If you sideswipe someone and their lawyer does a little homework on you, they may be pursuing a settlement far above your auto policy limits, leaving your home potentially at risk. Having umbrella liability insurance to protect you may be just the key to keeping a roof over your family’s head.
You might then ask what does an umbrella policy cover? Some other examples of where a personal liability umbrella policy might come in include if a neighbor volunteered to help you with your gutters, but then falls off his ladder. Your umbrella insurance policy would help pay for his medical care.
Or, let’s say someone was hurt jumping into your swimming pool. Your personal umbrella policy would help pay for their care, or even help protect you if they sued you.
And what if someone was walking in front of your yard and tripped on a crack in your sidewalk or driveway? Your umbrella liability insurance would typically step in there too.
Your umbrella policy may also protect you if your dog injures someone else. But just like any personal liability coverage, make sure to read the fine print on the policy, because some breeds are specifically excluded.
Surprising personal liability coverage
There are a few places where it is a little surprising to learn what does umbrella insurance cover.
For example, an umbrella insurance policy also applies in cases where your other insurance may have specifically excluded coverage. One example is while riding one of those electric scooters that have popped up in cities across the country.
Your auto insurance’s personal liability coverage typically specifically excludes two-wheeled vehicles, and your homeowner’s personal liability insurance excludes motorized vehicles. That leaves you in a liability gap while you are on that scooter.
If you got into a crash and damaged someone else’s property, your umbrella policy would likely step in and cover that liability.
Umbrella policies also cover legal liability, such as if you were sued for something you said or wrote.
While most people don’t see leaving an online comment as dangerous, if you left a nasty, damaging online comment about a local restaurant, that business owner could sue you for libel.
Libel lawsuits are typically very expensive, often reaching into the millions of dollars. Sure, your homeowner’s insurance would likely protect you, but the umbrella insurance policy would step in once those coverage limits are exceeded.
A few important details
In some cases you may have to adjust your liability limits on your other policies in order to be eligible for an umbrella policy. For example, you may need to carry a minimum $250,000 liability limit on your auto policy before you would be eligible for an umbrella policy.
That said, an umbrella policy is comparatively inexpensive, often giving you $1 million in coverage for just a few hundred dollars per year.
Having an umbrella policy is also useful if you engage in activities that can be considered risky or that may expose you to significant liability. Some of those activities could include owning a pool, trampoline or a dog; being a landlord; coaching children’s sports; or even serving as a director on a board for a nonprofit.
But keep in mind, a personal umbrella policy typically won’t protect you from a business or contractual liability. So, say you run a daycare out of your house and one of the kids is injured — that won’t likely be covered by your personal umbrella policy. That would be the role of business liability insurance.
Umbrella insurance also doesn’t cover your own property. So, say a pipe bursts and causes your ceiling to collapse — that would be a homeowner’s claim. Now, if your pipe destroyed your neighbor’s home, then the umbrella policy would kick in after your homeowner’s liability limits were exhausted.
For the relatively low cost of umbrella coverage, the extra personal liability protection offered in an umbrella policy goes a long way toward peace of mind.