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How Does Umbrella Insurance Work?

We all know that having good insurance coverage is a must for protecting ourselves, our families, and our assets. But every type of coverage carries its own limitations. So what about the circumstances that your auto or homeowners insurance won’t cover?

if you accidentally cause significant injury or property damage to others, you could be held financially responsible—and risk losing your entire future savings. 

Thankfully, that’s  where umbrella insurance enters the picture. This type of liability coverage kicks in as a supplement to your other policies, helping you avoid financial ruin in a worst-case scenario.

Stick with us as we explain everything you need to know about an umbrella policy, from what it covers (and doesn’t), to who needs it and how much it costs. 

Umbrella Insurance

What Is Umbrella Insurance?

Umbrella insurance is a type of liability coverage that provides extra protection beyond the limits on your existing insurance policies. If you’re at fault for injuries or damage to others and your primary policies—auto or homeowners insurance—aren’t sufficient to cover the costs, your umbrella policy will help foot the bill.

Examples of these kinds of disasters include a lawsuit against you (even if the charges are groundless). For example, if you cause a car accident, liability car insurance will cover the cost of a defense attorney, as well as any legal rulings or settlements. Umbrella insurance also covers claims such as  libel, slander, and false imprisonment. 

If you own rental property, umbrella insurance also offers liability coverage beyond what your renter’s policy covers. Just think of umbrella insurance as a safeguard for your savings and other assets when you need it most.

What Does an Umbrella Insurance Policy Cover?

Umbrella insurance offers protection for you and your family against 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 hazards, depending on your policy

For the circumstances above, umbrella insurance will pay out any damages up to your liability limit, as well as associated legal costs over and above that amount. For example, if your umbrella policy carries $2 million in liability coverage, and you were sued for that full amount, your insurer would pay out the $2 million, in addition to providing your legal defense or covering your fees. Be aware, however, that a “retained limit” might apply, which is similar to the deductible in that you’re responsible for paying it before your coverage kicks in.

What Does Umbrella Insurance Not Cover?

Umbrella policies are a smart option for anyone, since they pay for the circumstances that other policies won’t cover. But just as a standard auto or homeowners insurance policy won’t cover everything, an umbrella policy also has some limitations. 

Here are some things your umbrella policy likely won’t cover:

  • Damage to your own property.  Because it’s a liability policy, it will only cover you if you’re held responsible for damage to someone else’s property. To protect your own property and possessions, you’ll want to make sure you have enough homeowner’s insurance.
  • Damage that you or a covered member of your household cause on purpose. It should go without saying, but acts of criminal or malicious intent—such as  purposely injuring another person—won’t be covered by umbrella insurance (or your homeowner’s insurance, either). 
  • Liability incurred in business or professional activities. To cover injuries or property damage that happen in the workplace, or in a professional setting, you’ll need business liability insurance.
  • Liability associated with contracts you’ve entered into. If you’re sued for not paying for the work that was done under a contract you signed, for example, your umbrella insurance policy is unlikely to help. 

Do You Need Umbrella Insurance?

Umbrella insurance isn’t required by law, but some people are more likely to need an umbrella policy than others. It’s most often purchased by people who have a lot of assets to protect or a high chance of being sued. 

That’s because general advice says that you should opt for 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. That way, you’ll have enough liability insurance to fully cover your assets in the event of a lawsuit.

If your lifestyle increases your risk of excess liability, you’ll also want to consider an umbrella policy. Some examples of personal liability risk factors include:

  • Owning or renting out property
  • Owning a boat
  • Employing household staff
  • Owning a pool, hot tub, or trampoline
  • Having a teenage/inexperienced driver in the family
  • Owning a dog
  • Participating in high-risk sports where you could easily injure others (such as skiing, surfing, or hunting). 
  • Hosting frequent or large parties at your home
  • Being a well-known public figure

No matter how careful you are, one serious accident has the potential to be financially crippling—especially if a lawsuit is involved. Even if it’s unlikely that legal action will be brought against you, knowing you’re protected by an umbrella policy can give you peace of mind. 

How Much Does Umbrella Insurance Cost?

The cost of an umbrella liability policy depends on how much coverage you purchase, the state where you live (since insurance rates vary by state) and your level of risk to an insurance company. The more homes or cars you own, and the more household members your policy will cover, the more it will cost. Still, umbrella insurance is relatively inexpensive compared to other types of insurance, especially when you consider how much coverage it provides.

Most insurance companies’ umbrella liability policies start at $1 million in coverage, with higher limits available. The average $1 million policy costs between $150 and $300 per year. You can expect to pay about $75 more per year for $2 million in coverage, and $50 for every million in coverage beyond that.

Purchasing an umbrella policy comes with a caveat, however. Because it is a supplementary form of insurance, you’ll need to have the maximum level of coverage available on your other liability policies before you can purchase an umbrella policy. Typically, insurers will require you to have about $250,000 of liability insurance on your auto policy and $300,000 of liability insurance on your homeowners policy before they’ll sell you an umbrella liability policy for $1 million of additional coverage.

If you don’t already have this much coverage, your auto and homeowner’s insurance premiums may increase, resulting in a more expensive umbrella policy.

See How Much You Can Save on Umbrella Insurance

Umbrella liability insurance is so much more than a monthly premium—it’s the reassurance that you’ve got financial protection when you need it most. Best of all, we’re here to make it easier than ever to get umbrella liability insurance that’s comprehensive and affordable. Thanks to our fast and low-cost quotes, you can choose a plan and get your coverage—all in a matter of minutes.