What is Umbrella Insurance and How Does it Work?
Umbrella insurance is a personal liability policy that adds excess liability coverage if youre found liable for property damage or bodily injury, and the costs exceed the limits of your existing car insurance, homeowners insurance, or renters insurance. Its an added safety net for individuals that have a high chance of being sued or those who wish to protect high-value assets. Find out everything you need to know about umbrella coverage, how it works, and who needs it below. Personal umbrella insurance works by expanding your liability coverage in two ways. It increases the liability coverage amount to $1 million or more and includes new covered claims like libel, defamation, and slander. Higher coverage limits Additional liability inclusions Your auto and homeowners insurance offers liability coverage up to $300,000. Standard liability coverage within other policies is limited to bodily injury and property damage to others Basic umbrella insurance adds $1 million, so your overall liability protection increases to $1,3000,000 An umbrella policy adds coverage for personal injury claims like libel, defamation, slander, false arrest, malicious prosecution, wrongful eviction or entry, and invasion of privacy. If youre found liable in a lawsuit, your auto, home, or watercraft policy will only cover damages up to a certain limit. After that, any liability expenses become your responsibility, putting you at great financial risk. The suing party could claim assets like your life savings, investments, and even your home to gain their full compensation. Here is where umbrella coverage comes in. Once youve exhausted the underlying policy limits, an umbrella policy will pay for the difference, protecting you from losing everything. Umbrella insurance protects you from liability if youre responsible for damage inflicted on others or their property. Coverage can extend to the policyholders spouse and any dependents or relatives that live with them. Bodily injuries to the policyholder  Damage to the policyholders personal property  Criminal or intentional action  Claims excluded from the underlying policy, like restricted dog breeds  Always consult insurance providers about the exclusions on umbrella policies since many are based on your underlying policies or state-specific legislation. Common exclusions to watch out for include:  Damages caused by criminal or intentional action  If you or someone that lives with you punches a guest and they sue you for bodily harm, liability coverage will not protect you  Liability that is assumed under a contract  If you sign a contract where you assume liability on behalf of someone else, umbrella insurance does not apply. You will need a separate contractual liability insurance policy  Damages caused by using your auto or property for business purposes  Umbrella insurance would not cover liability for damages in a car accident if you were using that car for business purposes, like lending it to an employee for deliveries. You will need a separate business liability insurance  Injuries caused by restricted dog breeds  Restricted breeds like wolf-mixes, Pitbulls, Rottweilers, German Shepherds, and Akitas are commonly excluded from liability coverage. You can purchase an umbrella policy to cover the gap, but the exclusions of the underlying policy often apply to umbrella coverage as well. High-net-worth individuals  You may need umbrella insurance if you are a high-net-worth individual who wants to protect valuable assets. If your net worth is significantly higher than the limits of your auto and home insurance, a liability lawsuit could make you lose everything. Assets include life savings, investment portfolios, and even investment property. If you own investment property, worst-case-scenario examples look something like this:  A guest slips and falls while using the pool in your rental apartment complex, resulting in permanent disability. The victims dependents sue you for future income loss, medical expenses, and legal bills. Your whole rental property is now at stake  You host your sisters wedding in your large, private estate. One of the guests drives home drunk and causes an accident. Since the guest left your home drunk and you provided the alcohol, you are found liable. Your property, your savings, and stock investments are on the line  A basic umbrella policy would protect these assets by providing excess liability coverage of $1 million or more for a relatively affordable premium, guaranteeing peace of mind. People at a higher risk for being sued  High-net-worth is not the only reason to consider personal liability insurance. Owning certain dog breeds or even just owning a pool can expose you to an expensive lawsuit. Consider the following scenarios:  Your teenage son is found responsible for a major auto accident, resulting in severe bodily injury and property damage. As his guardian and principal policyholder, you are now liable for all the expenses your auto policy wont cover  Your untrained dog escaped and bit your neighbors hand, causing irreversible nerve damage. As a working musician, she is left without employment prospects for the foreseeable future and decides to sue you for bodily injury liability. Meet eligibility requirements  Own underlying insurance policies Meet minimum liability limits Umbrella insurance cannot be purchased as a standalone policy. Companies require that you have a home or auto policy, or both Umbrella insurance requires specific liability limits on your underlying policies You will need to raise policy limits to the specified amount before you can qualify for umbrella coverage  Determine how much coverage you need  Calculate appropriate coverage amount by considering:  The liability limits of your underlying policies  The total value of your personal assets: home, auto, life savings, and investments  Any future earnings or income youd stand to lose if a lawsuit lays claim to your investment properties or stocks  Basic coverage starts at $1 million, and it can be increased in $1 million increments if the policyholder requires more. Check the liability coverage of our best renters insurance, best homeowners insurance, and best car insurance companies to see how much they cover and whether they offer umbrella insurance. You may even qualify for a discount by bundling policies under the same provider. Research providers and get multiple quotes  Get quotes from multiple providers to compare the coverage and cost, but ask your current insurance agent if they offer umbrella coverage and discount bundles. To get a quote, you will need to speak directly with an insurance agent online, by phone, or in person. Keep in mind that many insurance companies will not extend umbrella coverage for policies they have not issued, which means that your auto and home insurance must be with the same provider. A $1 million umbrella insurance policy can cost anywhere between $150 to $300 a year. According to the Insurance Information Institute, umbrella insurance premiums increase about $75 for each $1 million of additional liability coverage. Heres what that looks like:  Yearly premium Coverage amount $150-$300 $1 million $225-$375 $2 million $300-$450 $3 million $375-$525 $4 million  Premiums vary per person and by the state of residence. The insurance company also analyzes your risk level by looking at your credit history, driving record, and property location, among other things. chevron-down chevron-up Umbrella insurance is an excess liability policy that increases your overall coverage amount. It applies if you're liable for damages and the expenses go above the limits of your underlying homeowners, watercraft, or auto policy. chevron-down chevron-up Umbrella insurance covers legal costs, medical fees, property damage, and other liability expenses like loss of income. Umbrella coverage also includes claims that are not part of auto or homeowners insurance, like defamation, libel, and slander. See our comparison table for more details on what umbrella insurance covers and doesn't cover. chevron-down chevron-up Umbrella insurance is advisable for people who own a lot of investment property and assets they'd like to protect and for people at risk of being sued. Many individuals fit these categories. To see if this applies to you, read the examples and scenarios in our who needs umbrella insurance section. chevron-down chevron-up You should have enough umbrella insurance to cover your net worth, including future earnings you stand to gain from investments. How much umbrella insurance coverage you need will depend on your liability risk, the value of all your personal assets, and the extra protection you want. chevron-down chevron-up Personal umbrella insurance covers the individual, while commercial umbrella insurance increases the liability coverage of a business or commercial entity. The business must already carry general liability and commercial auto insurance. The policy covers medical expenses and property damage if a customer or employee is injured or if your business damages somebody else's property. Summary of Moneys Guide to Umbrella Insurance