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Just like an umbrella can help protect you from a spontaneous downpour, an umbrella policy may help protect your financial future from costly liability claims. While your auto and home insurance likely has provisions for liability coverage, there are situations when it might not be enough, and an umbrella policy could supplement your existing liability limits. A common misconception is that umbrella coverage is only for the wealthy, but that is not always true. Umbrella policies may aid in protecting your current and future assets, so if you own your home, have a 401(k) or are just starting out in your career, this coverage may be beneficial.
What is an umbrella insurance policy?
Personal umbrella insurance provides extra liability protection when the coverage on your other policies falls short. It is designed to cover costs that exceed the liability limits of your underlying policies — including your home insurance policy, auto insurance policy and other policies like watercraft or motorcycle policies. If you have to file a liability claim and the loss goes over the limit of that underlying policy, your umbrella could kick in to provide extra protection. This may include additional coverage for legal costs after a covered claim.
When you’re learning how umbrella coverage works, it may be helpful to think of the policy as literally that — an umbrella. Your other policies all nest underneath the umbrella, which is there to provide extra liability if a covered claim on any of the underlying policies goes over that policy’s limit.
How does umbrella insurance work?
Now that you know what personal umbrella insurance is, you may be curious to see it in action. Here are some examples of an umbrella policy in use:
- You injure someone in a car accident: Imagine that you cause a car accident that results in serious injuries to the other party. If you have $100,000 in bodily injury liability per person on your auto policy, but their total injuries amount to $175,000, your umbrella policy could step in to pay the overage of $75,000, so you don’t have to pay out of pocket.
- Someone drowns in your pool: If someone is injured or drowns in your swimming pool, the financial costs may be devastating. Most home insurance policies include $100,000 to $300,000 in personal liability coverage, but an umbrella could provide extra coverage in scenarios like pool injuries.
- You damage a rented home: Suppose you rent a home for a vacation and don’t properly extinguish the campfire you enjoyed on the deck. If your actions start a fire that damages the home, your home insurance policy and your umbrella policy could help pay for the damages.
You’ll rarely file a claim for a new incident directly on your umbrella policy, except in certain cases where coverage isn’t available from your underlying policy but covered under an umbrella policy. If something happens — whether it’s on your auto, home or any other insurance policy — you’ll usually file the claim on the corresponding policy first.
What does an umbrella policy cover?
An umbrella policy may provide peace of mind when you face costly liability claims, but it may be important to understand what it does and does not cover. Most umbrella policies will cover:
- Bodily injury: Umbrella policies may provide excess liability coverage for injuries that you cause to others, whether those injuries occur in an at-fault auto accident, at your home or off your premises. If you are found liable for injuries, your umbrella may help pay the costs.
- Landlord liability: Some umbrella policies provide a certain level of coverage for landlords. For instance, if you own a home you rent out, you could be found liable for injuries that occur at that location. Perhaps the concrete sidewalk to the front door is heaved and a guest of the tenant trips and breaks an arm. Your umbrella policy might help cover the damages after your landlord policy reaches its limit.
- Property damage: Umbrella coverage may apply to property damage that you cause to others. Like liability claims, coverage would also only apply if the damage exceeds your underlying policy limits.
- Personal injury: Personal injury coverage covers legal expenses when someone sues you for libel, slander or wrongful eviction. The liability coverage in homeowners policies often excludes personal injury coverage, although an endorsement can sometimes add it. This is a scenario where your umbrella coverage might kick in without a claim being filed on an underlying policy.
In general, umbrella policies cover liability claims that go above and beyond the limits of your underlying policies. In rare circumstances, an umbrella policy may offer coverage for instances not covered by your underlying policies.
What does an umbrella insurance policy exclude?
Umbrellas may be helpful policies, but they don’t cover everything. Here are some things that typically aren’t covered by personal umbrella insurance:
- Property damage that you sustain: The only kind of property damage that umbrellas may cover is damage you cause to the property of others. Your own property is never covered by umbrella policies. Umbrellas provide extra liability coverage, not extra property coverage.
- Personal belongings: The personal property coverage of your homeowners policy will pay to replace your belongings, like clothing and furniture, following a covered loss, but an umbrella policy won’t. Umbrella insurance only covers the personal belongings of others when you’re at fault for a loss.
- Business-related losses: A personal umbrella policy will not typically cover any losses related to a business unless the business is covered under your home insurance policy. Likewise, umbrella insurance will not cover court costs or attorney fees associated with lawsuits filed against your business unless the business is covered on your home insurance. Some home insurance policies may cover certain small business operations, but you’ll likely need to buy business insurance, including a business umbrella insurance policy, to get the coverage you need.
- Losses caused by criminal acts: Similar to the liability coverage of home and auto policies, an umbrella policy does not cover losses caused by a policyholder’s illegal or intentional activity. For instance, if a policyholder operates an illegal, homemade fireworks business and an accidental explosion burns down a neighbor’s home, or if a policyholder deliberately damages the neighbor’s property, the insurer would likely deny the claim.
- Oral or written contracts: If a contractor sues you for not honoring oral or written contract terms, your umbrella policy likely won’t cover your legal expenses.
Keep in mind that all policies are different. To make sure you understand what your umbrella insurance does and doesn’t cover, you might want to talk to your insurance agent or company.
How much does umbrella insurance cost?
The cost of umbrella insurance varies. Many of the factors that affect your home insurance and auto insurance costs may affect the cost of your umbrella policy. These could include location, the features in your home, the types of cars you drive and your claims history. The price will also vary based on how much coverage you purchase.
Most umbrella policies start at $1 million, but you may be able to buy higher limits for a higher premium. Additionally, the number of underlying policies that an umbrella covers may also affect costs. A $1 million umbrella that is providing extra coverage for a home and auto policy will likely cost less than a $1 million umbrella that covers a home policy, an auto policy, a vacation home policy and a boat policy, for example. This is because the company issuing the umbrella policy likely sees additional underlying policies as riskier.
Many auto and home carriers also offer umbrella insurance. If you already have a homeowners or auto policy policy, you could ask your agent if the insurer sells umbrella coverage. Your insurer will likely have certain requirements you must meet before getting an umbrella policy. For example, it’s a common requirement that any underlying policy will have to have a certain level of liability coverage to qualify for an umbrella. You may also be required to bundle your underlying policies with the same insurer.
Some homeowners insurance companies may enable you to increase your homeowners liability limit to $1 million or more, which may eliminate the need for an umbrella insurance policy. However, keep in mind that increasing your liability limits on your home policy doesn’t change the liability limits on your other policies. An umbrella coverage provides extra liability coverage for all your underlying policies.
Do I need umbrella insurance?
Generally, you might want to consider an umbrella policy if you have any personal factors that pose greater liability risks or if you have high-value assets. These could include:
- Owning amenities or attractive nuisances, such as hot tubs, swimming pools, trampolines and treehouses.
- Having rental properties.
- Having extensive savings that you need to protect.
- Having an earning potential that predictably creates future wealth.
- Having a lifestyle or job that indicates wealth even if it isn’t there, such as driving a high-end car, being a doctor or owning a business.
- Frequently entertain guests, especially if alcohol is served in your home.
- Having children or often have children in your care.
Umbrella coverage provides an extra layer of financial protection against liability claims. Even if you don’t have high-value assets or elements that post a higher level of risk, it might be worth looking into umbrella coverage. If you’re not sure if an umbrella policy is right for your needs, consider talking with a licensed insurance agent or financial advisor.
Frequently asked questions
Having or frequently caring for children may be a commonly-overlooked factor in the umbrella coverage decision-making process. Whether you have one child or many, the inherent liability risk that comes with children of any age means that parents, guardians, and caregivers may want to consider an umbrella policy. Parents and guardians of children are usually legally and financially responsible for the child’s actions through vicarious liability. Here are a few examples of when an umbrella policy may help:
- Your young child pushes another child off the slide at the park, causing severe injuries.
- Your older child posts slanderous comments on a social media platform, causing another child mental anguish or embarrassment
- Your teen throws a house party and serves alcohol while you are out of town. A partygoer is injured or killed on the way home due to underage drinking and driving.
Home features such as swimming pools, fire pits, hot tubs and treehouses may increase your liability risk. If a guest sustains an injury in your home, you may need adequate liability coverage to cover you if you are found negligent. Umbrella insurance may help cover medical expenses and legal costs if they are higher than the liability limit on your homeowners policy.
There isn’t a way to plan for every possible scenario and the appropriate level of umbrella insurance will be different for everyone — no one wants to be over or under-insured. Typically, the goal is to have liability coverage equal to the total sum of your assets. Work with your insurance agent and financial adviser to find the proper coverage limit.
Liability coverage and an umbrella insurance policy both offer liability protection. However, an umbrella is its own policy, while liability coverage is a component of an underlying policy. The umbrella insurance policy typically only gets used if you exhaust the underlying liability coverage on your home, auto or other covered policy. However, an umbrella policy may be used in instances that are not covered by the underlying policy, such as personal injury. The umbrella insurance policy acts as a second layer of liability protection to back up your other insurance policies.
Yes, you can get business umbrella insurance. You’ll likely have to purchase other forms of business insurance as well, because business umbrellas work just like personal umbrellas: the coverage only kicks in after the liability limit on the underlying policy is exhausted. Many of the best home and car insurance companies also offer business insurance, which might make it easier to get a quote and manage your policies.