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Standard homeowners and auto insurance policies include liability coverage. This coverage is designed to help pay medical expenses and legal costs when you are found liable for someone’s injuries or damage to their property. This could stem from someone hurting themselves in your home, for example, or you causing an auto accident. However, these policies may not provide enough protection depending on the liability coverage limit, which varies by carrier.
Umbrella insurance provides a second layer of liability protection. An umbrella policy picks up where your underlying policies’ liability coverage ends. Typically sold in coverage increments of $1 million, you may purchase an umbrella policy for added financial protection in the event of a covered peril. An umbrella insurance policy is typically relatively cheap, offering an affordable way to maximize your protection.
What is umbrella insurance?
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. Even if your home insurance doesn’t cover personal injury claims, your umbrella policy might. This is a scenario where your umbrella coverage could 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 are 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 will 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: Like the liability coverage of your home insurance policy, an umbrella policy won’t cover losses caused by 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 in any way, the insurer would not likely pay a 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 to buy 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 such as hot tubs, swimming pools, trampolines and treehouses.
- Having rental properties.
- Having extensive savings that you need to protect.
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.