If you have an auto policy, homeowners policy, or insurance policies relating to recreational vehicles, you probably have sound peace of mind that if anything happens — a car accident, damage to your home or boat during a storm or theft — you are covered and can recover any losses that may occur. But, what if someone sues you for damages that you can’t afford? What if there are damages beyond your liability limits? Is that possible? Will your assets be protected? The answer is yes — if you have umbrella insurance. But, what exactly is umbrella insurance? Who and what does it cover?
What is umbrella insurance?
Umbrella insurance is insurance that offers protection against the loss of your personal assets or savings if you are sued for damages that exceed the liability limits of your auto insurance, homeowners insurance, boat insurance, or other insurance policy. The insurance coverage, also known as personal liability insurance, aims to prevent personal financial ruin if you are liable for damages that go beyond policy limits, and makes room for other situations and forms of liability, such as being sued for libel or slander. It covers you and members of your household if you are faced with such a claim.
Starting at coverage of $1 million, umbrella insurance policies are typically purchased by wealthy individuals and persons with the potential to be sued, such as those with property like swimming pools and trampolines, those serving as board members, or individuals with a high public profile.
How does umbrella insurance compare to excess liability insurance?
Umbrella insurance is similar to excess liability insurance in that it provides higher limits on liability coverage, but it is different in that it gives coverage that is not typical of base insurance policies, such as paying for legal fees and damages relating to accusations of libel and slander, invasion of privacy, and other situations for which you may be liable.
How does umbrella insurance work?
If you’ve purchased umbrella insurance, it will apply after your base liability limits have been met on an auto, homeowners, or other insurance policy. Here are a few examples:
You cause a multiple car accident: You find yourself in rush-hour traffic at the end of a busy workday, get easily distracted and rear-end a car in front of you, which causes a second collision with many injuries. All the parties involved have medical bills totaling $430,000, exceeding your $300,000 liability limit on your auto policy. Your umbrella policy will cover the difference of $130,000, which will protect your current assets.
A social media post leads to a libel suit: On a popular social media site, you allege impropriety on the part of your condo’s homeowner’s association and are soon thereafter hit with a $100,000 libel suit. None of your existing insurance policies cover this lawsuit, so your umbrella policy will automatically cover the costs of this suit against you as you’ve purchased the minimum $1 million coverage.
Your dog injures a neighbor: Your dog runs onto a neighbor’s property one day and bites the homeowner, leaving him injured and traumatized. He sues for medical bills, pain and suffering, and lost wages while in recovery. Your homeowner’s policy covers for this, but his lawsuit seeks more than the insurance liability amount, so your umbrella policy will kick in and cover the difference of the amount in the lawsuit against you.
What does umbrella insurance cover?
Umbrella insurance covers a variety of scenarios in which your auto, homeowners, or other insurance policy would cover up to the extent of the liability limits. There are also many examples or scenarios that many umbrella policies exclude.
What it covers
- Liability that is in excess of your base insurance policies, including damages for medical bills, a legal defense, or other expenses
- Being sued for libel, defamation, or slander
- Pain and suffering
- Invasion of privacy
- False arrest, imprisonment, or detention
- Liability as a landlord
- Liabilities when traveling overseas
- Other liabilities not covered by your home, auto or boat insurance
What it does not cover
- Your own medical bills, property damage or personal belongings
- Property damage or injuries caused by you while performing business or professional duties
- Business losses
- Breach of oral or written contract
- Property damage or injuries resulting from criminal or intentional acts by you
- Damage due to nuclear radiation, war, or terrorism
- Lawsuits due to the spread of a communicable disease
- Property damage or injuries caused by certain dog breeds, or recreational vehicles
Do you need an umbrella insurance policy?
Purchasing an umbrella insurance policy might be a good idea if you have significant assets or high personal net worth that you could lose in a lawsuit, or if you are an individual with a high chance of being sued. It offers protection against your current net worth as well as future potential earnings. Umbrella insurance policies also offers coverage in a broad range of situations, not just those limited to homeowners or auto policies, which provides greater protection of your assets.
You should consider purchasing an umbrella policy if:
- You own a swimming pool or pond
- You have a tree house, swings, or a trampoline
- You own dogs, horses, or other large animals
- You have teenage drivers in your household
- You host large parties in your home
- You employ household staff
- You manage a family trust
- You serve on a charitable board
- You have a high public profile
- You have a high net worth
Another alternative to purchasing an umbrella insurance policy is to increase your homeowners liability limit. There are some premium homeowners policies that enable you to do that to $1 million or higher.
How much do you need?
For umbrella insurance policies, it’s best to have enough insurance to cover your net worth. Insurance companies typically offer umbrella insurance in million-dollar increments. The lowest limit offered by any insurance company will be $1 million. To determine how much you will need, you will have to tally up your assets, including your home equity, personal savings, brokerage accounts, retirement accounts, your children’s college funds, and other assets and determine the difference after factoring in the limits of your base insurance policies. You should also factor in future earnings to come up with the right amount of umbrella insurance to purchase.
How much does it cost?
By most accounts, an umbrella insurance policy is a low-cost expense. It’s estimated that a $1 million policy costs between $150 to $300 a year, and for each additional $1 million in coverage, an added $50 to $75 per year. And as with all insurance policies, there are many factors that your rate will be based on, such as where you reside, your credit history, driving record, net worth, and other factors.
Purchasing umbrella insurance
Nearly all major insurers offer umbrella insurance, and in order to get the coverage, many may require that you carry auto, homeowners, renters, or boat insurance with them. You’ll also need to have a certain amount of liability insurance in your base policies before purchasing an umbrella policy, and some carriers may require that you bundle your policies with them. Requirement factors will be dependent on the insurance carrier you choose for your umbrella policy.