What is Umbrella Insurance?

Umbrella insurance is kind of like a home alarm system...

You hope you’ll never have to use it, and you probably never will. But you also sleep better at night knowing it’s there just in case. You know that if something goes wrong and you find yourself with a substantial liability, umbrella insurance will have you covered.

Umbrella insurance protects your assets in the event of a hefty lawsuit. If you’re on the hook for damages that exceed what your other insurance policies cover, it can help you avoid dipping into savings or going into debt. Umbrella insurance is something you have in addition to other types of insurance (such as car and homeowners insurance), not instead of them.

In most cases, your auto and homeowners insurance coverage will be enough to cover any liabilities you face. But in the case of a major lawsuit, you may bump up against coverage limits.

Let’s say you’re throwing a holiday party in your home. You haven’t gotten around to replacing your roof, which has been in disrepair for several years. While your guests are at your house, the roof collapses. Several people are seriously injured, and their medical bills surpass what your homeowners insurance will cover. Luckily, your umbrella insurance kicks in to cover the rest of the liability.

Umbrella insurance covers you when someone else sues you and you’re liable for damages beyond your base policy limits — It essentially picks up where your other insurance policies left off.

Here are some of the most common situations that will require coverage from umbrella insurance (meaning your traditional home or auto insurance might not be enough to cover them):

• Dog bites: If your dog attacks someone, your homeowners insurance policy will probably cover the damages. However, there’s the chance that a serious bite could result in more medical bills than your policy will pay for.
• Accidents in your home: If a visitor to your home is injured, you’re liable for the cost of their injuries. In the case of a serious accident or even death, you might need more coverage than your homeowners policy provides.
• Car accidents: With the rise of distracted driving, collisions are a pretty common occurrence. Most car accidents are covered by your auto insurance policy, but umbrella insurance covers expenses that exceed your policy limits.
• Lawsuits for libel, slander or defamation: If you’re sued for something you say or write, your other insurance policies probably won’t apply. An umbrella policy can help cover your legal costs and possibly pay for a settlement. Keep in mind that most personal umbrella policies won’t defend you if the claim is related to a business you own or if you intentionally made a false statement that harmed someone’s reputation.

Umbrella insurance is there to protect you if you owe more than your other policies cover. But there are some situations where umbrella insurance doesn’t usually apply:

• Business losses: A personal umbrella insurance policy won’t cover liabilities your business encounters. If you have a business you need to protect, you’ll probably have to get a separate malpractice or indemnity policy to cover you there.
• Criminal or intentional acts: Umbrella insurance also doesn’t apply if you’ve committed a crime or purposefully caused damage. For example, let’s say you intentionally keyed someone’s car and are on the hook for damages. Umbrella insurance policy would not cover your liabilities in that case. Nor would it take care of restitution you owe as a result of a criminal conviction.
• Personal losses: Umbrella insurance usually only protects you in the case of lawsuits against you. It typically won’t cover damages you incur personally. So if your roof burns down and your homeowners insurance won’t pick up the tab in full, your umbrella insurance policy generally won’t cover the rest for you. It also won’t cover medical bills that exceed your health insurance coverage.

Umbrella insurance is not a practical choice for everyone. The purpose of umbrella insurance is to protect your assets, so if you don’t have many, it might not be necessary. But if you have a high net worth — perhaps because you own a valuable property or have lots of cash in savings or investment accounts — extra coverage might be a good idea.

Some insurance companies advise getting umbrella insurance if the value of your assets exceeds the coverage limits of your home and auto insurance.

There’s no firm rule about when you must have umbrella insurance, but it could make more sense in certain scenarios:

• You have features in your home that make it more likely that someone would get hurt, such as a pool, a trampoline, or a dog.
• Your hobbies make it more likely that someone will sue you. For example, you coach children’s sports teams or are an avid skier or hunter (sports where you could injure someone else).
• You rent out your property. As a landlord, you run the risk of being sued by a tenant or others who injure themselves on your property.

One could make the argument for anyone to have umbrella insurance. You never know what kind of lawsuit you might face, and umbrella insurance supports you in unforeseen circumstances. But it generally makes the most sense for people with enough assets to protect.

You can purchase umbrella insurance from most major insurance companies. You’ll first need to have auto and homeowners insurance with a certain amount of coverage — The specific amount varies by company. Geico, for example, requires you to have at least $300,000 of bodily injury coverage and $100,000 of property damage liability on your car insurance policy and at least $300,000 in homeowners or renters personal liability coverage to qualify for umbrella insurance. To make things easier on yourself, you can usually get all your insurance policies through a single provider, and you might get a discount for bundling them.

Costs vary, but you can generally buy an umbrella insurance policy with $1M in coverage for about $150 to $300 per year. Every million after that will cost you roughly $50 to $75. Umbrella insurance policies often don’t have a deductible if you pay one on your auto or home insurance claim before the umbrella insurance kicks in. However, in a situation where your liability is not covered by another insurance, you’ll probably pay a deductible for your umbrella insurance.

The cost of umbrella insurance varies from person to person, and some risk factors might mean you’ll pay a higher premium for your policy. Here are a few things that might come into play:

• Your job. If you work in a role that increases your chances of getting sued, you might pay more for umbrella insurance. An example of this might be someone who’s career requires them to be in the public eye often.
• Your driving record. If you have a dicey driving history and your auto insurance policy has had to cover accidents in the past, you might end up paying more for umbrella insurance.
• Previous lawsuits. If you’ve faced lawsuits before, that might suggest you’re more likely to face them again in the future.
• Pets. If you have a dog, especially a breed that is considered more aggressive, this might increase the cost of your umbrella insurance.
• Your hobbies. Some hobbies, such as skiing, boating or hunting, might increase the chances of someone suing you. If you partake in a hobby like this, your insurance company might raise your premiums.

The amount of umbrella insurance you need depends on how much you are at risk of losing. Most people might be fine with the lowest amount of coverage of $1M, but if you have a net worth of several million dollars, you might want more. When you’re calculating your net worth, be sure to include all your assets, such as real estate, savings, retirement accounts, and more.

The company that provides your home, renters, or auto insurance probably offers umbrella insurance as well. The following companies, all of which are among the 10 largest home and auto insurance providers, supply umbrella insurance, as of 2019:

• State Farm Mutual
• Allstate Corp.
• USAA Insurance Group
• Liberty Mutual
• Farmers Insurance Group
• Nationwide Mutual
• Travelers Companies
• American Family Insurance