In your homeowners insurance or auto insurance policy, your personal liability coverage protects your combined assets against expensive litigation. That means if you crash into another car and injure the driver or a houseguest suffers a bad fall in your home, you’re covered by auto and home insurance, respectively, in the event the injured party decides to sue you for repairs, medical expenses, or lost earnings.
A standard homeowners or auto insurance policy lets you carry up to $500,000 in liability coverage, but that may not be enough if you have several expensive assets. If your combined assets exceed your standard coverage limit, you should consider a personal umbrella policy. Also known as umbrella insurance, it provides an additional layer of liability protection against potentially devastating liability claims. But not everyone needs an umbrella policy — it’s best suited for people with expensive assets to protect.
What is umbrella insurance?
Umbrella insurance is a type of liability coverage that’s mainly designed for people whose combined assets add up to more than their auto and home liability insurance covers. Basically, it makes sure that, in the event you’re liable for damage or injury that exceeds your standard home or auto liability coverage limits, your assets, like your home or savings, won’t be at risk. If you have umbrella insurance, it can kick in for the remaining costs once your standard liability coverage is exhausted. That way you don’t end up losing your assets in an expensive lawsuit.
How does umbrella insurance work?
Umbrella coverage works like this: say the third floor balcony of your home collapses onto the ground floor during a party and several people are badly injured. It’s determined that you’re liable for $400,000 in injury expenses, plus the injured parties are collectively claiming around $250,000 in lost earnings for their extended period of time out of work. That means you’re on the hook for a $650,000 liability claim.
The problem is you only have $500,000 in personal liability coverage in your homeowners policy, which means you need to look elsewhere for the remaining $150,000. Umbrella insurance pays the difference between what your initial policy covers and what you still owe.
Keep in mind that a minimum amount of personal liability coverage in both your home and auto insurance policies is needed before you can get umbrella insurance. Your insurer will typically require one of the following coverage combinations:
$300,000 per person and $300,000 per accident ($300,000/$300,000) in bodily injury coverage and $100,000 in property damage coverage in your auto policy, plus $300,000 in personal liability coverage in your homeowners policy or
$250,000/$500,000 in bodily injury coverage, $100,000 in property damage coverage in your auto policy, plus $300,000 in personal liability coverage in your homeowners policy
Personal umbrella policies are mainly sold in increments of $1 million, up to $5 million. Some insurance companies, like Travelers, sell umbrella policies with up to $10 million in coverage.
What does umbrella insurance cover?
In addition to providing you with higher liability coverage amounts, umbrella insurance also provides you with more robust protection.
For example, your homeowners insurance liability coverage may exclude coverage for dog bites from dangerous breeds or trampoline injuries. Slander, libel, and defamation of character are also excluded. Umbrella insurance essentially expands your liability protection to cover these liability risk exposures, in addition to others.
1. Injury to others
If a guest gets hurt while visiting your home, for example, and their medical costs exceed your home insurance liability limits, your umbrella insurance can pay out for the remaining costs. If your dog bites someone, or if a child is severely injured in your swimming pool, umbrella insurance can help pay for those injuries too.
2. Damage to other people’s property
If you’re found to be at-fault for damaging someone else’s property — like if you accidentally set your friend's deck on fire — umbrella insurance may help pay for repairs, after you’ve exhausted your standard liability coverage.
3. Legal fees
If you’re taken to court over a liability claim, umbrella insurance can help cover the cost of lawyer and legal fees.
4. Tenant injury or damage (if you’re the landlord)
If a tenant gets severely hurt while living in your rental, they may try to sue you for their medical costs, lost wages, and more. Once you’ve exceeded your liability coverage limits, umbrella insurance can kickin to pay for the remainder of the expenses.
5. Lawsuits related to slander, libel, or defamation of character
A standard homeowners policy won’t provide coverage if you’re sued for libel or defamation of character, however a personal umbrella policy may. That means if you write something about someone online and they sue you for slander or defamation, umbrella insurance may help cover the costs of legal fees.
Do I need an umbrella insurance policy?
To figure out whether or not you need a personal umbrella policy, you’ll want to take the following factors into consideration.
1. How much are your total assets?
The biggest thing to consider is what your total assets amount to. If your two homes, your cars, your boat, your income and savings, and the rest of your assets add up to $3 million and you only have the maximum $500,000 in liability coverage for your homeowners and auto policies, that’s potentially $2.5 million in unprotected assets that could be wiped out from under you in an expensive lawsuit.
2. Consider your future income
You should also take your future earnings into consideration when determining your coverage needs. Along with your assets, the plaintiff is allowed to collect from you in a number of other ways on a settlement, including by taking a portion of future earnings. In fact, federal law allows for a maximum garnishment of 25% of an employee’s net wages. For that reason, homeowners in medical school or law school who expect a hefty raise after graduation may want to consider an umbrella policy.
3. Your overall liability exposure
If your home has a pool, a trampoline, a tree fort, or you have a pack of wild huskies as pets, you may want to consider a personal umbrella policy. Simply put, the more risk you’re associated with, the more you’re liable for.
How much does umbrella insurance cost?
According to the Insurance Information Institute, you can buy a $1 million personal umbrella policy for anywhere from $150 to $300 per year.
If you increase coverage by another $1 million, your costs may go up an additional $75, and then an additional $50 for every $1 million in coverage you add after that.
What does umbrella insurance not cover?
Umbrella insurance is a form of liability coverage, and there are things a personal umbrella policy won’t cover, such as:
Damage to your own property: Umbrella insurance won’t cover the cost of repairing your home or personal belongings if either are damaged. It may cover the costs of repairing someone else’s property that you damaged and are liable to pay for, but never your own.
Your own injuries: Just like with your own property, umbrella insurance won’t cover medical expenses if you’re injured. However, it may help pay for someone else’s medical expenses if you’re responsible for their injuries.
Business liability: A personal umbrella policy won’t cover costs that your business is liable for.
Contract obligations: If you signed a contact, you’re legally obligated to uphold it. Umbrella insurance won’t cover the costs if you break a contract and also won’t cover the legal expenses if you get sued for doing so.
Criminal or intentional actions: Umbrella insurance — as well as home and auto insurance — won’t cover you if you committed a crime or intentionally and deliberately caused property damage or injury to someone else.
How to buy umbrella insurance
Most major insurance providers sell personal umbrella policies. Some insurers may offer generous discounts if you buy umbrella insurance along with another type of property coverage.
What company you should consider buying from will depend on your coverage needs. For example, some companies may only offer umbrella policies that go up to $5 million coverage, while other insurers, like Chubb, offer umbrella policies that go up to $100 million in coverage.