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What Is Umbrella Insurance and How Does It Work?

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When you purchase an insurance policy, your coverage is limited by your policy’s restrictions. With car insurance, that could be the current value of the car. With homeowners insurance, that might be the replacement value of your home in its present condition. Insurance can be a lifesaver, but many policies have gaps in their coverage.

When you purchase an umbrella policy on top of your regular insurance, you get additional liability coverage that exceeds the benefits of your primary insurance. This policy may cover things like slander and invasion of privacy lawsuits, in addition to bodily injury and property damage.

Here’s what you need to know about umbrella insurance:

What is umbrella insurance?

An umbrella policy, also known as excess liability coverage, adds another layer of coverage to your other insurance policies. The purpose of an umbrella policy is to protect your assets — like your home equity and retirement savings — in case you exceed the liability limits of your home or auto insurance policy. Umbrella insurance is additional coverage and should be used to supplement your primary insurance policies.

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How does umbrella insurance work?

Umbrella insurance helps you close gaps in your insurance policies. While mortgage lenders might specify the amount of dwelling coverage you must carry, many homeowners don’t carry enough personal liability coverage. An umbrella policy increases your coverage in case someone sues you and you don’t have a high enough liability insurance limit.

With umbrella insurance, you and the other members of your household won’t be at risk of losing your home or other assets if your insurance policy doesn’t cover all damages in an accident. Umbrella policies also protect against claims of your traditional policy may not cover, such as libel or false arrest.

Example: If your teenage driver texts while driving and causes a 12-car pileup, your auto insurance coverage likely won’t cover the medical expenses and repairs for all the vehicles involved. An umbrella policy can help you cover the additional costs.

You can file a claim against an umbrella policy just like you would for a claim against your home or auto insurance. You’ll need to provide supporting documentation, including documents about the payouts from your primary insurance, settlement or ruling documents, and accident reports.

What does umbrella insurance cover?

Umbrella policies typically cover a wide range of liabilities, including:

  • body injury: Umbrella insurance helps pay for injuries sustained by other parties, such as someone falling on your property or someone getting injured in a car accident. Once your home or auto insurance coverage maxes out, the umbrella policy will cover the excess.
  • property damage: Umbrella policies cover the cost of damaged property that exceeds your homeowners or auto policy limits. Additionally, many umbrella policies cover rental vehicles and vacation rental liabilities. Landlords can purchase umbrella insurance for extra coverage against personal liability.
  • Global coverage: You can purchase umbrella policies that protect you from any incident that happens when you’re out of the country.
  • Legal fees: Some insurance policies won’t cover many (if any) legal costs resulting from your liability in an accident. An umbrella policy ensures you don’t have to pay for the legal defense fees and court costs if you’re liable for an accident or incident.
  • other liabilities: Umbrella policies also cover miscellaneous incidents that could result in lawsuits for false arrest, slander, libel, and mental anguish.

What does umbrella insurance exclude?

While an umbrella policy provides additional coverage for liability, it isn’t the right solution for all situations. An umbrella policy won’t cover the following:

  • Your injuries and personal belongings: Umbrella policies protect against personal liability. The policy won’t cover injuries or damages to you, your household, or your personal belongings. You can’t file a claim on an umbrella policy for your medical expenses or damages to your home, car, or property.
  • business losses: Personal liability umbrella policies don’t apply to business liabilities. You can purchase business-specific umbrella policies if you need to protect business assets.
  • Contractual liabilities: If you have a contract agreeing to take on specific liabilities, your umbrella policy won’t cover those. Contractual liabilities are more common in business, but they may also apply to landlords who might otherwise use umbrella policies to provide additional coverage against damages and injury.

How much does umbrella insurance cost?

The cost of an umbrella policy depends on several factors, including the coverage amount and your other insurance policies. You can generally expect to pay between $150 and $300 per year, or between $15 and $30 a month, for a $1 million umbrella policy. You can purchase umbrella policies in increments of $1 million.

The amount of coverage you need depends on your risk tolerance. You’ll want to consider your risks as a homeowner, the likelihood of causing an accident, and your potential loss of future income. Consider factors like your commute to work, the age of drivers on your auto insurance policy, and risky activities happening on your property (like swimming).

Good to know: Because an umbrella policy covers additional expenses after your primary insurance pays out, the insurer will want you to have ample coverage. Most insurers require a minimum of $250,000 of liability coverage with your auto insurance policy and $300,000 with your home insurance policy.

Who needs umbrella insurance?

The purpose of umbrella insurance is to offer financial protection if you’re sed. While anyone can be sued, not everyone is as likely to face a legal battle. You should consider an umbrella policy if your current homeowners or auto insurance policy won’t provide adequate coverage in the event of a serious incident. Other people who could benefit from an umbrella policy include:

  • Landlords with renters
  • Homeowners with pools, especially those who plan to host pool parties
  • Homeowners with dogs
  • Parents of teen drivers
  • Drivers with long or difficult commutes
  • Individuals with a lot of savings or assets
  • Individuals participating in high-risk activities that could injure others, like hunting
  • Homeowners with trampolines or other potential hazards in the yard

Umbrella insurance is a safety net that provides extra peace of mind in the event of an accident where you face financial responsibility. If you’re concerned that one accident could cause financial ruin, consider adding an umbrella policy.

Further reading: Hazard Insurance: What It Is and What It Covers

How to purchase umbrella insurance

If you’re interested in purchasing an umbrella insurance policy, here are a few things you’ll need to do:

  1. Review your current insurance policies. Review your homeowners and auto insurance policies to ensure you have the minimum coverage required to qualify for an umbrella policy. You’ll typically need at least $250,000 in liability for your auto policy and $300,000 for your home.
  2. Determine how much coverage you’ll need. Look at your risk factors and assets to estimate your likelihood of being sued or held liable for an incident. Think about dog bites, accidents in your backyard, and car accidents.
  3. Compare rates. Look at rates from multiple insurers to find the best fit. You may want to check with your current auto or home insurance provider, since adding umbrella insurance to an existing policy can potentially save you money.
  4. Provide necessary documents and complete the application. Fill out any forms from your insurer and provide proof of home and auto insurance, as well as any other documents your insurance carrier requires. Once your policy is instated, keep your records in a safe place in case you need them.
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Disclaimer: All insurance-related services are offered through Young Alfred.

About the author

Angela Brown

Angela Brown

Angela Brown is a student loan, personal finance, and real estate authority and a contributor to Credible. Her work has appeared in Fox Business, LendingTree, FinanceBuzz, and Yahoo Finance.

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