Liability coverage is included in most homeowners and auto insurance policies. This coverage is intended to help pay for medical expenses and legal fees if you are found liable for someone else's injuries or property damage. This could be the result of someone injuring themselves in your home, or you causing an auto accident. However, depending on the liability coverage limit, which varies by carrier, these policies may not provide adequate protection.
Umbrella insurance protects you from additional liability. Where your underlying policies' liability coverage ends, an umbrella policy takes over. Umbrella insurance policies are typically sold in $1 million increments and provide additional financial protection in the event of a covered peril. An umbrella insurance policy is usually inexpensive, providing a way to maximize your protection.
Deeper look into umbrella insurance?
Personal umbrella insurance provides additional liability protection when your other policies' coverage falls short. It is intended to cover expenses that exceed the liability limits of your underlying insurance policies, such as your home insurance, auto insurance, and other policies such as watercraft or motorcycle policies. If you have to file a liability claim and the loss exceeds the limit of the underlying insurance policy, your umbrella insurance policy will kick in to provide additional coverage. This may include additional coverage for legal fees incurred as a result of a covered claim.
When learning how umbrella insurance coverage works, it may be helpful to visualize the policy as a literal umbrella. Your other insurance policies are all nestled beneath the umbrella, which provides additional liability if a covered claim on any of the underlying policies exceeds the policy's limit.
Umbrella insurance in action
You may be interested in seeing personal umbrella insurance in action now that you understand what it is. Here are some examples of umbrella insurance policies in action:
You cause a car accident and injure someone: Assume 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 insurance policy, but their total injuries are $175,000, your umbrella insurance policy may step in to pay the $75,000 overage, allowing you to avoid paying out of pocket.
Someone drowns in your swimming pool: If someone is injured or drowns in your swimming pool, the financial consequences could be catastrophic. Most home insurance policies include $100,000 to $500,000 in personal liability coverage, but an umbrella insurance policy may provide additional protection in situations such as pool injuries.
You cause damage to a rented home: Assume you rent a home for a vacation and fail to properly extinguish the campfire on the deck. If your actions cause a fire that damages the house, your home insurance policy and your umbrella policy may cover the costs.
Except in certain cases where coverage isn't available from your underlying insurance policy but covered by an umbrella insurance policy, you'll rarely file a claim for a new incident directly on your umbrella policy. If something happens, whether it's covered by your auto, home, or other insurance policy, you'll usually file a claim on the policy that covers it first.
What is the scope of an umbrella policy?
When faced with costly liability claims, an umbrella insurance policy may provide peace of mind, but it is important to understand what it does and does not cover. Most umbrella insurance policies will cover the following:
Bodily injury: Umbrella insurance policies may provide additional liability coverage for injuries you cause to others, whether they occur in an at-fault auto accident, at your home, or elsewhere. If you are found liable for injuries, your umbrella insurance policy may cover some of the costs.
Landlord liability: Some umbrella insurance policies include landlord liability coverage. For example, if you own a home that you rent out, you may be held liable for injuries that occur there. Perhaps the concrete sidewalk leading to the front door has been heaved and a tenant's guest trips and breaks an arm. After your landlord insurance policy's limit is reached, your umbrella insurance policy may help cover the damages.
Property damage: Umbrella insurance coverage may apply to property damage caused by you. Coverage, like liability claims, would only apply if the damage exceeded your underlying policy limits.
Personal injury coverage pays for legal fees if you are sued for libel, slander, or wrongful eviction. Personal injury coverage is frequently excluded from home insurance policies, though an endorsement can sometimes add it. Your umbrella insurance policy may cover personal injury claims even if your home insurance does not. In this case, your umbrella coverage may kick in even if no claim is filed on the underlying policy.
Umbrella policies, in general, cover liability claims that exceed the limits of your underlying policies. In rare cases, an umbrella policy may provide coverage for incidents that are not covered by your underlying policies.
What does umbrella insurance not cover?
Umbrella policies are useful, but they do not cover everything. Personal umbrella insurance typically does not cover the following items:
Property damage you sustain: The only type of property damage covered by umbrellas is damage you cause to the property of others. Umbrella insurance policies never cover your own property. Umbrellas provide additional liability coverage but not additional property coverage.
Personal belongings: Your home insurance policy's personal property coverage will pay to replace your belongings, such as clothing and furniture, following a covered loss, but an umbrella policy will not. When you are at fault for a loss, umbrella insurance only covers the personal belongings of others.
Business-related losses: Unless the business is covered under your home insurance policy, a personal umbrella policy will not typically cover any business-related losses. Similarly, unless your business is covered by your home insurance, umbrella insurance will not cover court costs or attorney fees associated with lawsuits filed against you. Some home insurance policies may cover certain small business operations, but to get the coverage you need, you'll most likely need to purchase business insurance, including a business umbrella insurance policy.
Losses caused by criminal acts: An umbrella insurance policy, like your home insurance policy's liability coverage, does not cover losses caused by illegal or intentional acts. For example, if a policyholder runs an illegal, homemade fireworks business and an accidental explosion burns down a neighbor's house, or if the policyholder intentionally damages the neighbor's property in any way, the insurer is unlikely to pay a claim.
Contracts, whether oral or written: If a contractor sues you for failing to honor oral or written contract terms, your umbrella policy will most likely not cover your legal fees.
Keep in mind that every policy is unique. You should speak with your insurance agent or company to ensure you understand what your umbrella insurance covers and does not cover.
How much is umbrella insurance?
Umbrella insurance premiums vary. Many of the factors that influence the cost of your home insurance and auto insurance may also influence the cost of your umbrella policy. These could include your home's features, the types of cars you drive, teen drivers, and your claims history. The cost will also vary depending on the amount of coverage you purchase.
Most umbrella policies start at $1 million, but for a higher premium, you may be able to purchase higher limits. Furthermore, the number of underlying policies that an umbrella covers may influence costs. A $1 million umbrella that provides additional coverage for a home and auto policy, for example, 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. This is because the company issuing the umbrella insurance policy likely considers additional underlying policies to be more risk.
Many auto and home insurance companies also provide umbrella insurance. If you already have a homeowners or auto policy, you could inquire with your agent about umbrella coverage. Before you can get an umbrella policy, your insurer will most likely have some requirements you must meet. For example, it's common for any underlying policy to have a certain level of liability coverage in order to qualify for an umbrella. It is also possible that you will be required to bundle your underlying policies with the same insurer.
Some home insurance companies may allow you to increase your liability limit to $1 million or more, removing the need for an umbrella insurance policy. Keep in mind, however, that increasing your liability limits on your home policy does not affect your liability limits on your other policies. An umbrella policy adds liability coverage to all of your underlying policies.
Is it necessary for me to purchase umbrella insurance?
In general, you should consider purchasing an umbrella policy if you have any personal factors that increase your liability risks or if you have high-value assets. These may include:
Having amenities like hot tubs, pools, trampolines, and treehouses.
Possessing rental properties.
You have substantial savings that you must safeguard.
Umbrella insurance adds a layer of financial protection against liability claims. Even if you don't have high-value assets or elements that pose a higher level of risk, umbrella coverage may be worth considering. If you're unsure whether an umbrella policy is right for you, consult with a licensed insurance agent or financial advisor.