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You Probably Need Umbrella Insurance
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Liability insurance protects you and your family’s finances from major disasters, such as a lawsuit against you (even if the charges are groundless). For example, if you crash into someone else, liability car insurance pays for a legal defense and any judgments or settlements. Or if your dog bites someone, homeowners liability insurance covers medical expenses.
But the safety net of liability insurance only stretches as far as the coverage amount you have. If you have significant assets that you could lose in a lawsuit, you need higher levels of liability insurance. Here’s more on what can be taken from you in a lawsuit.
That’s where umbrella insurance policies come in. An umbrella policy is designed to help prevent financial ruin from a catastrophic event that you’re financially responsible for.
What is Umbrella Insurance?
Umbrella insurance provides “excess liability insurance” (meaning additional coverage) beyond the liability insurance already in your auto, homeowners and/or watercraft insurance policies. It’s for expensive situations where medical bills or repairs exceed your “base” auto, home or boat policies. For example:
You cause a serious auto or boating accident. Auto accident bills can amount quickly, especially if you’re responsible for the medical bills of multiple people. Your auto or watercraft insurance policy would pay first, up to its maximum, followed by umbrella insurance.
Your dog bites someone. Dog bites are typically covered by a homeowners insurance policy. But if you’re sued for an amount above your home insurance liability limits (such as medical bills and pain and suffering), your umbrella policy would start paying.
You drive your car into a building. It happens–someone is parked close to a convenience store and they put the car in drive rather than reverse, causing extensive building damage. An auto insurance policy would pay for the property damage first, followed by an umbrella policy.
You accidentally injure someone. If you or a family member accidentally injures someone, umbrella insurance will pay when auto or home insurance is exhausted. For example, say your son accidentally throws a baseball into someone’s face, causing extensive injury. Your homeowners liability insurance will pay first, followed by umbrella insurance.
You’re on a board of directors of a charity and are sued for a board-related issue. An umbrella policy may provide coverage for lawsuits against you related to your work on a board of directors. The coverage may depend on whether the board is a non-profit and whether you’re paid for your service. It’s best to consult your insurance agent to understand whether you’ll be covered.
According to the Insurance Information Institute, a $1 million umbrella policy will cost about $150 to $300 per year. Generally, the next million will cost roughly $75 and $50 for every million after that.
How Does Umbrella Insurance Work?
Umbrella insurance kicks in when your “base” liability limits have been reached. Here’s an example: You cause a car accident that results in severe injuries for multiple people. The medical bills are $400,000, which exceeds your $300,000 in liability auto insurance policy limits. Your umbrella insurance can cover the remaining $100,000.
To add to this example, let’s say one of the injured parties is a highly paid professional who cannot perform their job for six months because of the injuries. Because your car insurance liability limits are exhausted, without umbrella insurance your assets such as your house and savings could be at risk with the extra layer of insurance from an umbrella policy.
Umbrella Coverage Beyond the Base Policy
Another advantage of umbrella insurance is that it usually provides coverage that’s not found in the base auto or homeowners policy at all. For example:
- Libel, defamation or slander. For example, if you post something defamatory about someone else to a website, you could be used.
- False arrest, imprisonment or detention
- Malicious prosecution
- Wrongful eviction or entry
- Invasion of privacy
What Umbrella Insurance Won’t Cover
Umbrella insurance doesn’t cover your own injuries or damage to your own property. For example, your health insurance would typically cover medical expenses for injuries and your homeowners insurance would cover your property from problems like fire or theft. Here are other losses typically not covered by umbrella insurance:
- Damage to your personal belongings
- Business losses
- Intentional criminal acts
- Written or oral contracts
While umbrella insurance provides an important safeguard against lawsuit judgments and settlements, examples of situations it generally won’t cover include:
- Intentional acts or injury
- Damages due to nuclear radiation, war or terrorism
- Communicable disease, such as a lawsuit against you for giving someone herpes.
How to Buy Umbrella Insurance
Umbrella insurance is commonly available from insurers that sell auto, home and watercraft insurance.
You’ll need a certain amount of liability insurance in the base policy before you can add umbrella insurance. For example, you might need to have:
- Home insurance: $300,000 in liability
- Auto insurance: $100,000 per person/$300,000 per occurrence for bodily injury and $100,000 for property damage, or more
- Watercraft insurance: $300,000 in liability
Do You Need Umbrella Insurance?
Wealthy households in particular need umbrella insurance. A wealthy individual or family can be a lawsuit target.
In addition, these circumstances could increase your chances of being sued:
- You serve on a charitable board.
- You have a swimming pool, pond or trampoline.
- You have dogs, horses or other large animals.
- You manage a family trust.
- You host large parties in your home.
- You employ household staff.
- You have a high public profile.
How Much Umbrella Coverage Do I Need?
When selecting the right amount of coverage there are a couple things to consider.
- Value of your assets: An umbrella policy should cover at least the value of your assets — this is what you stand to lose in a lawsuit.
- Potential future income loss: Your current assets and future income could be at risk in a lawsuit. Even if you have a limited income now, consider your potential future income. For instance, if you’re a medical student, you should consider your future earning potential.
A long legal proceeding is stressful and can potentially ruin a reputation, whether or not the lawsuit was baseless. Purchasing an umbrella policy won’t help the stress, but it can save everything you’ve worked so hard to amass.