What Is Umbrella Insurance?
Property and casualty policies have coverage limits. You’re responsible for any costs beyond your coverage limits unless you have umbrella insurance.
Umbrella insurance is a secondary type of liability insurance covering your liability above and beyond the standard liability you have taken on your homeowners insurance policy. It protects you above and beyond the limits on your homeowners or condo insurance, car insurance, watercraft, or other personal insurance policies and offers added liability protection for lawsuits or claims you’re found responsible for.
Alternate name: Personal excess liability insurance
How Umbrella Insurance Works
Umbrella liability insurance can protect you from:
- Litigation arising from property damage and/or injuries
- Associated legal defense costs
In most cases, before umbrella insurance starts paying, an underlying liability policy must pay out first. For example, a home insurance policy provides the primary liability for a loss. Once the amount of money in the homeowners personal liability coverage is exhausted or maxed out, the umbrella insurance kicks in.
Let’s say you’re in a collision and found to be at fault. Your car insurance policy has $500,000 per accident of liability coverage. One of the passengers in the collision was injured and can’t continue in their line of work. They sue you for damages. Depending on their profession, you could be on the line for a lot more than $500,000. If your insurance company and the passenger reach a settlement for $750,000, you would be responsible for the difference unless you had an umbrella policy. The umbrella policy would pay the difference up to its policy limits.
Requirements for Umbrella Insurance
Insurance companies set the underwriting requirements for umbrella policies. The umbrella policy wording will clearly state the minimum amount of liability required to qualify for the umbrella policy.
For example, states typically require a minimum amount of liability coverage in auto policies, but that may not be enough to meet the minimum underlying insurance requirements of the umbrella policy.1 In that case, you would increase your liability limits on the primary policy first and then add the umbrella policy.
Some insurance companies require you to insure all your properties with them before offering you umbrella coverage. They may add the umbrella coverage as an endorsement to your existing policy.
Umbrella policy underwriting varies from company to company and may provide coverage for tens of millions of dollars or as little as $1 million. It all depends on you and your budget. Also note that some companies can double or triple the coverage from $1 million to two or three, but the cost of the coverage doesn’t double or triple respectively. It’s worth getting quotes for a few umbrella insurance policies before you make your decision.
Do I Need Umbrella Insurance?
Property and casualty policies have limits on liability coverage, which is the portion of your policy that pays for expenses such as an injured person’s:
- Medical bills
- Rehabilitative therapy
- Lost wages
The liability portion of an insurance policy also covers legal defense fees. Once you add up all of the expenses and the legal fees, the standard liability in a homeowners or auto policy often isn’t enough.
Almost every state has financial responsibility laws that will hold drivers accountable for bodily injury and property damage resulting from accidents, and the at-fault driver could be sued for the damage. Personal assets could also be seized following a lawsuit.
Tip: Even if you have no assets, you can still be held liable for damages, and you may be required to pay off the damages awarded with future earnings.
A personal liability umbrella insurance policy can give you extra liability protection without additional costs. The Insurance Information Institute estimates that a $1 million policy costs between $150 to $300 a year. Additional liability insurance is inexpensive, especially compared to the value of the coverage you get; paying $150 to $300 in exchange for $1 million of protection is the cheapest million dollars you’ll ever buy.
Key Takeaways
- Umbrella insurance extends the coverage of other property and casualty insurance policies you own.
- In most cases, before umbrella insurance starts paying, an underlying liability policy must pay out first.
- Insurance companies set the underwriting requirements for umbrella policies. The umbrella policy wording will clearly state the minimum amount of liability required to qualify for the umbrella policy.
- Once you add up the expenses and legal fees associated with injuries, standard liability coverage may fall short, which is why you may need umbrella insurance.
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