An umbrella policy is a proactive move for anyone looking to protect their finances from the uncertainties of life. While your auto, home or renters insurance policy provides liability coverage, some situations can fall outside of basic policy coverage—and that can get costly very fast. Bankrate’s insurance editorial team dives a bit deeper to help you understand what an umbrella insurance policy is and what it covers so you can make the best financial decision for yourself.
What is an umbrella insurance policy?
An umbrella policy is a form of personal liability insurance that is designed to extend the standard coverage provided by your underlying policies — including your home insurance policy, renters insurance, auto insurance and other policies like boat or motorcycle policies. It provides a kind of safety net for individuals who might find themselves facing substantial liability claims.
If you have to file a liability claim and the loss exceeds the limit of, say, your home insurance policy, your umbrella policy could kick in to provide additional coverage for your legal costs. It is ultimately designed to fill gaps and provide extra protection to your existing policies.
How does umbrella insurance work?
As mentioned, umbrella insurance acts as an additional layer of insurance protection and covers you and those living in your household. It can help cover legal costs if you’re found responsible for damaging someone else’s property or if someone gets hurt on your property.
You would not file a claim for a new incident directly on your umbrella policy unless coverage isn’t available from your underlying policy but is under your umbrella policy. If something happens — whether it’s on your auto, home or any other insurance policy — you typically file the initial claim on the corresponding policy first. When the umbrella policy acts as the primary policy, you may be responsible for a self-insured retention (SIR) fee that must be paid for the umbrella policy to become operational. Some examples of when your umbrella insurance might not have underlying coverage from another policy are:
- Claims of libel and slander
- False arrest, imprisonment or detention
- Invasion of privacy
- Malicious prosecution
- Wrongful eviction or entry
What is the difference between umbrella insurance and excess liability insurance?
Both umbrella insurance and excess liability insurance aim to provide additional insurance coverage over your base policies, but they do so in different ways. Excess insurance simply extends the financial limits of your existing policy without changing its terms or coverage. It provides extra protection for the same potential risks and only comes into play when your main policy’s limits have been exhausted, often in cases of significant claims.
Umbrella insurance, on the other hand, actually broadens the scope of coverage and can cover situations not covered by your base policies. It has the ability to extend protection across multiple primary policies and can potentially offer higher liability limits. Unlike excess insurance, umbrella insurance may have its own unique restrictions and exclusions.
What does an umbrella policy cover?
An umbrella policy could ease your fears if you faceexpensive liability claims, but it is important to understand what it does and does not cover. Most umbrella policies cover:
- Bodily injury: Umbrella policies may provide excess liability coverage for injuries you cause to others, whether in an at-fault auto accident, at your home or off your premises. If you are found liable for injuries, your umbrella may help pay the costs.
- Landlord liability: Some umbrella policies provide some coverage for landlords. For instance, if you rent out your home, you could be found liable for injuries that occur there. Say the concrete sidewalk to the front door is heaved and a tenant’s guest trips and breaks an arm. Your umbrella policy might help cover the damages after your landlord policy reaches its limit.
- Property damage: Umbrella coverage could apply to property damage that you cause to others. Like liability claims, coverage would also only apply if the damage exceeds your underlying policy limits.
- Personal injury: Personal injury coverage typically covers legal expenses when someone sues you for libel, slander or wrongful eviction. The liability coverage in homeowners policies often excludes personal injury coverage, although an endorsement can sometimes add it. This is a scenario where your umbrella coverage might kick in without a claim being filed on an underlying policy.
In general, umbrella policies cover liability claims that go above and beyond the limits of your underlying policies. In rare circumstances, an umbrella policy may offer coverage for instances not covered by your underlying policies.
Examples of situations covered by umbrella insurance
- You injure someone in a car accident: Imagine that 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 policy but their total injuries amount to $175,000, your umbrella policy could step in to help pay the overage of $75,000, so you don’t have to pay out-of-pocket.
- Someone drowns in your pool: If someone is injured or drowns in your swimming pool, the financial costs may be extreme. Most home insurance policies include $100,000 to $300,000 in personal liability coverage, but an umbrella could provide extra coverage in scenarios like pool injuries.
- You damage a rented home: Suppose you rent a home for a vacation and don’t properly extinguish the campfire you enjoyed on the deck. If your actions start a fire that damages the home, your home insurance policy and your umbrella policy could help pay for the damage.
- Your dog bites someone: If you are talking with your neighbor in the front yard and your dog bites their hand, umbrella insurance could help you cover expenses related to the injury. Some breeds may be excluded from umbrella policies, so check the terms and conditions of your policy.
- Someone trips on your porch: If a delivery person or party guest trips over a crack in your cement porch and the claim exceeds the liability covered by your standard homeowners, your umbrella policy could kick in.
- You’re involved in certain lawsuits: While your umbrella coverage won’t cover you against all legal allegations, it might kick in during select situations. For instance, your umbrella insurance may cover you if you’re sued for damages related to slander, libel or mental anguish. It could also help if another driver sues you following an at-fault accident.
- Your teen is accused of slander on social media: If your teen posts a negative comment about a classmate on social media, it could cause reputational harm. Since your policy extends to household family members, if their parents sue for defamation of character, the claim may be covered.
What does an umbrella insurance policy exclude?
Umbrellas may be helpful policies, but it doesn’t cover everything. Here are some scenarios that typically aren’t covered by personal umbrella insurance:
- Property damage that you sustain: The only kind of property damage that umbrellas may cover is damage you cause to the property of others. Your own property is not covered by umbrella policies. Umbrellas provide extra liability coverage, not extra personal property coverage.
- Personal belongings: The personal property coverage of your homeowners policy will pay to replace belongings like clothing and furniture following a covered loss, but an umbrella policy won’t. Umbrella insurance only covers the personal belongings of others when you’re at fault for a loss.
- Business-related losses: A personal umbrella policy will not typically cover any losses related to a business unless the business is covered under your home insurance policy. Likewise, umbrella insurance will not cover court costs or attorney fees associated with lawsuits filed against your business unless the business is covered by your home insurance. Some home insurance policies may cover certain small business operations, but you’ll likely need to buy business insurance, including a business umbrella insurance policy, to get the coverage you need. Talk to your insurance agent to learn more.
- Losses caused by criminal acts: Similar to the liability coverage of home and auto policies, an umbrella policy does not cover losses caused by a policyholder’s illegal or intentional activity. For instance, if you operate an illegal, homemade fireworks business and an accidental explosion burns down your neighbor’s home, or if you deliberately damage your neighbor’s property, your insurer would likely deny the claim.
- Oral or written contracts: If a contractor sues you for not honoring oral or written contract terms, your umbrella policy likely won’t cover your legal expenses.
Keep in mind that all policies are different. To make sure you understand what your umbrella insurance does and doesn’t cover, you might want to talk to your insurance agent or company.
How much does umbrella insurance cost?
How much an umbrella policy costs depends on many variables. Many of the factors that affect your home insurance and auto insurance costs may also affect the cost of your umbrella policy. These could include location, the features in your home, the types of cars you drive and your claims history. The underwriting criteria for an umbrella policy can also be more restrictive than a standard auto or home policy. If you are deemed too risky or have had liability claims in the past, you may not qualify for coverage.
The cost of umbrella insurance will also vary based on how much coverage you purchase. Most insurers offer umbrella policies in the range of $1 to $5 million, but some offer limits of up to $10 million. On average, $1 million in umbrella coverage costs approximately $400 a year.
Additionally, the number of underlying policies that an umbrella covers may also affect costs. A $1 million umbrella that provides extra coverage for a home and auto policy 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, for example. This is because the more policies that are likely to trigger an umbrella claim, the greater the risk for the insurer.
Where can I purchase an umbrella policy?
You can purchase an umbrella policy as a standalone policy or bundle your policy with your existing auto, home or renters carrier if your insurer offers it. Regardless of where you buy your umbrella policy, your insurance company will likely have certain requirements for your underlying coverage. The most common requirement is for your auto policy to have liability limits of 250/500/100 and for your home insurance to have a personal liability limit of $300,000.
Not having an active auto insurance policy can be a significant roadblock when looking for an umbrella policy. If you do not own a vehicle and want an umbrella policy, inquire about non-owner insurance. This type of policy can usually meet the requirement of an underlying auto policy without the additional expense of comprehensive or collision coverage. It has the added benefit of extending liability coverage to a vehicle you may rent or borrow.
Some auto and homeowners insurance companies may enable you to increase your liability limits to $1 million, which may eliminate the need for an umbrella insurance policy. However, keep in mind that increasing your liability limits on your auto and home policy doesn’t change the liability limits on your other policies. Nor does it provide additional coverage for liability losses those policies won’t cover. Your insurance agent should be able to talk you through any scenarios you might be concerned about.
Who needs umbrella insurance?
Generally, you might want to consider an umbrella policy if you have any personal factors that pose greater liability risks or if you have high-value assets. These could include:
- Owning amenities or attractive nuisances, such as hot tubs, swimming pools, trampolines and treehouses.
- Having rental properties.
- Having extensive savings that you need to protect.
- Having a high earning potential.
- Having a lifestyle or job that indicates wealth even if you aren’t rich, such as driving a high-end car, being a doctor or owning a business.
- Frequently entertaining guests, especially if alcohol is served in your home.
- Having children or often having children in your care.
Umbrella coverage provides an extra 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, it might be worth looking into umbrella coverage. If you’re not sure if an umbrella policy is right for your needs, consider talking with a licensed insurance agent or financial advisor.
Frequently asked questions
-
Having or frequently caring for children may be a commonly overlooked factor in the umbrella coverage decision-making process. Whether you have one child or many, the inherent liability risk that comes with children of any age means that parents, guardians and caregivers may want to consider an umbrella policy. Parents and guardians of children are usually legally and financially responsible for the child’s actions through vicarious liability, for scenarios such as these:
- Your young child pushes another child off the slide at the park, causing severe injuries.
- Your older child posts slanderous comments on a social media platform, causing another child mental anguish or embarrassment.
- Your teen throws a house party and serves alcohol while you are out of town. A partygoer is injured or killed on the way home due to underage drinking and driving.
-
Home features like swimming pools, fire pits, hot tubs and treehouses may increase your liability risk. If a guest sustains an injury on your property, there is a chance that your standard homeowners insurance policy won’t have adequate liability coverage to protect you if you’re found negligent. Umbrella insurance may help cover medical expenses and legal costs that exceed your primary policy’s limits.
-
Like all forms of insurance, there’s no exact formula to determine how much umbrella coverage to buy since everyone’s needs are different. Ultimately, insurance offers financial protection from the unexpected. But there are some steps you can take to help plan for the unknown. Before you purchase a policy, you might want to determine how much all of your assets are worth and what elements of your home or lifestyle might invite more risk. Then, you may want to discuss your financial goals with an insurance agent and financial advisor to ensure you’re not over or under-insured.
-
Liability coverage and an umbrella insurance policy both offer liability protection. However, an umbrella is its own policy, while liability coverage is a component of an underlying policy. The umbrella insurance policy typically only gets used if you exhaust the underlying liability coverage on your home, auto or other applicable policy. However, an umbrella policy may be used in instances that are not covered by the underlying policy, such as personal injury. The umbrella insurance policy acts as a second layer of liability protection to back up your other insurance policies.
-
Yes, you can get business umbrella insurance. You’ll likely have to purchase other forms of business insurance as well because business umbrellas work just like personal umbrellas — the coverage only kicks in after the liability limit on the underlying policy is exhausted. Many of the best home and car insurance companies also offer business insurance, which might make it easier to get a quote and manage your policies.
Read the full article here
