Most insurance policies you may have, such as car or renter’s insurance, have built-in liability coverage. In short, liability insurance pays for your legal defense in third party personal injury or property damage claims. This prevents you from paying out of your own pocket if you are found liable for a claim.
But even though insurance can save lives in such situations, it does not provide unlimited protection. This means that your insurance company will only pay out a certain amount, called the policy limit, in the event of a claim (for example, in the event of a faulty car accident).
So what happens if you need more liability coverage than your standard policy covers? This is where umbrella insurance comes into play.
In this guide, we’ll explain all the ins and outs of umbrella insurance – what it covers, how much it costs, who needs it, and where to get it.
What is umbrella insurance?
Umbrella insurance is a type of insurance that provides additional liability coverage on top of what your standard insurance policies offer if you get sued. The main purpose of umbrella insurance is to protect your assets in personal liability claims in which you may be held financially liable.
For example, imagine that you caused a serious car accident with several injured drivers. The liability limits of your basic auto insurance policy may not provide enough coverage to compensate each driver for their medical bills.
Read more: Auto insurance liability limits: how much do you need?
In this case, an umbrella insurance policy will provide more coverage and reduce the amount of money you have to pay out of your own pocket. Without umbrella insurance, you would have to pay the difference between your insurance policy limit and the total cost of medical expenses using your own money.
What does umbrella insurance cover?
Each umbrella insurance policy is slightly different. However, all policies will protect you financially in liability claims, including:
- Personal injury claims.
- Damage claims.
- Statements of personal responsibility.
- Defamation and defamation allegations.
In particular, umbrella insurance compensates for the following expenses:
- Your legal defense and legal costs.
- Settling with other parties.
- Decision with other parties.
Although liability insurance is usually considered in connection with auto, home or renter insurance, you can apply umbrella insurance to any personal liability claim you may face. For example, let’s say you left a harsh review after a bad hotel experience and the hotel is suing you for defamation. You can use your umbrella insurance policy to pay legal costs.
Another thing to know about umbrella insurance is that it covers you anywhere in the world. So if you accidentally hit a pedestrian while driving a Vespa in Italy, your umbrella insurance policy will apply if the pedestrian sues you for their medical bills, pain and suffering.
What does umbrella insurance not cover?
Umbrella insurance has several limitations. Here are some things that umbrella insurance does not cover:
- Your own injury or property damage.
- Liability claims related to your business.
- Liability claims for breach of contract.
- Intentional acts and crime.
Before purchasing an umbrella insurance policy, it is recommended that you discuss the details of the policy with an agent, as each policy is slightly different. For example, some umbrella insurance policies exclude boat liability claims unless your boat is insured.
Umbrella insurance vs liability insurance for excess liability
If you are in the market for additional liability insurance, you may have come across a policy called excess liability insurance. While umbrella insurance and excess liability insurance are sometimes used interchangeably, they are actually two separate policies.
Supplemental liability insurance increases the liability coverage limits for insurance policies you already have. This is usually sold as an endorsement.
For example, imagine you have $500,000 in liability insurance from your homeowner’s insurance policy. After installing the pool, you decide that you need more coverage. In this case, you can purchase additional liability insurance and increase your coverage limit to $1 million.
However, unlike umbrella insurance, excess liability coverage only covers the policy for which you purchase it. If you receive additional liability coverage under a renter’s insurance policy, it does not cover your auto or home insurance.
In addition, excess liability insurance does not cover non-insurance claims. For example, if you or one of your family members is sued for defamation or defamation, liability insurance will not cover your legal costs.
Read more: Tenant liability insurance: what covers it, how much it costs and who needs it
How long does umbrella insurance last?
Because umbrella insurance is designed to protect your personal assets in the event of a personal liability claim, the correct amount of coverage is different for everyone. Ultimately, this depends on your net worth and assets, which may be at risk if you are found liable in a liability claim.
To calculate which umbrella cover you need, consider the following:
- Physical assets that you own, such as cars and houses.
- The amount of money in your savings account.
- The amount of money in your investment portfolio.
As a general rule, you should purchase enough umbrella insurance to fully cover your net worth. This ensures that your personal assets are not at risk if you are sued.
Unlike home insurance or auto insurance, umbrella insurance policies have very high coverage limits. Most insurance companies sell umbrella insurance with coverage ranging from $1 million to $5 million.
Read more: Net worth is your most important financial metric – do you know yours?
Remember that even if you do not have exceptionally large wealth, your tangible and financial assets can be confiscated in court if you are sued and you do not have enough money to pay off the plaintiff (the person or company filing a lawsuit against you ).
The cost of umbrella insurance
It sounds like umbrella insurance is going to be expensive, but most policies are more affordable than you might think. Most insurance companies estimate that a $1 million umbrella policy costs between $150 and $300 per year, with higher premiums for higher coverage limits.
However, the cost of umbrella insurance depends on several different factors. Here are some of the biggest ones:
- your insurance company.
- The amount of coverage you are buying.
- Your unique risk factors.
If you’re hesitant about getting umbrella coverage, the extra costs probably won’t increase your insurance premiums too much. But keep in mind that the more you risk, the more expensive your premium will be. Certain situations, such as keeping a firearm in your home, may have a greater effect on the cost of your insurance coverage.
Who needs umbrella insurance?
Umbrella insurance is never a legal requirement, but can be beneficial for many people. However, you should seriously consider getting umbrella insurance if you have a large net worth or are at increased risk of being sued.
If you fall into one of the following categories, you can potentially benefit from umbrella insurance:
- You own an expensive house.
- You have significant financial capital.
- You often host parties at your home.
- Do you have a swimming pool, trampoline, dog, or other items in your home that could harm other people.
- You are concerned that you may be sued while traveling internationally.
- You are a landlord or owner of a rental property.
Where to buy umbrella insurance
Most major insurance companies sell umbrella insurance policies. Some offer quotes online while others require you to call an agent. However, every umbrella insurance policy is different, so it’s important to compare multiple policies before buying one.
For example, most insurance companies sell umbrella insurance policies with coverage limits ranging from $1 million to $5 million, but you can find policies with higher limits. Also, some policies may have exceptions. You must ensure that the policy covers you adequately based on your lifestyle and the unique risks you face.
Summary
At this point, you may be asking yourself, “Is umbrella insurance worth it?” Answer: it depends. Each person has different insurance needs, and this also applies to umbrella insurance.
If you have a large net worth or have an increased risk of prosecution, umbrella insurance can provide an extra layer of protection and extra peace of mind. Even if you don’t have a substantial savings account or a few properties, umbrella insurance can still be useful.
A personal liability lawsuit comes out of the blue when your normally friendly dog bites a delivery driver, you hit another skier on a slope, or you cause a major accident on the highway. Since most umbrella insurance policies are economical, it can be beneficial to add them to your insurance portfolio.
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