Understanding Umbrella Insurance

If you’re sued for damages that exceed your primary insurance liability limits, an umbrella policy helps pay what you owe.

We know that nobody is perfect. That is why people buy liability insurance. With an umbrella policy in place you can avoid financial ruin if you accidentally cause others injuries or property damage. Why umbrella? The problem is, your car and home insurance can only get you so much insurance and that is where a personal umbrella insurance policy comes in.

Think of umbrella insurance — sometimes called excess liability insurance — as a fail-safe for your savings and other assets. If you’re sued for damages that exceed the liability limits of your vehicle or home insurance or some other coverage types, an umbrella policy helps pay what you owe. In some cases it provides coverage that’s not included in the base insurance policies.

Who needs umbrella insurance

 

Umbrella insurance is not required, but is commonly purchased by people who:

  • Own property.
  • Have significant savings or other assets.
  • Are worried about liability claims against them when they travel outside the U.S.
  • Own things that can lead to injury lawsuits such as pools, trampolines and dogs (check with your insurer to make sure your breed is covered).
  • Engage in activities that increase your chances of being sued, such as:
    • Being a landlord.
    • Coaching kids’ sports.
    • Serving on the board of a nonprofit.
    • Volunteering.
    • Regularly posting reviews of products and businesses.
    • Participating in sports where you could easily injure others (skiing, surfing, hunting, etc.).

You can make a case that just about anyone can benefit from umbrella insurance. Why? Because a large lawsuit can wipe out not only your current savings but also what you stand to earn in the future. Even if you don’t have the money to cover a massive settlement now, you could be stuck paying off the debt for years.

How umbrella insurance works

To get a better sense of how umbrella insurance can come in handy, imagine the following scenario:

You run a red light and accidentally T-bone another car. There is significant damage to the vehicle, and several people are injured. The car needs $50,000 in repairs, and treatment of the injuries totals $250,000. Plus, the driver of the other car is an orthodontist who won’t be able to work for months due to a broken arm and sues you for $200,000 in lost earnings.

You’re on the hook for a grand total of $500,000. If you carry only $300,000 liability coverage with your car insurance, the remaining $200,000 will have to come out of your pocket.

If you have umbrella insurance, it would pay the difference between what your primary insurance covers and what you still owe.

Inside an umbrella insurance policy

Umbrella Insurance Pays For: Umbrella Insurance Doesn’t Pay For:
    • Others’ injury treatment and funeral costs.
    • Others’ property damage.
    • Lawsuits involving slander, libel, defamation of character and other personal attacks.
    • Your legal defense costs.
  • Injuries or property damage suffered by a tenant if you’re a landlord.
    • Your own injuries.
    • Damage to your personal belongings.
    • Others’ injuries or property damage that your business is liable for.
    • Intentional or criminal acts.
  • Property damage or injuries you cause while using certain recreational vehicles, such as an all-terrain vehicle or Jet Ski (this can vary by insurer).

Buying umbrella insurance

Insurers typically sell umbrella insurance in million-dollar increments. This means the cheapest policy available provides up to $1 million in coverage, the next-cheapest policy offers $2 million in coverage, and so on.

Companies sell umbrella insurance only if you already have either auto or property insurance — usually homeowners insurance, but possibly another policy such as renters or condo. You must buy a minimum amount of liability insurance on those coverages before you can buy an umbrella policy; the minimums vary by company.

For instance, to add umbrella coverage to your car insurance, your policy may need to have $100,000 to $300,000 bodily injury liability coverage and $100,000 property damage liability coverage. To add umbrella coverage to a homeowners policy, you need around $300,000 liability insurance.

HOW MUCH UMBRELLA INSURANCE DO YOU NEED?

It’s wise to buy at least enough umbrella insurance to cover your net worth. This includes your savings, other assets and income. You may also want to include potential income if you’re likely to earn much more in the near future than you do now — if you’re a medical student, for example.

It’s difficult to pinpoint exactly how much umbrella insurance is the “right” amount, because you don’t know how much a potential worst-case lawsuit could cost you. Umbrella policies typically start at $1 million in coverage, so you get a decent amount no matter what you choose and go up to $10 million.

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