What is Umbrella Insurance?

Umbrella insurance is supplemental to your other insurance policies and can protect you in case you’re sued. Is it right for you?

Written by Erin Gobler / May 25, 2022

Quick Bites

  • Umbrella insurance is a type of liability insurance that is designed to supplement the liability coverage in your other insurance policies.
  • Umbrella insurance covers costs related to lawsuits against you and members of your household, including for personal injury, libel, slander and more.
  • These policies can cost as little as $150 per year for $1 million of coverage, and can be useful protection if you have a high net worth or a position that makes you more likely to be sued.

Most people have insurance to protect everything from their homes and cars to their lives and pets. Most of those policies come with liability insurance—meaning protection in case you’re responsible for damages or injuries to someone else—it often isn’t enough. Enter Umbrella insurance, which seeks to fill in the gaps left by your other policies.

We’ll tell you more about how umbrella insurance works, what it costs and who should think about buying such a policy.

Inside this article

  1. What is umbrella insurance?
  2. What Umbrella Insurance Covers
  3. What doesn’t it cover?
  4. Umbrella insurance example
  5. The cost of umbrella insurance
  6. Who needs umbrella insurance
  7. How much do I need?
  8. How to sign up for it

What is umbrella insurance?

Umbrella insurance is a type of personal liability insurance that provides coverage above and beyond the liability coverage in your home and auto policies. If you are sued and are responsible for damages to another party, your umbrella insurance will cover anything your other liability coverages don’t.

Like other types of insurance, umbrella insurance requires a monthly or annual premium. As long as you maintain your coverage and pay your premiums, your insurer will provide the needed benefit, up to your coverage limit, when you file a claim.

What Umbrella Insurance Covers

Umbrella insurance applies anytime you or a member of your household is subject to a lawsuit by another party.

First, liability insurance can be used to provide coverage when your home or auto insurance aren’t sufficient.

For example, if you’re responsible for a car accident that causes injuries to others and your liability insurance doesn’t cover all the damages, your umbrella insurance will kick in to cover the remainder of your liabilities.[1]

“An umbrella policy can be extremely helpful in the case that you are found responsible for unexpected damages that exceed the coverage limits of your auto, home, boat, or other policies,” says Emily Grant, the head of specialty lines at Travelers, an insurance company.

Umbrella insurance can also apply to other situations where you’re on the hook for financial damages. Examples include lawsuits for libel, slander and defamation of character. Attorney fees and court expenses may be covered.[1]

What doesn’t it cover?

So, what doesn’t umbrella insurance cover?

First off, it doesn’t cover damage to your personal property. Just like your car liability insurance doesn't cover damage to your own vehicle, your umbrella insurance doesn’t cover damage to your property, nor does it cover injuries to you or other members of your household.

Umbrella insurance also doesn’t cover intentional or criminal acts. For example, umbrella insurance would generally cover liabilities from a car accident above and beyond what your car insurance liability protection covers. But if you intentionally ran into another vehicle with your own—especially if you faced criminal charges for it—then your umbrella insurance provider would likely deny the claim.

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Finally, umbrella insurance won’t cover damages to your property or other peoples’ property that occur in the operation of your business.[1]

For example, if you’re a contractor and you damage someone’s home in the course of doing a job, your umbrella insurance wouldn’t apply. This type of insurance is only for personal liabilities, and you would need a separate business liability policy to cover business claims.

Umbrella insurance example

Let’s say the weather is changing gloriously from a frigid winter and you’re ready to throw a backyard Memphis-style pork ribs barbeque get-together at your home and you invite friends and family to join. Very unfortunately, your deck collapses under the weight of those guests, and several people sustain semi-serious injuries. Because the injuries happened on your property, you’re financially responsible.

But what if the liability coverage on your homeowners insurance policy isn’t enough to pay for everyone’s medical expenses? In that case, your umbrella insurance would kick in, paying for your liabilities above and beyond the limits of your homeowners insurance liability coverage, and up to your umbrella insurance coverage limits.

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The cost of umbrella insurance

Umbrella insurance can be relatively affordable for the coverage it offers, as little as $1 a day. While it often comes with coverage limits of upwards of $1 million, annual premiums are considerably lower than any of the other types of insurance you likely already carry.[2]

“Umbrella insurance for $1 million in coverage costs between $150-$500 — this could be as little as $1 a day,” Grant says.

Like other types of insurance, the cost of your umbrella insurance may depend on several factors. First, the amount you’ll pay depends on the insurance carrier you open a policy with, and you may get the best price by obtaining a policy through your home or auto insurer.

The amount you’ll pay for umbrella insurance may also depend on what other insurance coverages you have. The more protection your other policies offer, the lower your umbrella insurance rates may be, since you’re less likely to have to file a claim.

It’s worth noting that while umbrella insurance may come at an affordable rate, it may also result in you paying a higher rate for your other insurance coverages. Umbrella insurance companies often require that you maximize your liability coverage on your other insurance policies. As a result, you’re likely to see your premiums on those policies increase.[3]

Who needs umbrella insurance

Umbrella insurance isn’t nearly as common as other popular types of insurance, including homeowners and auto insurance. But you might be surprised to learn just how many people can benefit from it.

“We like to say that, ‘You don’t have to be a millionaire to be sued like one’,” Grant says. “This means if you’re found responsible for an accident, like a car wreck on the way home, you could lose everything unless you have insurance to cover it.”

While umbrella insurance can be good for just about anyone, those with a high net worth (attractive targets) or those who hold a position that increases the chances of them being sued are the most likely to benefit from these policies.

You may also need umbrella insurance based on a position you hold.

For example, someone who coaches a children’s sports team where one of the kids could easily get hurt or someone who owns a horse ranch where people could be injured horses may be at a higher risk of being financially responsible for someone else’s impairment.

Finally, you may need umbrella insurance if you are a public figure of any kind. This could include being a politician or celebrity, as well as those who serve on the board of a company or non-profit organization–anyone who has a lot to lose.

How much umbrella insurance do I need?

If you’re shopping for umbrella insurance, it’s wise to purchase at least enough to cover your entire net worth in case of a large lawsuit.

Certain assets, including those in workplace retirement accounts, are protected from lawsuits. But other assets you, including individual retirement accounts, could be fair game if you’re sued for a large amount of money.

How to sign up for umbrella insurance

It’s pretty easy to sign up for umbrella insurance. The simplest way is to open a policy with whatever insurance company you use for your other insurance policies, such as your home or auto insurance.

“Most major insurers offer umbrella insurance and most will require that you have an auto, homeowner, condo or renters insurance with them as well,” Grant says.

Additionally, there are a small number of companies that offer standalone umbrella insurance policies, meaning you can open a policy without having your other insurance policies with the same carrier. Keep in mind, however, that these insurers will still require you to have the maximum liability coverage on your other insurance policies.

So, is it for you? Considering the cost-benefit scenario, it's not a bad bet if you can fit it into your budget.

Article Sources
  1. Geico. “Umbrella Insurance - How it Works & What it Covers.” https://www.geico.com/information/aboutinsurance/umbrella/.
  2. Geico. “Required Minimum Limits for Umbrella Insurance.” https://www.geico.com/information/aboutinsurance/umbrella/insurance-requirements/.
  3. Allstate. “What do I need to qualify for umbrella insurance?” https://www.allstate.com/resources/personal-umbrella-policy/umbrella-insurance-cost.

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio

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