What is umbrella insurance?

Key points

• Your homeowners and auto insurance provide you with some liability coverage if you’re sued, but you may want the extra protection provided by umbrella insurance. 
• An umbrella insurance policy is a type of liability insurance that kicks in once you’ve exceeded the liability insurance limits in your home or car insurance policies.
• Umbrella insurance can also cover you for a defamation or slander lawsuit.
• Umbrella insurance policies typically cost $150 to $600 per year for $1 million in coverage.
• You may want to consider umbrella insurance if you have teenage drivers, a high net worth or a position that makes you more likely to be sued. 

Liability insurance is a part of your home and auto insurance policies that protects your finances when you cause damage or injury to someone else. If you crash into another car, for example, the liability coverage in your auto insurance pays the other driver’s medical bills, their property damage and your legal defense costs, but only up to your policy limits. 

If the medical bills or legal fees exceed your liability insurance policy limits, that’s where umbrella insurance can help.

What is an umbrella insurance policy?

Umbrella insurance is a type of liability insurance that provides coverage above and beyond the liability coverage in your home and auto policies. Also called excess liability insurance, umbrella insurance can help cover the costs of a lawsuit or medical expenses if you are responsible for damages or injuries to another party. 

Most insurers require you to have primary liability insurance through your home and auto insurance policies before you can qualify for an umbrella policy. Umbrella insurers typically require you to have at least $250,000 in auto liability insurance and $300,000 in home liability insurance. This is because umbrella insurance only pays out once you’ve already exhausted your primary liability insurance. 

How does an umbrella insurance policy work?

Umbrella insurance policies pay out once you’ve exceeded the liability insurance in your home or auto insurance policy.

Here’s an example:

Let’s say you are hosting a party at your home when your deck collapses and several people sustain injuries. Because the guests were injured on your property, you’re financially responsible for their medical bills.

If your guests’ medical expenses total $700,000 and you only have $500,000 in liability insurance through your home insurance policy, your umbrella insurance policy will pay for the remaining $200,000. This saves you from having to pay $200,000 out of pocket.

What does an umbrella insurance policy cover?

An umbrella insurance policy covers problems ranging from bodily injury and property damage you cause to others — beyond the limits of your home or auto insurance policy — to lawsuits against you for defamation, libel and slander — which would not be covered by your homeowners insurance. 

Members of your household, like your spouse and children, are also typically covered by your umbrella insurance policy.

If you or your family member cause an accident, umbrella insurance can help cover others’ medical expenses and property damage, as well as your legal fees and any settlements or judgments arising from a lawsuit. 

Umbrella insurance provides excess liability coverage for problems like:

• Car accidents you or licensed drivers in your household, such as a less experienced teen driver, are at fault for.
• Injury caused by your dog biting someone at the park.
• Accidental injury that happens to a visitor on your property.
• Damage or injury caused by your child.
• Accidental property damage you cause, like accidentally starting a fire that damages your neighbor’s house.

“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 vice president of personal insurance product management at Travelers, an insurance company.

Umbrella insurance also extends coverage to situations that aren’t covered by standard home or auto liability insurance. Your umbrella insurance policy may cover the cost of court and attorney fees if you’re sued for the following: 

• Libel.
• Slander.
• Defamation.
• Invasion of privacy.

What does an umbrella insurance policy not cover?

Your umbrella insurance policy does not cover your medical expenses or damage to your own property. Just like your car liability insurance doesn’t cover damage to your own vehicle, your umbrella insurance policy doesn’t cover the cost of repairing your own property or paying for your medical bills, nor does it cover injuries to you or other members of your household.

Below are other instances when you would not be covered by an umbrella insurance policy.

• Intentional acts, like if you intentionally crash your car into another vehicle.
• Criminal acts, like if you get into a car accident while driving under the influence.
• Business property and activities, like if you’re a contractor and damage someone’s belongings while working. (You’ll need separate business liability insurance to cover that).

How much does an umbrella insurance policy cost?

Umbrella insurance for $1 million in coverage typically costs between $150 to $600 a year.

Umbrella insurance policies are sold in increments of $1 million. Depending on the insurance company, you can purchase $1 million to $10 million in umbrella insurance. The cost of your umbrella insurance policy may depend on several factors, including:

• How much coverage you buy. The more coverage you purchase the more expensive your policy will be.
• Your insurance company. You may get the best price by obtaining a policy through your home or auto insurer.
• How much liability insurance you already have with your home and auto policies. 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.

Who needs an umbrella insurance policy?

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

“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.”

You may also need umbrella insurance based on the risks in your home. For example, if you own a pool or trampoline, you may want to consider extra liability coverage through an umbrella policy since there is an increased risk for injury. 

And if you have teenage drivers in the house, who may be more likely to cause an accident that could result in a lawsuit, umbrella insurance is worth looking into. 

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, including individual retirement accounts, could be fair game if you’re sued for a large amount of money.

How to buy an umbrella insurance policy

The simplest way to purchase an umbrella insurance policy is to buy one through the insurance company that you already 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.

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 company. Keep in mind, however, that these insurers will still require you to have the maximum liability coverage on your other insurance policies.