Solved! What Is Umbrella Insurance?

Q: A friend of mine accidentally caused a wreck that totaled another driver’s luxury vehicle and caused serious injuries to the driver. Her liability coverage limits weren’t enough to cover the repairs and the medical bills, and she’s facing enormous out-of-pocket expenses. Her insurance agent recommended raising her liability limits and also getting an umbrella policy to provide additional liability coverage if this were to ever happen again. What is umbrella insurance, and do I need an umbrella policy?

A: A lot of people have heard the term “umbrella insurance” and wonder “What is umbrella insurance?” The best way to describe an umbrella policy is that it provides additional liability coverage beyond the limits of auto and homeowners insurance policies. They give drivers, homeowners, and renters extra liability protection above what their regular policies provide. An umbrella policy provides an “umbrella” of coverage above the limits of their existing policies.

If a driver slides into oncoming traffic on a wet road and causes a major accident, their auto insurance would cover damages up to the policy’s limit. In the same vein, if a homeowner’s dog bites a neighbor, their homeowners insurance would provide coverage for the neighbor’s injuries up to the policy limit. In either of these scenarios, if the cost of the damages is higher than the policy limit (or if the injured parties decide to sue), the policyholder could be on the hook to pay. Umbrella coverage helps cover these additional liability costs.

Umbrella insurance is a type of liability insurance that increases the liability limits of a homeowners or auto insurance policy.

The answer to “What is an umbrella policy?” is that it’s an insurance policy that provides extra liability coverage on top of existing insurance. Umbrella policies are sometimes called excess liability insurance policies or personal liability insurance. Standard auto, homeowners, or renters insurance policies cover liability up to the limits stated on the policy; umbrella insurance extends coverage past the limit.

For example, if a homeowner accidentally started a kitchen fire and the fire spread to neighboring homes, it could cause expensive damage that the homeowner may be liable to pay. The homeowners insurance policy would cover the liability claim up to the policy limits, but after that the homeowner would need to pay out of pocket for the remaining damages. An umbrella policy would kick in once the homeowners insurance liability limit was reached, helping keep the homeowner out of thousands of dollars in debt.

Umbrella insurance isn’t stand-alone coverage, although it is a separate policy. Policyholders must already have an existing insurance policy in place, such as homeowners insurance or auto insurance, before they can purchase an umbrella policy. Most people purchase umbrella policies to increase the liability coverage of their auto, homeowners, or renters policies. One umbrella policy provides additional coverage beyond the limits of what a policyholder’s existing auto and homeowners insurance provides. That means a policyholder could purchase an umbrella policy and have additional liability protection for both their car and their home.

Umbrella insurance can cover the policyholder if they are sued for damages following a covered incident.

Base insurance policies generally include liability insurance to protect policyholders from the cost of being at fault for a covered accident. For example, most types of homeowners insurance include liability coverage in case the policyholder were to accidentally cause major damage outside their home, such as a car accident or if they were sued for defamation. This protection, however, only goes up to the policy’s limit. If someone sues the policyholder for more than their base insurance policy covers, the policyholder could be required to cover the remaining damages out of pocket. This puts the policyholder’s assets—like their house, car, and investment accounts—at risk. Umbrella insurance is backup protection for the policyholder’s assets in case they’re sued for more than their base liability insurance limit.

Umbrella insurance coverage also usually extends past the main policyholder, and the policy generally covers the policyholder’s spouse and their dependent children. It could potentially also cover any other relatives living in the policyholder’s home, such as a policyholder’s aging parent.

Relatives other than the policyholder’s spouse and dependent children who live in the home may not qualify for coverage under the umbrella policy if they have their own insurance (such as auto insurance) with a different provider. For example, if an aging parent lives with an umbrella policyholder but still drives and carries their own car insurance on a separate policy, the adult child’s umbrella policy won’t provide additional liability coverage. The parent may need to purchase their own umbrella policy to benefit from additional liability protection.

Umbrella insurance can also help pay for treatment of injuries or funeral costs for third parties.

Many liability insurance claims are made because of injuries and the resulting medical bills. If a policyholder causes a covered accident and injures a third party, they could be held liable for the medical costs of others. One of the most common examples of liability insurance covering medical bills is for car accidents. If a driver causes an accident, their car insurance may cover the medical bills of other drivers or people injured in the accident.

Umbrella coverage extends the amount of money an insurance policy will pay for a third party’s medical expenses related to a covered accident. For example, if a driver were to accidentally run a red light and cause a 10-car accident, there could be multiple injuries to other drivers and passengers. The driver who caused the accident may be asked to pay the resulting medical bills for all involved. Their car insurance may cover part of the expense, but they would still be on the hook for the remaining medical costs. In this scenario, their umbrella policy would kick in and cover any remaining amount up to the umbrella policy’s limit. This could prevent a policyholder from having to sell their assets to help pay for the damages resulting from the accident.

An umbrella policy can also cover funeral costs if the accident involves the death of another person. If the car accident in the previous example caused a fatality, the victim’s family could sue the at-fault driver for end-of-life costs. Umbrella insurance could help the driver pay the cost of the funeral, outstanding medical bills, and pain and suffering damages for the victim’s family that extend beyond the limits of the responsible party’s auto insurance.

Other incidents that umbrella insurance can cover include libel, slander, dog bites, false arrest or imprisonment, and wrongful eviction.

Insurance shoppers who may be wondering “What does umbrella insurance cover?” might be surprised to learn the benefits of an umbrella policy don’t stop at property and medical coverage. Many umbrella policies also cover claims against the policyholder for slander and libel. For instance, if the teen son of a policyholder were to make several false posts about a prominent local business owner online, the business owner could sue the teenager for libel, claiming that the teenager’s posts cost them thousands of dollars in lost revenue at their business. If the resulting settlement was $300,000, but the parent’s homeowners insurance policy had a liability limit of $100,000, the policyholder’s umbrella policy could kick in and cover the remaining $200,000.

An umbrella policy can also be a type of pet liability insurance for renters or homeowners. Like other umbrella policy benefits, these coverages usually extend to immediate family members, such as a spouse or dependent children.

While the main benefit of umbrella insurance is to provide additional liability coverage beyond a base insurance policy, that’s not the only coverage umbrella policies offer. Umbrella policies can offer coverage for some types of liability that aren’t generally covered by auto insurance or homeowners policies. This often includes coverage for legal fees for the defense of the policyholder against false arrests or imprisonment, wrongful eviction, and invasion of privacy. In these cases, the umbrella policy is the first line of defense. However, not all umbrella policies or insurance providers offer this coverage. It’s important for umbrella policyholders to carefully review their policy or ask their insurance agent about the policy’s coverage to make sure they fully understand what is and is not covered.

Umbrella insurance is a generally affordable form of liability coverage and can provide coverage both in and out of the U.S.

One of the most common questions about umbrella coverage is, “How much does umbrella insurance cost?” The good news for people shopping for insurance is that many umbrella policies only cost a few hundred dollars a year for millions of dollars in additional liability coverage that’s valid for incidents both in the U.S. and in other countries. Some people might consider it an extension of the cost of homeowners insurance or car insurance.

As is the case with most insurance products, the actual cost of umbrella insurance depends on the person buying it. Factors like location and the amount of coverage purchased can change the cost of a policy. The number of people covered by the policy also affects the cost. Generally, covering more people under one policy costs more. Someone who owns and insures multiple houses and cars will likely pay more than someone with a single vehicle. That’s because more insured assets mean more risk. The more assets a policyholder has, the greater the need for an umbrella policy.

Many major insurance carriers offer umbrella policies. However, most carriers don’t have stand-alone umbrella insurance products, and they might require the policyholder to have their homeowners and/or auto insurance policies with the company as well. For example, if a homeowner had their homeowners insurance policy through one of the best homeowners insurance companies and wanted to purchase an umbrella policy from another carrier, the carrier may require the homeowner to take out a homeowners insurance policy first before offering an umbrella policy. The homeowner can either look into purchasing an umbrella policy from their current provider or switch their homeowners coverage to the new company.

The umbrella insurance policy will typically begin to cover a claim only after another policy’s base liability limits have been reached.

One of the drawbacks of umbrella insurance is that coverage doesn’t start until another policy’s base limits have been reached. Umbrella policies don’t pay out claims until the policyholder’s other forms of liability insurance are exhausted. A driver who is at fault in an accident will find that the liability portion of their car insurance pays up to the policy limits before their umbrella policy pays up to its limits. Likewise, if a homeowner’s dog bites a neighbor, the liability portion of their homeowners insurance policy pays for medical bills and any resulting legal costs before the umbrella policy kicks in.

Insurance shoppers will want to note that it’s a common requirement that a policyholder must have a certain amount of coverage from a base policy (either their homeowners and/or car insurance) before they can purchase an umbrella policy. That means someone may have to increase their liability coverage limits on either their car policy or their homeowners insurance policy before they can buy umbrella insurance.

Say, for instance, a car owner has a car insurance policy with up to $100,000 in liability coverage and wants to buy an umbrella insurance policy to add to their overall liability coverage. It’s likely the insurer would require their car insurance to have at least $300,000 in coverage before they could buy the umbrella policy.

In addition to paying out liability claims, umbrella insurance will generally cover all associated legal costs.

Liability coverage from homeowners, renters, car, and umbrella insurance can pay for more than just medical bills or property damage. Liability protection often includes coverage for legal fees and costs. Many liability claims involve attorney fees, court filing expenses, and the cost to hire experts or subpoena witnesses. If a policyholder still has legal fees to pay after exceeding their base insurance’s liability limit, an umbrella policy can help cover the costs.

For instance, if a homeowner were to throw a high school graduation party and an underage party guest drank alcohol and caused a serious accident on the way home, the underage guest’s parents could sue the homeowner for damages. The party host and the driver’s parents could go through a long legal battle before coming to a settlement. In addition to the settlement costs, the party host would be required to pay legal fees from the drawn-out legal proceedings.

However, if the party host had extensive homeowners liability coverage and an umbrella insurance policy for additional liability costs, the homeowners insurance and umbrella policy would help to cover the remaining settlement costs and any legal expenses, such attorney and court fees.

The policyholder may be required to pay a “retained limit,” which is similar to a homeowners or renters insurance deductible.

Insurance policies of any kind generally require policyholders to pay a deductible before the insurance company will pay out claims. A deductible is the amount of money a policyholder has to pay before an insurance company will pay out on a claim. However, there is generally no deductible pertaining to liability claims.

Umbrella policies, on the other hand, don’t have deductibles. Once a policyholder pays their homeowners or renters insurance deductible and hits their liability coverage limit, the umbrella policy can help cover the remaining costs up to the policy limit. However, some umbrella policies have a “retained limit” if they offer protection for liability not offered by other insurance.

Umbrella insurance generally won’t cover any injuries or property damage that the policyholder sustains to their person or their property.

Homeowners insurance generally provides both personal property and liability protection. Personal property protection helps homeowners replace or repair their belongings if they’re damaged in a covered peril. However, the liability coverage won’t usually pay for personal medical bills or property damage to the homeowner’s property. Liability protection helps cover the cost of liability—the damage a policyholder does to a third party. Umbrella insurance is a type of liability coverage. That means it won’t pay to repair or replace the policyholder’s belongings. Umbrella policies also don’t cover the policyholder’s medical bills if they’re injured in the accident.

If an umbrella policyholder wants coverage for their personal property or self, they’ll need to look into other types of protection. This could include increasing their personal property coverage on their homeowners, renters, or car insurance policies. They might also want to double-check their health insurance coverage to see how it would pay in the event they sustain injuries from an accident.

Although an umbrella policy won’t pay medical bills or property damages for the policyholder or their family, it can still help their overall financial situation. For example, say a visiting child was playing with the homeowner’s child in the backyard and both children fell off a trampoline and hit their heads on a concrete patio. The homeowner’s liability coverage would help cover the visiting child’s medical expenses up to the policy limits, after which the umbrella policy would kick in up to its policy limits, which could help cover a larger portion of the medical expense. This would keep the family from having to sell assets to pay the settlement.

A personal umbrella policy won’t normally cover business liability expenses—but a commercial umbrella policy may.

Business owners generally have to carry separate business insurance for their companies. A business owner who drives a company-owned vehicle, for example, might have to purchase a commercial auto insurance policy. If they were involved in a car accident while driving a company-owned vehicle, their personal car insurance may not pay for damages. Similar to car insurance, separate umbrella are required for personal and business use.

Personal umbrella policies won’t usually cover the liability of a business owner if an accident is related to their business. This includes businesses that are run out of the policyholder’s home. For example, say a homeowner runs a day care business out of their home. They serve food that accidentally sickens the children with food poisoning, and the parents of several children sue the day care owner. The day care owner’s personal umbrella policy likely won’t pay any claims because the accident occurred in the line of business.

However, many insurance carriers offer business umbrella insurance policies. A business umbrella policy works similarly to a personal umbrella policy. Instead of covering a policyholder’s personal liability, business policies cover the policyholder’s actions in their business.

Breach of contract is also not typically covered by an umbrella insurance policy.

A breach of contract happens when one party breaks the terms of an agreement they made with one or more other parties. When an umbrella policyholder signs or verbally agrees to a contract, they may be assuming certain liabilities. In this case, an umbrella policy wouldn’t pay for claims related to damages caused by the breach of contract. For example, a homeowner throws a large party at their house. They hire an event management company to decorate the house and grounds, caterers for food and drinks, and a popular band for entertainment. They sign contracts with each service provider stating they will pay for services within 30 days of the party. After the party, however, the homeowner skips out on paying their bills. The service providers sue the homeowner for the cost of services and additional damages. The homeowner’s insurance policies, including their umbrella coverage, probably won’t pay any claims due to the homeowner breaking their agreement.

What is not covered by an umbrella policy? Aside from breach of contract, criminal acts and intentional negligence aren’t covered. If a policyholder commits a crime and injures someone in the process, their umbrella policy is unlikely to pay any claims. A base homeowners or renters insurance policy will also not likely cover a claim if the policyholder was involved in criminal activity at the time of the accident. Likewise, an umbrella insurance company is unlikely to pay claims if the policyholder intended to cause an accident, such as if a driver decides to intentionally run into another vehicle.

An umbrella insurance policy covers a variety of situations and is generally worth considering for most homeowners and renters.

Umbrella policies are generally lower-cost insurance coverage that can help homeowners, renters, and car owners protect their assets. When deciding if they should get umbrella insurance, policyholders will want to consider their risk of a high-dollar lawsuit. Umbrella protection can be a wise move for most people but is especially recommended for those who have considerable financial assets that extend beyond what would be covered by their homeowners or car insurance. A few people who might have a higher risk of lawsuits include:

• Public figures like politicians or CEOs;
• Landlords and multi-property owners;
• Those who want liability protection when traveling outside of the U.S.;
• Homeowners with high-risk items in their home, such as a trampoline, a swimming pool, or a gun collection;
• Coaches of kids’ sports teams or adult advisers for extracurricular clubs;
• Pet owners;
• Households with an inexperienced driver who may be more likely to cause an accident.

Someone looking for an umbrella policy might wonder “How much umbrella insurance do I need?” The answer to that question depends on the risk of a lawsuit as well as the value of their assets. For example, if a homeowner has over $3 million in assets and liability limit on their homeowners insurance is $500,000, they may want to consider an umbrella policy that’s at least $2.5 million in coverage. Those looking for umbrella insurance will want to make sure their coverage extends to adequately protect all their assets.