As you build wealth, you have more to protect. A serious car accident, an injury on your property or a lawsuit could result in damages that exceed the liability limits of your auto or homeowners insurance. If that happens, your savings, investments, home equity and even future wages could be at risk. Umbrella insurance adds an extra layer of liability coverage that can help shield your assets from a large lawsuit.
How umbrella insurance works
An umbrella policy provides additional liability coverage beyond the limits of your underlying insurance policies, such as auto, homeowners, renters or boat insurance. It kicks in after the liability limits of those policies are used up.
For example, suppose you cause a serious car accident that injures several people, and the resulting damages and legal judgments total $1 million. If your auto insurance policy has a liability limit of $300,000, you would be personally responsible for the remaining $700,000. An umbrella policy with $1 million of coverage could cover that remaining amount, up to its limit.
Umbrella policies are typically sold in increments of $1 million, and coverage can extend to several million dollars or more for those with substantial assets.
Umbrella insurance is often relatively affordable for the amount of coverage it provides, because it only pays after your other policies are exhausted, which makes claims less frequent.
What umbrella insurance may cover
Umbrella policies generally cover liability for injuries to others or damage to their property caused by you or members of your household. This might include car accidents, injuries to guests on your property, injuries caused by your pet or accidents involving your boat or recreational vehicle.
Depending on the policy, umbrella insurance may also cover certain lawsuits that your underlying policies may not, such as claims of libel, slander, defamation, false arrest or invasion of privacy. This can be increasingly relevant in the age of social media.
Umbrella policies often cover legal defense costs, which can be substantial even if you’re not found liable. In many cases, defense costs may be covered in addition to the policy limit.
Umbrella coverage may also extend to incidents that occur outside the United States, depending on the policy.
What umbrella insurance doesn’t cover
Umbrella policies don’t cover your own injuries or damage to your own property. They focus on your liability to others.
They also have exclusions. Common exclusions include business activities, which typically require separate commercial liability coverage, intentional or criminal acts, liability you assume under a contract and certain types of vehicles or activities. Professional liability, such as malpractice, generally requires separate coverage.
Read your policy carefully to understand what’s covered and what’s excluded.
Who might consider umbrella insurance
People with significant savings, investments or home equity have more assets at risk in a lawsuit and may benefit from additional protection.
Households with teen drivers face higher risks, since young drivers are statistically more likely to be involved in accidents.
Homeowners with features that increase liability risk, such as swimming pools, trampolines, hot tubs or dogs, especially breeds that insurers consider higher risk, may want extra coverage.
Landlords who own rental properties face additional liability risks from tenants and visitors.
People with higher incomes may consider umbrella insurance, since future wages could be at stake in a lawsuit judgment.
People who frequently host gatherings, serve on nonprofit boards, coach youth sports or have a public profile may also face higher liability risks. Some umbrella policies can include coverage for volunteer board service.
Requirements for buying umbrella insurance
Insurers usually require you to carry minimum liability limits on your home and auto policies before they’ll sell you an umbrella policy. For example, an insurer might require certain liability limits on your auto and homeowners policies. This ensures that your underlying policies provide a base level of coverage before the umbrella kicks in.
Buying your umbrella policy from the same insurer as your auto and homeowners insurance can sometimes earn a multi-policy discount and simplify claims.
How much coverage do you need?
A common approach is to consider buying enough umbrella coverage to protect your net worth, though this is only a starting point. Consider your assets, income, risk factors and potential exposure. Some people choose coverage exceeding their net worth to account for future earnings and the possibility of large judgments.
Compare quotes
Ask your insurance agent how much coverage would fit your net worth and risk profile, and compare quotes from several companies. Review your underlying policies at the same time to make sure their liability limits meet the umbrella insurer’s requirements. Review your coverage periodically as your wealth grows and your circumstances change, such as when you add a teen driver, buy a rental property or install a pool.
Content on The Evergreen Edit is for educational and informational purposes only and is not individualized financial, investment, tax or legal advice. Learn more.
This article is for educational purposes only and isn't personalized financial, tax or legal advice. Consider talking with a qualified professional about your situation.
Kiara Miller — Founder & Editor
Kiara Miller is the founder and editor of The Evergreen Edit. He has been doing independent finance research for two decades and reviews every article before it's published.
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