What Is Umbrella Insurance?

Definition & Examples of Umbrella Insurance

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Umbrella insurance is add-on or extra coverage that extends the limits of other property and casualty plans that you have in place. It can protect you and your assets in the event of a loss.

Learn more about these plans, why some people need them, and how they work.

What Is Umbrella Insurance?

Property and casualty plans have limits to the amount of coverage they provide. If you sustain a loss, you will need to pay for any costs beyond your plan limits unless you have an umbrella plan.

An Umbrella policy is an extra type of liability insurance that will provide coverage to you above and beyond the standard policy you have in place. It protects you over the limits on your home or condo insurance. You may also be able to add it to your boat, car, or other policies. It can protect you if you are named in a legal suit or a claim is made for which you're found at fault.

  • Alternate name: Personal excess liability insurance.

How Umbrella Insurance Works

Once you pay the premium, an umbrella plan can protect you from:

  • Being sued for property damage and injuries.
  • Legal defense costs that come from being sued.
  • Having to sign over your future earnings to settle a claim.
  • Seeing your assets taken away to pay for a loss.

In most cases, before your plan starts paying, your main liability policy must pay out first. For instance, a home policy will pay out first in the event of a loss. Once the amount of money in your home liability coverage is maxed out, the umbrella portion kicks in.

Let's say you're in a crash and found to be at fault. Your auto policy has $500,000 per accident of liability coverage. One of the people in the car you were driving at the time of the crash was hurt, and she can no longer work at her job. Her earning power has been taken away as a result of the crash you caused. She has no choice but to sue you for the loss of income. Depending on what she does for a living, you could end up being on the hook for a lot more than $500,000. If your insurance and the person who got hurt settle for $750,000, you would have to pay the difference unless you had an umbrella plan. It would pay the rest up to its plan limits. Your first policy would pay the $500,000, and the umbrella plan would pay the $250,000.

Requirements for Umbrella Insurance

Insurance companies set the rules and limits for umbrella policies. The wording of your policy will clearly state the least amount of liability you must have to be able to get a policy.

For example, almost all states require drivers to carry minimum liability coverage in auto policies. These amounts are often very low and would not cover very much in the event of a crash. A minimum policy may not be enough to meet the requirements of the umbrella plan. In that case, you would need to increase your liability limits on the main policy and then add the umbrella.

Some companies require you to insure all your assets with them before they agree to give you umbrella coverage. They may add it as an endorsement to your main policy.

Umbrella policy underwriting rules and methods vary between companies. One plan may provide a coverage amount of tens of millions of dollars. You'll then find the next plan offers as little as $1 million. How much you can get depends on you and your budget. You should also note that some companies can double or triple the coverage from $1 million to $2 or $3 million, but the cost of the plan does not double or triple in most cases. It's worth getting quotes for a few policies before you decide how much to be covered for.

Do I Need Umbrella Insurance?

Property and casualty policies have limits on the liability they will cover. This is the portion of your policy that pays for costs that may arise from an injured person's:

  • Medical bills.
  • Rehabilitative therapy.
  • Current and future lost wages.

The liability portion of a policy also covers legal defense fees. Once you add up all of the costs and the legal fees, the standard liability you can get in a home or auto policy often isn't enough.

Almost every state has financial responsibility laws. These laws hold drivers at fault for injuries and damage that comes from accidents they cause. The at-fault driver could be sued for the damage, and assets of the driver could also be seized as the result of a lawsuit found in favor of the person who had the loss.

Even if you have no assets, you can still be held liable for damages. You may have to pay them off with your future earnings, which could mean having a lien put on your paychecks.

An umbrella policy can give you extra protection without you having to pay more. It's estimated that a $1 million policy may only cost between $150 to $300 a year. More liability insurance doesn't cost a lot if you compare it to the value of the coverage you get. You'll also be paying for peace of mind. Paying $150 to $300 a year in exchange for $1 million of protection is the cheapest million dollars you'll ever buy.

Key Takeaways

  • Umbrella plans extend the coverage of other property and casualty insurance policies you own. 
  • In most cases, before an umbrella plan starts paying, your first liability plan must pay out first. 
  • Insurance firms set the rules for these plans. The wording on these policies will clearly state the lowest amount of liability you must hold to be able to get a policy.
  • Once you add up the costs and legal fees that come with being held at fault for a person's injuries, standard liability may fall short. This is why you may need an umbrella plan.