What is Umbrella Insurance and How Does it Work?

Umbrella insurance is a personal liability policy that adds excess liability coverage if you’re found liable for property damage or bodily injury, and the costs exceed the limits of your existing car insurance, homeowners insurance, boat insurance, or even your renter’s insurance. It’s an added safety net for individuals that have a high chance of being sued or those who wish to protect high-value assets. Find out everything you need to know about umbrella coverage, how it works, and who needs it below.

How Does Umbrella Insurance Work?

Personal umbrella insurance works by expanding your liability coverage in two ways. Most policies increase liability coverage amount to $1 million or more and generally include new covered claims such as libel, defamation, and slander.

If you’re found liable in a lawsuit, your auto, home, or watercraft policy will only cover damages up to a certain limit. After that, any liability expenses become your responsibility. The suing party could claim assets like your life savings, investments, and even your home to gain their full compensation.

Here is where umbrella coverage comes in. Once you’ve exhausted the underlying policy limits, an umbrella policy will pay for the difference, protecting you from losing everything.

What Does Umbrella Insurance Cover?

Umbrella insurance protects you from liability if you’re responsible for damage inflicted on others or their property. Coverage can extend to the policyholder’s spouse and any dependents or relatives that live with them.

What is covered?

• Auto accidents
• Bodily injury
• Personal injury
• Property damage
• Funeral costs
• Legal fees and defense costs
• Medical expenses
• Landlord liability
• Slander
• Libel
• Defamation
• False arrest
• Malicious prosecution
• Shock or mental anguish
• Certain dog breeds
• Incidents that take place abroad
• Accidents involving rental property like watercrafts or scooters

What isn't covered?

• Bodily injuries to the policyholder
• Damage to the policyholder’s personal property
• Criminal or intentional action
• Claims excluded from the underlying policy, like restricted dog breeds
• Others' property damage or personal injury that your business might be liable for

Always consult insurance providers about the exclusions on umbrella policies since many are based on your underlying policies or state-specific legislation. Common exclusions to watch out for include:

• Damages caused by criminal or intentional action
• If you or someone that lives with you punches a guest and they sue you for bodily harm, liability coverage will not protect you
• Liability that is assumed under a contract
• If you sign a contract where you assume liability on behalf of someone else, umbrella insurance does not apply. You will need a separate contractual liability insurance policy
• Damages caused by using your auto or property for business purposes
• Umbrella insurance would not cover liability for damages in a car accident if you were using that car for business purposes, like lending it to an employee for deliveries. You will need a separate business liability insurance
• Injuries caused by restricted dog breeds
• Restricted breeds like wolf-mixes, Pitbulls, Rottweilers, German Shepherds, and Akitas are commonly excluded from liability coverage. You can purchase an umbrella policy to cover the gap, but the exclusions of the underlying policy often apply to umbrella coverage as well. You will need to purchase a pet-liability policy or find a new underlying home policy that covers your dog breed

Who Needs Umbrella Insurance?

High-net-worth individuals

You may need umbrella insurance if you are a high-net-worth individual who wants to protect valuable assets. If your net worth is significantly higher than the limits of your auto and home insurance, a liability lawsuit could make you lose everything. Assets include life savings, investment portfolios, and even investment property.

If you own investment property, worst-case-scenario examples look something like this:

• A guest slips and falls while using the pool in your rental apartment complex, resulting in permanent disability. The victim’s dependents sue you for future income loss, medical expenses, and legal bills. Your whole rental property is now at stake
• You host your sister’s wedding in your large, private estate. One of the guests drives home drunk and causes an accident. Since the guest left your home drunk and you provided the alcohol, you are found liable. Your property, your savings, and stock investments are on the line

A basic umbrella policy would protect these assets by providing excess liability coverage of $1 million or more for a relatively affordable premium, guaranteeing peace of mind.

People at a higher risk for being sued

High-net-worth is not the only reason to consider personal liability insurance. Owning certain dog breeds or even just owning a pool can expose you to an expensive lawsuit. Consider the following scenarios:

• Your teenage son is found responsible for a major auto accident, resulting in severe bodily injury and property damage. As his guardian and principal policyholder, you are now liable for all the expenses your auto policy won’t cover
• Your untrained dog escaped and bit your neighbor’s hand, causing irreversible nerve damage. As a working musician, she is left without employment prospects for the foreseeable future and decides to sue you for bodily injury liability. You are now financially responsible for her medical bills and future income loss

People assume high liability risks by:

• Owning restricted dog breeds like wolf mixes, pitbulls, or rottweilers
• Owning a swimming pool, trampoline, or treehouse
• Owning a gun
• Practicing high-risk sports like skiing, surfing, or hunting
• Coaching kid’s sports
• Being parent or guardian of a driving minor

How to Buy Umbrella Insurance?

Meet eligibility requirements

Determine how much coverage you need

Calculate appropriate coverage amount by considering:

• The liability limits of your underlying policies
• The total value of your personal assets: home, auto, life savings, and investments
• Any future earnings or income you’d stand to lose if a lawsuit lays claim to your investment properties or stocks

Basic coverage starts at $1 million, and it can be increased in $1 million increments if the policyholder requires more.

Check the liability coverage of our best renter’s insurance, best homeowners insurance, and best car insurance companies to see how much they cover and whether they offer umbrella insurance. You may even qualify for a discount by bundling policies under the same provider.

Research providers and get multiple quotes

Get quotes from multiple providers to compare the coverage and cost, but ask your current insurance agent if they offer umbrella coverage and discount bundles.

To get a quote, you will need to speak directly with an insurance agent online, by phone, or in person.

Keep in mind that many insurance companies will not extend umbrella coverage for policies they have not issued, which means that your auto and home insurance must be with the same provider.

How Much Does Umbrella Insurance Cost?

A $1 million umbrella insurance policy can cost anywhere between $150 to $300 a year. According to the Insurance Information Institute, umbrella insurance premiums increase about $75 for each $1 million of additional liability coverage.

Here’s what that looks like:

Premiums vary per person and by the state of residence. The insurance company also analyzes your risk level by looking at your credit history, driving record, and property location, among other things.

Summary of Money’s Guide to Umbrella Insurance