What Is Umbrella Insurance, and How Does It Work?

Nobody’s perfect. That’s why you buy liability insurance: You can avoid financial ruin if you accidentally cause major injuries or property damage to others. Problem is, your insurance isn’t perfect, either. That’s where a personal umbrella insurance policy comes in.

Think of umbrella insurance — sometimes called personal liability insurance — as a fail-safe for your savings and other assets. If you’re sued for damages that are above the liability limits of your car insurance, homeowners insurance or other policies, an umbrella policy helps pay what you owe.

Note that umbrella insurance is similar but not identical to excess liability insurance, which gives you higher limits on the liability coverage you already have. What’s the difference? Most umbrella insurance also provides extra coverage that’s not included in your base insurance policies. For example, it may pay for legal fees and damages if you’re accused of slander (a false spoken statement) or libel (a false written statement).

To get a better sense of how umbrella liability insurance can come in handy, imagine this scenario:

You run a red light and T-bone another car. There is significant damage to the vehicle, and several people are injured. The car needs $25,000 in repairs, and treatment of the injuries totals $275,000. Plus, the driver of the other car is an orthodontist who won’t be able to work for months due to a broken arm. He sues you for $200,000 in lost earnings.

You’re on the hook for a total of $500,000. If you carry only $300,000 liability coverage with your car insurance, the remaining $200,000 will have to come out of your pocket.

If you had umbrella insurance, it would pay the difference between what your primary insurance covers and what you still owe. An umbrella policy would also cover your legal costs in the lawsuit.

» MORE: Compare car insurance rates

Umbrella insurance covers you and members of your household against lawsuits involving personal injury to others, damage to other people’s property, and a variety of claims such as defamation, landlord liability and false imprisonment, depending on your policy.

In addition to paying damages up to your liability limit, your umbrella insurance will typically also cover associated legal costs beyond that amount. Say you have an umbrella policy with $1 million of liability coverage, and you’re sued for that full amount. Your insurer would pay out the $1 million plus provide your legal defense or cover your fees.

You might have to pay a "retained limit," which is similar to a deductible. It’s an amount you’ll have to cover before your policy begins to pay out.

Details and exclusions can vary significantly between umbrella policies, but here are a few sample scenarios that would generally be covered:

• Your teenage son gets into a car accident, and the cost of injuries to other drivers is above your auto insurance liability limit.

• A houseguest falls down your stairs and sues you for her medical bills plus pain and suffering, exceeding your homeowners insurance liability limit.

• A restaurant sues you for writing a negative review online.

» MORE: What is liability car insurance and how much do you need?

Umbrella insurance doesn’t cover your own injuries or property damage — you’ll need other types of coverage for that (such as health insurance or collision coverage on your auto insurance). Nor will it cover liability associated with your business unless you have a commercial umbrella policy rather than a personal one.

Most umbrella insurance policies won’t cover liability stemming from the breach of a contract you’ve entered into. For example, if a roofing company sues you because you haven’t paid for the work it’s done under the contract you signed, your umbrella insurance policy is unlikely to help. And if you hurt someone deliberately or commit a crime, you’re almost certainly not covered.

Boats are another common area of exclusions. Some companies cover certain sizes or types of watercraft only. Others don’t cover them at all unless you have an existing boat insurance policy.

There’s no law requiring you to buy umbrella insurance. But if you have a lot of assets or a high chance of being sued, you might want an umbrella policy. It might be worth buying umbrella insurance coverage if you:

• Own property.

• Have significant savings or other assets.

• Are worried about liability claims against you when traveling outside the U.S.

• Own things that can lead to injury lawsuits such as pools, trampolines, guns or dogs. (Check with your insurer to make sure it covers your dog’s breed.)

• Are a landlord.

• Have an inexperienced driver in your household.

• Coach kids’ sports.

• Often host parties in your home.

• Serve on the board of a nonprofit.

• Regularly post reviews of products and businesses.

• Take part in sports where you could easily injure others (such as hunting, skiing or surfing).

• Are a public figure.

It’s wise to have at least enough liability insurance to cover your assets. To decide how much umbrella insurance coverage you need, add up the value of your property, savings and investment accounts. Then, take a look at the liability insurance you already have through your existing policies and buy enough umbrella insurance to make up the difference.

You may also want to include potential income if you’re likely to earn much more in the future than you do now — if you’re a medical student, for example.

When considering potential lawsuits, keep in mind that employer-sponsored retirement accounts such as 401(k)s are protected from most lawsuits under the federal Employee Retirement Income Security Act of 1974^[0]

However, state laws may partially protect your IRA accounts and the equity you have in your home. Check your local laws before deciding how much umbrella insurance you need.

Insurers typically sell umbrella insurance in million-dollar increments. This means the cheapest policy available provides $1 million in coverage, the next-cheapest policy offers $2 million in coverage, and so on — so you get a decent amount no matter what you choose.

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The cost of an umbrella policy could be as low as $200 per year, with an average cost of about $380 for $1 million of coverage, according to Trusted Choice^[0]

Almost all major insurers offer umbrella insurance. Most require that you carry your auto, homeowners, condo or renters insurance with them, too. You generally must buy a minimum amount of liability insurance on those policies before you can buy an umbrella policy.

For instance, to add umbrella coverage to your car insurance, your policy may need to have $300,000 of bodily injury liability coverage and $100,000 of property damage liability coverage. To add umbrella coverage to a homeowners policy, you often need $300,000 of liability insurance.

RLI and Auto-Owners Insurance are two companies that offer stand-alone umbrella insurance policies, meaning you could carry your auto or homeowners coverage with someone else. (Availability may vary by state.) An independent agent or broker can help you find options from these companies or others.

Another factor to look at when shopping is the maximum limit a company offers. Most umbrella policies stop at $5 million, but some go higher. Liberty Mutual and Farmers, for instance, offer umbrella insurance up to $10 million, while Chubb’s umbrella limits go up to $100 million.

Remember that the best umbrella insurance for you will cover your hobbies and other activities. For example, if your idea of a fun vacation is renting a Jet Ski and hitting the water, know that some umbrella insurers won’t cover these watercraft.

Below is a sampling of umbrella insurance offerings from major carriers.

Allstate

Coverage limits: $1 million to $5 million.

States available: Washington, D.C., and all states except Alaska and Massachusetts.

Eligibility requirements: You must have underlying policies with at least the following limits:

» MORE: Allstate home insurance review

Amica

Coverage limits: $1 million to $5 million.

States available: Washington, D.C., and all states except Hawaii.

Eligibility requirements: Requirements vary by state. Generally, your underlying policies must meet the following minimums:

» MORE: Amica home insurance review

Chubb

Coverage limits: $1 million to $100 million.

States available: All 50 states and Washington, D.C.

Eligibility requirements: Minimum limits for underlying policies vary by state.

» MORE: Chubb home insurance review

Farmers

Coverage limits: $1 million to $10 million, except in Florida and California, where the maximum limit is $5 million.

States available: All states except Alaska, Delaware, Hawaii, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, New Hampshire, North Carolina, Rhode Island, Vermont, Washington, D.C., and West Virginia.

Eligibility requirements: If you own a car, Farmers must insure it with bodily injury liability limits of at least $250,000 per person and $500,000 per accident. You can insure your home with any company as long as it has at least $300,000 of liability coverage. However, if you don’t own a car, Farmers must insure your home.

» MORE: Farmers home insurance review

Liberty Mutual

Coverage limits: $1 million to $10 million.

States available: All 50 states and Washington, D.C.

Eligibility requirements: You generally must have a Liberty Mutual auto policy with at least the limits below, but requirements may vary by state. The other policy types are optional, but if you have any of them, the liability limit must be at least $100,000.

» MORE: Liberty Mutual home insurance review

Nationwide

Coverage limits: $1 million to $5 million.

States available: Washington, D.C., and all states except Alaska, Hawaii, Louisiana, Massachusetts and Oklahoma.

Eligibility requirements: It depends on where you live. In most cases, all vehicles and your primary home must have Nationwide policies with at least the following limits:

» MORE: Nationwide home insurance review

State Farm

Coverage limits: Policies start at $1 million. There’s no set maximum limit; coverage is evaluated on an individual basis.

States available: All 50 states and Washington, D.C.

Eligibility requirements: Minimum liability limits for underlying policies vary by state.

» MORE: State Farm home insurance review

USAA

Coverage limits: $1 million to $5 million, with higher limits available through the USAA Insurance Agency.

States available: All 50 states and Washington, D.C.

Eligibility requirements: The following limits apply to underlying policies:

» MORE: USAA home insurance review