What Is Umbrella Insurance, and How Does It Work?
If someone sues you for damages above your primary liability limits, an umbrella policy helps pay what you owe.
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Before we dive in, do you need umbrella insurance?
You may want an umbrella policy if you have lots of savings and other assets you could lose in a lawsuit. It may also be a good idea if you’re at a high risk of being sued — for example, if you have a teen driver in your household who might get into an expensive car crash. See more details below.
Three key takeaways from this article
Umbrella insurance is extra liability insurance beyond what’s on your existing policies.
An umbrella policy can pay what you owe if you’re at fault for someone else's injuries or property damage.
The cost of umbrella insurance usually starts around $200 per year for $1 million of coverage.
What is umbrella insurance?
Umbrella insurance is protection for your savings and other assets. It provides extra liability coverage beyond the limits on your existing policies, such as car or home insurance. If you're at fault for injuries or damage and your other policies aren't enough to cover the costs, an umbrella policy helps pay what you owe.
Umbrella insurance is similar but not necessarily identical to excess liability insurance. What’s the difference?
Excess liability coverage typically provides a higher limit on the policies you already have.
Umbrella insurance may also add coverage for scenarios your underlying policies don’t include.
For example, umbrella insurance may pay for legal fees and damages if someone accuses you of slander (a false spoken statement) or libel (a false written statement). A typical homeowners insurance policy doesn’t offer this coverage.
Umbrella and excess liability policies vary from one company to another. If you’re confused about your coverage, contact your insurance company or agent.
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How umbrella insurance works
Umbrella insurance offers extra liability coverage if you reach the limit on an underlying policy. Here’s how it could work.
Example: You run a red light and T-bone another car. There's major damage to the vehicle, and several people are hurt. 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. She sues you for $200,000 in lost earnings.
In this example, you’re on the hook for a total of $500,000. If your auto policy has only $300,000 in liability coverage, the remaining $200,000 will 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 could also cover your legal costs in the lawsuit.
What does umbrella insurance cover?
Umbrella insurance usually covers claims involving anyone in your household, including kids and pets. Depending on your policy, it can cover the following types of liability claims.
Bodily injury
Bodily injury is when someone gets hurt on your property or because of something you did. Bodily injury claims may include things like medical bills, lost wages and even funeral expenses.
Example: A houseguest falls down your stairs and sues you for her medical bills plus pain and suffering, exceeding your homeowners insurance liability limit.
Property damage
Someone may file a property damage claim against you to recover the cost of repairing or replacing tangible items. These could include vehicles, household goods and more.
Example: Your teenage son drives off the road into someone’s house, causing hundreds of thousands of dollars in damage.
Personal injury
When it comes to umbrella insurance, personal injury typically refers to scenarios like:
Slander or libel.
False arrest or imprisonment.
Wrongful eviction or entry.
Invasion of privacy.
Example: A restaurant sues you for defamation after you write a negative review online.
Landlord liability
Landlords can use an umbrella policy to provide extra liability coverage beyond their underlying landlord insurance. However, you may want to speak with an agent about whether a personal or commercial umbrella policy would be better for your situation.
Example: A tenant slips on an icy sidewalk outside your rental property and sues you for failing to maintain the property.
Legal costs
In addition to paying damages up to your liability limit, your umbrella insurance will typically also cover associated legal costs. Say you have an $1 million umbrella policy, and someone sues you for that full amount. If a court finds you liable, your insurer could pay the $1 million plus provide your legal defense.
You might have to pay a "retained limit," which is similar to a deductible. It’s an amount you may have to cover before your policy begins to pay.
What umbrella insurance doesn’t cover
Umbrella insurance doesn’t usually cover your own injuries or property damage. For that, you’ll need other types of coverage for that (such as health insurance or collision coverage on your auto insurance).
Some insurers allow you to add uninsured or underinsured motorist coverage to your umbrella policy. This gives you extra coverage beyond what you already have on your auto policy. It may be useful if you get into a serious accident with someone who doesn’t have enough insurance to pay for your injuries or vehicle damage.
Your umbrella policy also won’t typically cover:
Liability associated with your business. For this, you’d need a business umbrella policy rather than a personal one.
Liability related to the breach of a contract. Say 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.
Crimes or deliberate injury. Umbrella insurance is generally designed for harm you do accidentally, not on purpose.
Some boating incidents. Umbrella policies may cover certain sizes or types of watercraft only. Other umbrellas don’t cover them at all unless you have an existing boat insurance policy.
Who needs umbrella insurance?
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.
Consider 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 the policy 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.
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How much umbrella insurance do you need?
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.
Look at the liability insurance you already have through your existing policies.
Consider buying at least enough umbrella insurance to make up the difference.
You may also want to consider 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 the value of your assets, keep in mind that certain accounts aren't subject to lawsuits. For example, employer-sponsored retirement accounts such as 401(k)s are protected from most lawsuits under federal law. IRAs aren't, except for funds rolled over from an employer-sponsored account.
However, state laws may offer some protection for 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, so you get a decent amount no matter how much you choose.
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How much does umbrella insurance cost?
The cost of an umbrella policy starts around $200 per year, according to InsuredBetter, a platform for independent insurance agents. The average cost is about $380 for $1 to $2 million of coverage.
Nerdy Perspective
With its high coverage limit, umbrella insurance generally offers good value for the cost. But many companies require you to have minimum liability limits on your underlying insurance policies to get umbrella insurance. For example, you may need to have at least $300,000 of personal liability on your homeowners policy. If you previously had just $100,000, your homeowners premium will likely go up.
How to get umbrella insurance
1. Check your existing policy limits.
Make sure you understand how your current coverage stacks up against your assets.
2. Call your insurer.
If you’ve already got homeowners and auto coverage with a certain company, see how much it would cost to add umbrella insurance on top of those policies.
3. Shop around.
Consider getting quotes from at least two other insurers to make sure you’re getting the best combination of coverage and price. An independent insurance agent can shop on your behalf.
Learn how to find the best umbrella insurance.
Bottom line: Is umbrella insurance worth it?
If no one ever sues you, you could pay thousands of dollars for umbrella insurance without any benefit. But if you do need the coverage, it could save you $1 million or more and keep you from losing your home and investments.
Not everyone needs umbrella insurance. But for those with significant assets or a high lawsuit risk, it can offer both financial protection and peace of mind.
Pays your legal fees in addition to any damages.
Covers incidents that your main insurance might not, such as libel and slander.
Costs relatively little compared to the potential payout.
Coverage often applies anywhere in the world.
May cover certain rental items for which you don't have insurance, such as a boat.
You must already carry auto or property insurance, usually homeowners, to qualify.
You may need to have the umbrella policy and all underlying insurance with the same company. This reduces your ability to shop around for better rates on individual policies.
Your total premium costs may go up if you need to add extra liability coverage to your existing policies.
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