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A personal umbrella policy (PUP) is a form of liability insurance. It protects you from financial responsibility if you cause damage to a person or their property and they file a lawsuit against you. Typically, umbrella insurance is a cheap form of coverage, and you can purchase it in increments of $1 million. However, insurance companies usually require you to carry auto or homeowners insurance before buying an umbrella policy.
What Does Umbrella Liability Insurance Cover?
Umbrella policies protect you from financial liability if you cause damage to another person or their property. Examples of incidents where umbrella insurance may provide coverage include:
- A car accident for which you are at least partially at fault
- Someone falls or is otherwise injured on your property
- Your dog bites somebody
- Your bathroom floods and it causes water damage to your downstairs neighbor's home
- You're found guilty in a defamation lawsuit
It's important to understand that umbrella insurance only provides secondary coverage. This means if you have another policy that provides primary coverage, you'll need to exhaust that policy's limits before your umbrella coverage kicks in.
What's Not Covered by an Umbrella Policy?
Personal umbrella insurance only provides liability protection—legal shelter from incidents when you've unwittingly caused damage to another person or their property. If you or someone else causes damage to your own property, your PUP insurance won't provide any coverage.
In addition to your own property and medical care, your personal umbrella policy may not provide coverage for the following scenarios.
- Business liability: Property damage, injuries or losses for which your business is liable, such as malpractice, are not insured. Instead, these may be covered by the business's liability policies.
- Liability due to criminal behavior: For example, if you intentionally assault a guest in your home.
- Liability incurred through contractual agreements: For example, injuries sustained while a contractor does home repairs in exchange for payment.
- Liability due to the use of recreational vehicles: Some umbrella insurance policies may exclude coverage for injuries you cause while operating certain vehicles, such as a dirt bike or jet ski.
Do I Need an Umbrella Insurance Policy?
If you have a significant amount of at-risk assets, or regularly engage in high-liability activities, you should consider purchasing a personal umbrella policy.
You Have Significant At-Risk Assets
You should consider purchasing a personal umbrella policy if you have significant valuable assets.
Typically, umbrella insurance policy limits begin at $1 million, and they can be increased in increments of $1 million. For most policyholders, a $1 million policy is sufficient to cover them. However, plaintiffs are more likely to file a lawsuit if they believe the defendant will be able to pay out a claim. So if you possess substantial assets in the form of non-retirement investments and real estate that you don't use as your primary home, you may need a higher limit.
In most states, certain retirement funds, such as money saved in 401(k) programs, are protected from lawsuits up to specified limits. However, other assets, such as real estate equity or even future wages, could be garnished.
|Assets at Risk in a Lawsuit||Assets That May Be Protected from a Lawsuit|
|Vehicles titled in your name||401(k)s|
|Business assets that you personally own||Annuities|
|Non-dwelling real estate||Primary home equity|
|Future wages||Social Security benefits|
|Money saved in your bank accounts|
You Regularly Participate in High-Liability Activities
You might be a candidate for umbrella insurance if you regularly participate in activities that could incur liability for another party's damages. For example, if you run a blog that posts reviews of local businesses, and a particularly negative review results in a defamation lawsuit, your umbrella policy could provide coverage. Or, if you regularly drive your child's friends to their sporting activities, you could end up responsible for extremely high medical bills should you cause a serious accident.
Even if you don't possess significant assets, you could still be sued for an amount greater than your entire net worth. In such situations, a personal umbrella policy will help protect you.
Others Who Should Consider Umbrella Coverage
How Much Does an Umbrella Policy Cost?
Your umbrella policy's premiums will depend on the amount of coverage you require and a number of personal risk factors, including:
- The age and accident history of covered drivers
- Net worth
- Credit history
Most major insurance companies offer umbrella insurance coverage. However, they typically require you to carry a minimum amount of auto or homeowners insurance with them to provide primary coverage. Fortunately, by bundling multiple types of policies with the same insurance company, you may qualify for a discount.
The following companies offer umbrella policies:
- State Farm
- Farmers Insurance
- Liberty Mutual
- American Family