What Does an Umbrella Policy Cover?
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A personal umbrella policy (PUP) is a form of liability insurance. If you are sued for causing damage to a person or their property, it can help cover the financial judgment against you.
Typically, umbrella insurance is a relatively inexpensive 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 with them before they'll sell you 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. Umbrella insurance may provide coverage in a variety of incidents, such as:
- You're in 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.
Umbrella insurance only provides secondary coverage. You must have another policy that provides primary coverage, and you'll need to exhaust that policy's limits before your umbrella coverage kicks in.
For example, imagine a guest falls on your property and is critically injured, and they successfully sue you for $1 million in damages. If your homeowners insurance policy's liability coverage limit is $250,000, that would be used first to pay the guest. Your umbrella policy would then cover the remaining $750,000 in damages. Without a personal umbrella policy, you'd be responsible for the $750,000 yourself.
What's not covered by an umbrella policy?
Personal umbrella insurance only provides liability protection, meaning legal shelter from incidents when you've unwittingly caused damage to another person or their property. If your own property is damaged — by you or someone else — your PUP insurance won't provide any coverage.
For example, if someone drives their car into the side of your house, that driver's property damage liability insurance would cover the damage to your home. Or, if the driver didn't have an auto insurance policy, the damage may be covered by your standard homeowners insurance policy. But your PUP cannot be used.
In addition to not covering your own property or medical care, your personal umbrella policy typically does 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 your business's liability policies.
- Liability due to criminal behavior: If you intentionally assault a guest in your home, for example, any damages you're held responsible for would not be covered by insurance.
- Liability incurred through contractual agreements: For instance, injuries sustained while a contractor does home repairs in exchange for payment are likely not reimbursable from an umbrella policy.
- 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
A personal umbrella policy can provide some protection if you have significant valuable assets. For example, if your total net worth is $1 million, and you're at fault for a car accident that causes serious injury to another driver or their passengers, you would be a prime target for a lawsuit.
However, not all of your assets would be considered at risk if you were sued. In most states, certain retirement funds, such as money saved in 401(k) accounts, are protected from lawsuits, up to specified limits. But 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 |
| Boats | IRAs |
| 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 | |
| Investments | |
| Personal belongings |
If a sizable amount of your net worth is in assets that could be targeted in a lawsuit, a PUP may provide worthwhile coverage and peace of mind. Umbrella insurance policy limits typically begin at $1 million and can be increased in increments of $1 million. For most policyholders, a $1 million policy is sufficient. 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.
Let's say you carry $100,000 of bodily injury liability insurance under your auto insurance policy, which is much more than the minimum requirement) in most states. If the other driver in a crash sues you for $1 million in damages, you'd be responsible for the $900,000 difference.
However, if your umbrella policy is worth $2 million, it would cover the $900,000 that exceeds your auto insurance policy's limit. You would only have to pay the deductible for the claim.
You regularly participate in high-liability activities
You might be a candidate for umbrella insurance if you regularly participate in activities that could make you liable for another party's damages.
For example, if you post reviews of local businesses online, 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, and you cause a serious accident, you could end up responsible for extremely high medical bills.
A trampoline or ATV on your property can lead to a serious injury to a guest that may exceed the limits of your homeowners insurance. Incidents like these can result in ongoing medical bills. Even if you don't possess significant assets, the injured party may still sue you for more than your entire net worth, because they need financial compensation beyond their own coverages. In such situations, a personal umbrella policy will help protect you.
Others who should consider umbrella coverage:
- Long-distance commuters
- People who carpool
- Rideshare drivers
- Owners of restricted dog breeds
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:
- Location
- Ages and accident histories of covered drivers
- Net worth
- Credit history
For example, if you're 45 years old and have a net worth of $500,000, a clean driving record and an excellent credit-based insurance score, you can probably expect to pay between $150 and $350 per year for a $1 million umbrella insurance policy. However, if you add a teen driver to your auto insurance policy or increase your coverage to $2 million, you should expect to pay between $350 and $650 annually for your policy.
Most major insurance companies typically require you to carry a minimum amount of auto or homeowners insurance with them before they'll provide umbrella insurance 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:
- Geico
- State Farm
- Allstate
- Farmers
- Progressive
- Liberty Mutual
- USAA
- American Family
- Nationwide
- Travelers
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