What Is an Umbrella Policy and Who Needs One?

Liability insurance confuses a lot of people, even though it’s an essential aspect of having a house, car, motorcycle or boat that you own, rent or lease. Basically, it’s that part of your insurance coverage that kicks in when anyone listed on the policy, including your dog, is at fault for accidentally injuring someone else or their property.

Sometimes, the potential settlement or judgment associated with a third-party liability claim on your homeowners insurance, renters insurance or car or boat insurance can exceed your coverage limits, at which point you can be held personally liable for the amount over your primary limits. That’s why it’s good to know about umbrella policies, which protect your personal assets in case of liability lawsuits.

Key Things to Know about an Umbrella Policy

Umbrella insurance is a separate policy that you can buy in order to supplement and broaden the liability coverage you already have through your home, car, motorcycle or boat insurance. Its primary purpose is to protect you from a financially devastating claim that exceeds your standard coverage. Here are the key things to know about how it works and who might need it:

Prerequisites for an umbrella policy: You must have at least one underlying insurance policy, such as homeowners or car insurance, typically with the maximum amount of available liability limits, in order to get an umbrella policy. In the event of a claim, the underlying policy pays first. After it’s exhausted, your umbrella policy kicks in up to its limit and within its scope.

Umbrella policy coverage amounts: In general, personal umbrella policies are available in $1,000,000 increments.

Typical coverage inclusions: Umbrella insurance policies can vary, but in most cases, they help cover the cost of the following when you’re deemed to have caused the accident or incident in question:

• Medical treatment for others’ bodily injury, sickness or disease sustained at the time of the accident or as a result of it, as well as potential future care
• Lost wages from the time of the accident to settlement, as well as potential future earnings
• Pain and suffering, as well as mental anguish
• Funeral in the event of a fatality
• Property damage sustained by others
• Others’ personal injury caused by things like slander, libel and defamation of character
• Defense attorney fees and expenses
• Injury to a tenant or damage to their property if you’re their landlord

Typical coverage exclusions: The following things are generally not covered by an umbrella policy:

• Your own injuries, which would be covered by your health insurance
• Damage to your property, which can be paid by different coverages on your primary policy, such as the collision coverage in your auto policy.
• Injury or damage sustained by others as a result of your business, in which case your business policies would be primary
• Injury or damage sustained as a result of intentional or criminal activity
• Financial injury as a result of a breached contract on your part

Umbrella policy candidates: Given its purpose, anybody can benefit from having an umbrella policy, however, there are several situations where it’s especially beneficial. These include the following:

• The value of your personal assets exceeds the liability limits on your insurance policies.
• You have a high net worth that others could go after with a liability lawsuit.
• Your home includes high-risk features, such as a pool, trampoline or dog.
• You rent out investment property as a landlord.
• You volunteer your time to coach youth sports, help out charities or serve on a nonprofit board.
• You engage in activities that pose a high risk of injury to others, such as hunting.
• You post a lot of reviews of others’ products or businesses.

Real-World Examples Where Umbrella Policies Protect

Now that you know what an umbrella policy is, let’s look at how it protects a policyholder.

A teenager accidentally veers into oncoming traffic, hits a brand-new, fully loaded Cadillac Escalade worth $100,000 and severely injures the driver, who makes $350,000 a year. Because it slammed into a tree, the Escalade’s past the point of repair and the driver needs multiple surgeries for the injuries sustained, making him unable to work for at least a year or more. In this situation, the cost of the totaled car along with its driver’s medical bills, lost wages and pain and suffering claims could easily exceed $1,000,000, well beyond the teen’s parents’ auto policy liability limits, despite having the maximum.

Even a routine day of fun with friends by a policyholder’s swimming pool can turn into a financial nightmare if someone is seriously injured. According to the CDC, more than 40% of those involved in nonfatal drownings treated in the ER require further hospitalization or care, which could turn into a multi-million dollar claim if the injured person requires long-term care due to brain damage.

In these examples, the policyholder’s underlying circumstances (a teenage driver and a swimming pool) put them at higher risk for a claim that exceeds their primary limits, but with an umbrella policy in place, their personal assets would be better protected from a large lawsuit.

Your insurance agent or provider can help you determine if your particular circumstances warrant the added protection of an umbrella policy.

Editor’s note: Quorum is not affiliated with any of the companies mentioned in this article and derives no benefit from these businesses for placement in this article.