Umbrella Insurance Policy

An umbrella insurance policy provides additional liability coverage that exceeds the limits of the insured's homeowners, auto, or watercraft insurance. It adds an extra layer of protection to those who are at risk of being sued for damages to other people's property or injuries caused by an accident. It also provides protection from libel, vandalism, slander, and invasion of privacy.

How an Umbrella Insurance Policy Works

The additional coverage provided by an umbrella insurance policy is most beneficial to high net worth individuals who own a large number of assets—or very expensive assets—and are at a high risk of being sued. Small businesses also use umbrella insurance to protect themselves from potential monetary damages resulting from claims.

If an umbrella insurance policy is purchased from the same insurer that provided the original auto, home, or watercraft insurance, the premium may be less expensive. The policyholder who wants to add an umbrella insurance policy must have a base insurance coverage of $150,000 to $250,000 for auto insurance and $250,000 to $300,000 for homeowners insurance, depending on the provider.

Umbrella insurance is also known as excess liability insurance. If a policyholder is sued for damages that exceed the liability limits of their car insurance, homeowners insurance, or other types of coverage, an umbrella policy can help pay the bill. In other words, if the original policy's dollar limit is reached, the umbrella policy serves as a fail-safe, preventing the insured from having to dip into savings or other assets.

Special Considerations

People who buy umbrella insurance on a regular basis usually own expensive property or have significant savings. Alternatively, they may own dangerous items that can cause injury (swimming pools, trampolines, dogs, etc.). They may also engage in activities that increase their likelihood of being sued, such as:

• Being a landowner
• Sports coaching for children
• Serving on the board of a nonprofit
• Volunteering
• Regularly posting product and business reviews
• Participating in sports that put you in danger of injuring others (skiing, surfing, hunting, etc.)

Example of an Umbrella Insurance Policy

Consider the following scenario to see how umbrella insurance can help. If a driver runs a red light and hits another car, the vehicle may sustain significant damage, and several people may be injured.

With car repairs totaling $50,000 and injury treatment exceeding $500,000, the driver at fault may be liable for expenses that exceed their insurance's coverage limits. An umbrella insurance policy will cover any additional liability costs that exceed the limits of your car insurance policy.