What is umbrella insurance and how does it work?
Nobody is perfect. That’s why you buy liability insurance: You can avoid financial ruin if you accidentally cause severe injury or property damage to others. The problem is that your insurance is not perfect either. That’s where a personal umbrella insurance policy comes in.
What is umbrella insurance?
Think of umbrella insurance, sometimes called personal liability insurance, as insurance on your savings and other assets. Suppose you’re sued for damages that exceed the liability limits of your auto insurance, homeowners insurance, boat insurance, or some other policies. In that case, an umbrella policy helps you pay what you owe.
Keep in mind that umbrella insurance is similar but not identical to excess liability insurance, giving you higher limits on the liability coverage you already have. What is the difference? Most general insurance also provides additional coverage not included in your base insurance policies, such as payment of legal fees and damages if you are accused of defamation (a false statement) or defamation (incorrect information in writing).
How general insurance works
To get a better idea of how general liability insurance can help, imagine the following scenario:
You go through a red light and move another car. There was significant damage to the vehicle, and several people were injured. The car needs $25,000 in repairs, and treatment for injuries totals $275,000. Also, the other vehicle driver is an orthodontist who will be out of work for months due to a broken arm; he sues you for $200,000 in lost profits.
You’re on the hook for a total of $500,000. If you only have $300,000 of liability coverage with your auto insurance, the remaining $200,000 will have to come out of pocket.
If you had umbrella insurance, you would pay the difference between what your primary insurance covers and what you still owe. An umbrella policy would also provide coverage for any of your legal costs in the lawsuit.
What does umbrella insurance cover?
Umbrella insurance covers you and members of your household against lawsuits involving personal injury to others, damage to other people’s property, and a variety of claims such as defamation, property owner’s liability, and false imprisonment, depending on your policy.
In addition to paying for any damage up to your liability limit, your umbrella insurance will also cover associated legal costs above that amount. For example, if you have an umbrella policy with $1 million of liability coverage and you were sued for that total amount, your insurer would pay the $1 million-plus to provide your legal defense or cover your fees. A “retained limit” may apply, which is similar to a deductible in that you are responsible for paying it before your coverage begins to pay.
Details and exclusions can vary significantly between umbrella policies, but here are some sample scenarios that would generally be covered:
- Your teen is in a car accident, and the cost of other drivers’ injuries exceeds your auto insurance liability limit.
- A guest falls down the stairs and sues you for your medical bills plus pain and suffering, exceeding your homeowner’s insurance liability limit.
- A restaurant sues you for writing a negative review online.
» MORE: What is liability car insurance, and how much do you need?
What does general insurance not cover?
General insurance does not cover your injuries or property damage; You’ll need other types of coverage for that (like health insurance or collision coverage on your car insurance). It also won’t cover liability associated with your business unless you have a general business policy rather than a personal one.
Most general insurance policies exclude liability arising from the breach of a contract you have entered into. For example, if a roofing company sues you because you didn’t pay for the work you did according to the agreement you signed, your umbrella insurance policy is unlikely to help. And if you deliberately hurt someone or commit a crime, you’re almost certainly not covered.