Matt Hands, VP, Insurance and MoneySense
Umbrella insurance is a type of liability coverage that extends beyond the limits of property and casualty policies. It is often referred to ass excess liability insurance. So if you don’t have enough liability protection on either your auto insurance policy or home insurance policy, an umbrella insurance policy can fill in the gap to ensure you won’t be paying out-of-pocket for expenses such as legal fees, medical bills, and compensatory damages.
This type of insurance can also protect you against liability risks that wouldn’t otherwise fall under the categories of auto and home insurance. For instance, if you’re being sued for libel or slander, umbrella insurance can pay for the damages involved. And the coverage isn’t only limited to the policyholder – it can also apply to members of your household or your family.
Personal umbrella insurance is generally an affordable way to get a substantial amount of coverage. This is because insurance companies require you to already carry car and home insurance as your primary coverage before purchasing the extended protection.
Although being held liable for your actions may seem unlikely, one lawsuit can quickly turn into immense financial trouble – and an umbrella insurance policy can provide the peace of mind you need, just in case.
Do I need personal umbrella insurance?
A personal umbrella insurance policy can be of use to anyone who is at risk of being sued – which essentially means everyone. However, some people are more susceptible to liability claims than others, so be sure to weigh your personal risks when deciding whether to purchase a policy.
Umbrella insurance is more popular and arguably necessary for high-net-worth individuals who have considerable assets—or very expensive assets—and are at a significant risk of being sued. Here are a few situations that could increase your risk of being sued and need for additional personal liability protection:
You have a pool, hot tub, or trampoline in your backyard.
Your newly licensed teen takes out the car frequently.
You rent out your properties to short-term tenants.
You have a large public following on social media.
You have a dog that is known to bite others.
Umbrella insurance is a secondary policy, meaning your primary policy – such as your auto or home insurance – will pay out first up to its liability limit. Then, the remaining expenses from your claim will then be paid out through your umbrella insurance. While a personal umbrella policy will typically also have its own limit, the idea is that you should be able to reduce your out-of-pocket expenses as much as possible.
Let’s say you’re being sued for $1 million because your dog violently attacked a guest in your home. Your home insurance has a $500,000 limit in liability coverage, and you’ll need to contribute a $5,000 deductible to this amount. After your home insurance policy has been exhausted, you’re still left on your own to foot the second half of the bill. Having a personal umbrella insurance policy, however, can help cover the remaining costs, including the $500,000 plus any legal expenses involved – so you no longer have to put your house up for sale or dig into your hard-earned retirement savings.
In this case, you only need to pay a total of $5,000 because the $500,000 home insurance policy acts as a deductible to access the money on your umbrella policy. If you’re being sued for a risk that doesn’t fall under another one of your policies – say for defamation on social media – you’ll need to pay the set deductible on your umbrella coverage.
The general rule of thumb when it comes to selecting your limit is to buy as much insurance to cover your entire net worth – that’s because the more assets and money you have, the more you’re able to lose. So if you own multiple vacation properties and several luxury vehicles, you’ll want more umbrella insurance than someone who owns a simple family home.
Keep in mind that you still have liability protection on your auto and home policies, so you can factor in these numbers when calculating the limit on your umbrella policy. However, in the event you’re sued for a risk you aren’t otherwise covered for – such as libel or slander – you’ll want to be comfortable with the financial repercussions of setting a lower umbrella limit.
Aside from your current assets, it’s also a good idea to consider your potential earnings. If you’re a start-up founder or a medical student, for instance, your net worth could look a lot differently a few years down the line. But you can also adjust the umbrella policy limit to reflect your needs in the future.
How much does umbrella liability insurance cost?
Umbrella insurance is generally a low-cost option, considering the amount of coverage you’re able to protect yourself with. Policies with $1 million in coverage typically cost between $150 to $300 each year, but you won’t know the exact cost you’ll be paying until you get a quote from us.start my quote
Umbrella insurance is a form of liability coverage – meaning it’ll foot the bill if you’re ever sued for bodily injury or property damage by a third party. Here are a few examples in which a personal umbrella policy would come in handy.
Auto insurance – After hitting a biker while driving on the road at night, you are sued for $1 million, even though you only purchased the minimum third-party liability coverage of $200,000 on your car insurance policy.
Home insurance – A mail carrier slips and falls on your icy driveway, and the jury awards them $150,000 in damages, plus another $1,000 for medical benefits. However, your home insurance policy only covers liability claims up to $100,000.
Landlord insurance – Your tenant complains of improper maintenance after experiencing bed bug bites at your furnished apartment. You reach a settlement and agree to pay $100,000 in damages, but your landlord policy only offers $50,000 in liability coverage.
Boat insurance – Your motorboat leaks gas into the water, resulting in an environmental liability claim that totals over $1 million in clean-up fees and compensatory damages. While you do have boat insurance, you never opted in for coverage against this specific risk.
General liability claims – Your teenager gets into a fight at school and breaks a classmate’s arm, causing their parents to seek legal action for $50,000. This situation wouldn’t otherwise be covered by your home or car insurance policy.
What is not covered under an umbrella insurance policy?
Like all insurance policies, personal umbrella insurance has its own exclusions also – here are a few examples in which your insurer will most likely deny your claim.
Bodily injury or property damage of your own – Umbrella insurance is a form of liability coverage, meaning it only pays out when you’re being held liable for actions inflicted on others. It won’t cover the repair of your own vehicle after an accident if you don’t have collision insurance on your car policy.
Business liability claims – You can purchase commercial umbrella insurance to help bridge the gaps in your business policy, but personal umbrella insurance won’t pay out claims related to your company operations. So don’t expect your umbrella provider to cover a slip and fall lawsuit at your restaurant. You'll need to first claim the funds from your commercial general liability policy, instead.
Intentional, criminal, or war acts – Like most other types of insurance, you won’t be able to make an umbrella liability claim if you purposely inflicted injury or property damage on someone else. Most policies also have exclusions when it comes to war and terrorist activity.
Contractual liability – If you assumed liability in an oral or written contract, your umbrella insurance company typically won’t agree to pay out the damages.
Communicable disease – Claims related to communicable diseases could also potentially be denied, so if you’re being sued because your child spread chicken pox at school, you may be on your own.
Find out if an umbrella insurance policy is right for you.
Connect with one of our qualified brokers to review your personal liability coverage needs and get a free quote for umbrella insurance.
Is personal umbrella insurance worth it?
Personal umbrella insurance can be worth it, depending on your individualized needs. While most people won't face a million-dollar lawsuit during their lifetime, an umbrella policy can protect those that are more susceptible to claims. For instance, if you have a large following on social media, you're far more likely to face a defamation lawsuit. And if your teenager regularly takes out your vehicle, having extra liability coverage in your back pocket is never a bad idea.
Even if you generally live a risk-free lifestyle, personal umbrella insurance is one simple, affordable way to get coverage for unpredictable situations – it can give you peace of mind, knowing you have the financial protection in place for you and your family.
What is commercial umbrella insurance?
Commercial umbrella insurance differs from personal umbrella insurance as this specialized policy protects you against the unique liability risks of your business operations. Let's say a bad batch of ingredients caused your restaurant to give hundreds of guests food poisoning in one night. If you don't have enough product liability insurance to cover the suit, a commercial umbrella policy can help bridge the gap in funds – which your personal umbrella insurance wouldn't be able to help with.
What's the difference between umbrella and excess insurance?
Umbrella insurance provides a broader form of protection – you can make a claim even if you don't have an underlying policy that applies or if the underlying policy doesn't outline coverage for the specific loss. With excess insurance, however, you'll only be able to increase your limits on losses that are already specified within the first policy. And generally speaking, this type of coverage only extends to one of your policies, not multiple.
For example, if you want to increase your home liability from its original $1 million to $1.5 million, you can purchase $500,000 in personal excess liability insurance. But if you want to be covered for all-around liability lawsuits, including those that don't fall under your auto and home insurance, an umbrella policy is the way to go.