What Is an Umbrella Insurance Policy? Definition and Who Needs It

What Is an Umbrella Insurance Policy?

An umbrella insurance policy is extra liability insurance coverage that goes beyond the limits of the insured's homeowners, auto, or watercraft insurance. It provides an additional layer of security to those who are at risk of being sued for damages to other people's property or injuries caused to others in an accident. It also protects against libel, vandalism, slander, and invasion of privacy.

How an Umbrella Insurance Policy Works

The added coverage provided by an umbrella insurance policy is most useful to high-net-worth individuals who own a significant amount of assets—or very expensive assets—and are at risk of being sued. Small businesses may also use an umbrella insurance policy to guard against potential monetary damages arising from claims.

The premium for an umbrella insurance policy may be less expensive if it is purchased from the same insurer that provided the original auto, homeowners, or watercraft insurance. Depending on the provider, 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.

Umbrella insurance is often referred to as excess liability insurance. If a policyholder is sued for damages that exceed the liability limits of car insurance, homeowners insurance, or other coverage types, an umbrella policy helps pay what they owe. In other words, if the dollar limit of the original policy has been exhausted, the umbrella policy acts as a fail-safe, so the insured person doesn't have to dip into savings and other assets.

Special Considerations

People who purchase umbrella insurance may own expensive property or have significant savings. Those who own dangerous items that can cause injury, such as swimming pools, trampolines, or dogs, might also buy an umbrella insurance policy.

If you have a mortgage loan, homeowners insurance is required by mortgage lenders. However, if you have high-risk items on your property, an umbrella policy can provide additional liability coverage that exceeds that homeowners policy.

People who engage in activities that increase their chances of lawsuits may also purchase umbrella insurance. Those activities might include:

• Being a landlord
• Coaching kids’ sports
• Serving on the board of a nonprofit
• Volunteering
• Regularly posting reviews of products and businesses
• Participating in sports where you could easily injure others, such as skiing, surfing, or hunting

Example of an Umbrella Insurance Policy

To understand how umbrella insurance can help, consider the following scenario: A driver runs a red light and accidentally hits another car, causing significant damage to the vehicle and injuring several people.

With car repairs totaling $50,000 and the treatment of the injuries eclipsing $500,000, the driver at fault may be liable for expenses that go far beyond the coverage limits of their insurance. An umbrella insurance policy will pick up the additional liability costs beyond the limits of their car insurance coverage.

The Bottom Line

An umbrella insurance policy provides additional personal liability coverage for those with an existing policy. The umbrella coverage kicks in when the liability coverage of the original, basic policy has been exhausted. Those who own dangerous items that can cause injury, such as swimming pools, trampolines, or dogs, might buy umbrella insurance. Those engaged with others, such as landlords, coaches, and board members, might also buy umbrella insurance.