Umbrella insurance policies: A guide

By Insurance.com Posted : 02/13/2015

What if someone sues you for millions of dollars and your car insurance or homeowners liability coverage tops out at $300,000?

You’ve got trouble.

Your insurance company stops paying when your limits are reached, leaving you personally liable for the rest.

“When we tell people to buy as much liability coverage as they can afford on either their car or their home, it’s these worst-case scenarios we have in mind,” says Des Toups, managing editor of Insurance.com. “You don’t want your house or life savings vulnerable.”

The answer, especially for those whose high net worth makes them a more tempting target for lawsuits, is typically an umbrella liability policy. (See “How to buy an umbrella policy.”)

What is an umbrella policy?

A personal umbrella policy provides liability coverage above home or auto insurance limits -- to anywhere from $1 million to $10 million.

It is sometimes referred to as a catastrophe policy, and for good reason: "The claims are not frequent, but they're severe," explains Ken Kitzmiller, vice president of underwriting for insurer Mercury Group. "It's for one of those things that only happens once in a while, but when it does, it's expensive."

What does a Personal Umbrella Policy (PUP) cover?

A personal umbrella policy covers injuries or damage to property that you cause others, as well as attorney's fees in the event you are sued. It covers the same things that home and auto liability insurance does, but expands to extras like slander, libel, lost wages, or occurrences on foreign trips or a tenant's property. Think of it as, well, an umbrella that follows you around.

You’re also typically covered for damages or legal defense in cases of:

  • False arrest
  • False imprisonment
  • Defamation
  • Invasion of privacy
  • Malicious prosecution
  • Eviction
  • Wrongful entry

What is not covered by an umbrella policy?

A personal umbrella policy is a liability policy, which means it doesn't cover your own medical expenses or property damages. It is also not intended for business activity, although gray areas exist when professionals are personally named in lawsuits.

Like any insurance, it doesn't cover intentional, or criminal, acts.

When does an umbrella policy kick in?

An umbrella policy kicks in after the limits are reached on your first line of insurance: the homeowners, renters, condo or auto policy, for example; or to cover something that this first, so-called primary, line of protection doesn't, such as libel.

You personally are covered, as are your spouse and other relatives or dependents living with you. If you die, your legal representative is covered.

Can anyone buy a personal umbrella policy?

Yes. But there are caveats:

  • You'll need a minimum level of primary insurance first, since that must be exhausted before the umbrella line is tapped. A common requirement is that you carry $300,000 each of home and auto liability insurance before you can buy a $1 million umbrella policy. You'll also need primary coverage on second homes, rental units, watercraft, RVs, motorcycles and other property.
  • Insurers are wary of selling umbrella policies to people who pose a high risk of being sued because of their work: doctors, engineers, architects, journalists, to name some. Some might deny coverage or require certain exclusions.

Is an umbrella policy expensive? Are there discounts?

Personal umbrella policies are relatively cheap, given the high amount of coverage. A $1 million policy can be had for $150 to $300 a year, according to the Insurance Information Institute. Another million in coverage may add just $75. Insurers can afford this because big liability payouts are relatively rare.

"It's classic insurance, in that they're charging you a small amount for a very small chance of an extremely catastrophic event," says Kathy Kristof, a personal finance columnist with Kiplinger and CBS News.

Many insurance companies will offer a discount on the underlying homeowners or auto policies if you bundle an umbrella policy with them. Kristof bought a $300 personal umbrella policy only to have the price essentially cut in half by the auto and home policy discounts.

"The net cost was closer to $100 or $150," she says. "That's not that much money for a whole lot of peace of mind."

Do I really need an umbrella policy?

In the words of Allstate: "You don't have to be a millionaire to be sued like one."

If another person is injured or killed, medical and legal expenses rise steeply and quickly. You needn't have lots of cash in the bank to be vulnerable. In many states, judgment creditors can come after assets in your primary home and retirement accounts.

"Somebody who has a home with a lot of equity in it [has] probably been counseled by their insurance professional to buy an umbrella policy," says Mike Barry, of the Insurance Information Institute.

What if I'm a renter and don't own a home?

You can buy an umbrella policy as a renter if  you've purchased minimum levels of renter's insurance. "The companies that we have . . . they will all issue an umbrella over a tenant's policy," says John Parsons, a principal with Parsons & Associates, an independent insurance agency in Syracuse, New York.

Whether you need one depends on the value of your assets, which can include property, retirement accounts or even future earnings; and your risk of being sued. Do you:

  • Have a dog?
  • Have children?
  • Have a trampoline in the yard?
  • Have young drivers in the household?
  • Hunt?
  • Coach youth sports?
  • Travel?
  • Drive a lot of miles?
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