Umbrella insurance is liability insurance that protects you and your assets from big-ticket lawsuit judgments against you. (Another name for umbrella insurance is "excess liability" coverage.) An umbrella policy provides liability protection above your standard homeowner, auto or boat insurance, and may cover you for claims that are excluded by your other liability policies.
Many people with auto and homeowner's insurance wonder if an umbrella insurance policy is really necessary. If you own property or have other assets you want to preserve, you should strongly consider umbrella insurance.
This guide covers:
Benefits of umbrella insurance
What does umbrella insurance cover?
Do you need a personal umbrella policy?
What is your risk for paying a lawsuit judgment?
How much should you buy?
What does umbrella insurance cost?
How to save on umbrella insurance
Examples of umbrella insurance benefits include protection against:
- Significant property damage. Your standard auto insurance liability limit may be exhausted if you are at fault in an auto accident where you destroy another vehicle and/or other property.
- Serious bodily injury liability. Your homeowners insurance liability limit may be insufficient to cover medical and other costs related to a guest falling off a balcony at your home, or being bitten by your dog.
- Landlord liability. A tenant might file an expensive suit over an injury sustained while renting your property.
- Libel or slander. Lawsuits could result from something that you say or write about another person.
- Malicious prosecution. You may file a suit against someone and in turn be sued for wrongfully, or maliciously, prosecuting that individual.
In each of the above examples, you may have some amount of liability insurance through your home or auto policy, but umbrella insurance provides another layer of protection once your standard liability coverage reaches its limit.
If you or someone in your household causes harm to another person or property, umbrella insurance covers:
- Expensive legal fees to defend yourself in a suit
- The portion of a settlement or judgement that exceeds your home or auto insurance liability limits
Without umbrella coverage, you would have to pay out-of-pocket for any costs beyond your home or auto insurance limit, or you could have a lien placed on your home, your wages garnished, and your savings and other assets might be up for grabs.
Liability awards in these settlements can be expensive. According to data from Jury Verdict Research, 13 percent of personal injury liability awards and settlements hit the million dollar mark or higher. That's where umbrella coverage can be critical.
How does umbrella insurance work?
Let's use a car accident as an example. This is how the process after your accident would work:
- Notify your insurance company as soon as possible so it can start the claims process.
- Your auto insurance policy will cover you up to your coverage limits.
- Though your auto insurance policy covered you up to its limits, you may still owe money because of a lawsuit or the extent of the damages or injuries. This is when you file a claim for your umbrella policy.
- Eligible damages that exceed your auto insurance will be covered by umbrella insurance. Note that in order to purchase an umbrella policy, your insurer will likely require that your auto liability insurance limits be above minimum levels.
- Your umbrella policy will cover the damages (and even your legal defense) up to your umbrella policy limit, which are often between $1 million and $5 million.
The decision to purchase umbrella coverage depends upon two major factors:
- What have you got to lose?
- How must risk are you taking?
This comprehensive guide should help you address both factors and help you determine whether or not you should augment your liability insurance coverage with an umbrella policy.
Use our auto insurance coverage calculator to see if you need umbrella insurance. Answer a few questions and get a recommendation of whether you should have umbrella insurance and in what amount. Also, you'll be given a recommendation of auto insurance coverage.
What's at stake?
Remember that old saying, "You can't get blood from a turnip?" That describes what happens when someone with few resources causes harm to someone else.
No matter how much damage has been done, a lawsuit is unlikely when the at-fault party has little or nothing available to pay the injured party.
However, an at-fault party with assets can expect a full-court press from the other side since compensation seems like it is within their grasp. Most people want to be repaid for the harm done to them -- and they could prevail in court. To protect what's yours, you need to determine what could be taken if you lost a major lawsuit.
Consider these factors when determining your umbrella insurance needs:
"Net worth" equals what you own minus what you owe -- assets minus liabilities.
Net worth = Assets (what you own) - Liabilities (what you owe)
Basing your umbrella limit off of your net worth is the most common method. See the example of calculating net worth below. The limit of you umbrella policy should exceed your net worth. If your net worth is less than your current liability coverage, you may not need an umbrella policy.
Setting your umbrella limit based on your total assets gives you more protection than basing it off of your net worth. Instead of matching your liability coverage to your net worth, experts recommend coverage equal to the value of your assets without regard for your debts (this could help you avoid selling your home to pay a judgment if your net worth is your home equity, for example). Applying this to the example above, then, you'd want at least $500,000 of liability insurance, because the assets total $500,000. You may need an umbrella policy if your insurer's basic liability coverage limit is less than $500,000.
But that's not all. If someone sues you and gets a judgment that exceeds your liability coverage, your future earnings may also be on the line, and could be garnished up to 25 percent. To address this, consider multiplying your income by five and adding that amount to your asset total. If your total household earnings are $100,000 a year, and you have $500,000 in assets to protect, you may want a $1 million policy. You'd almost certainly want umbrella coverage.
Another facet of this examination is the potential damage to others. If you've got two teens entering college, plan to retire soon, or are supporting aging relatives, a financial wipeout could be catastrophic and possibly permanent. That's another indication you might need to expand your liability insurance with an umbrella policy. If you're young, single, broke, renting and healthy, losing everything you own would be terrible, but you'd probably recover eventually.
Next, you'll need to review your lifestyle -- chances are, you're gambling more than you think. ACE Private Risk Services has created a 22-part Personal Liability Risk Scorecard designed to assess your possible need for umbrella coverage. Some factors considered may surprise you.
Consider the following points:
- Do you own vacant land that the public could access? Someone who gets hurt on your property, even if uninvited, could sue you for damages. It's even riskier if you lease it out for hunting.
- How many swimming pools, hot tubs, ponds and/or trampolines do you own? Statistically, these fun features are likely sources of injury and lawsuits.
- Do you have a home office or business that receives regular customer/client visits?
- Is your property getting a major renovation? Construction increases the risk of injury; even if you purchase home construction insurance, an umbrella policy can protect you when you reach the limit of that coverage.
- The number of automobiles owned, presence of high performance cars and the number of drivers, especially those under 26, all impact your exposure. The more of these you have, the more vulnerable you are. And if you hit someone in your Lamborghini, they'll almost certainly come up with whiplash -- it's human nature.
- Does anyone in your home serve on a charitable board? Those who serve on corporate boards of directors are usually protected from personal liability, but those working for charities or non-profits often don't get the same protection. (File that under "no good deed goes unpunished.")
- Do you own rental properties? The more tenants you have, the higher your lawsuit risk.
- Small recreational and transportation vehicles, such as ATVs, golf carts, personal watercraft and boats are fun. Until someone loses an eye…
- Social media participation is something most people take for granted, but verdicts for trashing companies or individuals online have brought some lucky "trashees" millions in damages. If you type first and think later, consider extra protection.
- Do any household members have a prominent public profile? This is also known as the "Google test." Prominent people tend to attract more lawsuits because people assume they have something to lose.
- How many home-hosted parties with 25 or more guests do you have each year? Big parties increase opportunities for injury. In fact, you may be required to get an umbrella policy before you're allowed to reserve a local community facility, such a group picnic area, club house or park, for a larger party.
Umbrella insurance policies are usually sold with a minimum of $1 million in coverage, although insurance companies offer these policies in increments up to $5 million and sometimes even $10 million.
Ben Schaum, a product manager for Progressive Insurance, says that a large majority of people who purchase umbrella insurance opt for $1 million in coverage.
"The important thing to realize is that you don't need $1 million in assets to need that much coverage," Schaum warns. "The amount of coverage depends more on your personal comfort level and where you are in life."
While $1 million may seem like a lot of coverage, liability totals can add up fast. For example, Ronald Moore, a senior product manager for MetLife Auto and Home Insurance, describes a scenario where a balcony collapses at a dinner party, severely injuring several people.
"If those people have to miss work for six months or more while recovering, and each makes $150,000 per year, the standard home insurance liability coverage of $100,000 won't cover the replacement of $300,000 or more in lost income along with the medical bills for the injuries," says Moore.
Moore says that in a case when two people crash into each other on jet skis, the medical costs for even relatively minor injuries can easily exceed $60,000 per person.
"If someone is severely injured, the immediate medical costs and projected future costs of medical care and perhaps remodeling a home to accommodate the person's injuries could quickly exceed $1 million," says Moore.
Excess liability coverage is not that expensive, considering the amount of insurance you get. A $1 million policy runs between $150 and $300 per year, according to the Insurance Information Institute.
However, if you're carrying the bare minimum auto and home liability insurance, you can't simply add a million dollars of umbrella coverage. That would be like trying to buy a basic cable package and then adding HBO. And just as your cable provider won't let you add the high-end channel unless you also purchase a premium programming package, insurers won't let you buy umbrella coverage until you have a substantial amount of liability coverage on your auto and homeowner's policies. For example, a company may mandate minimum liability coverage of $300,000 for homeowners and $250,000 per person/$500,000 per accident for bodily injury (these limits are common) for auto before they'll let you add a personal umbrella policy.
Here's an estimate of what an umbrella insurance policy would cost you each year:
- $1 million policy -- $150-$300
- $2 million policy -- $225-$375
- $3 million policy -- $275-$425
- $4 million policy -- $325-$475
- $5 million policy -- $375-$525
One strategy many households employ to pay for their additional insurance is to:
- Raise your deductible: Choosing a higher deductible means you save on premiums, which can go toward paying for your umbrella coverage. You'll want to make sure you have enough money to pay your deductible if you ever need to file a claim.
- Compare insurance quotes: Compare the whole package when you get insurance quotes (you might find savings on your basic policies as well).
- Bundle your insurance: You can save hundreds of dollars if you bundle home and auto insurance, including your umbrella policy.
Other discounts may include:
- Discount for being over 50
- Safe driving discount
- Good credit discount
- Claim-related discount (if you've filed no claims with your auto and homeowner policies)
Keep in mind that some insurers may give you a better rate on your basic liability policies if you add umbrella insurance. It pays to shop the entire package. However, the biggest expense involving umbrella coverage may be the cost of failing to protect yourself with this relatively inexpensive insurance.