How does umbrella insurance work?

Our recommendation

Most people with significant assets, teen drivers, a pool, rental property or frequent hosting responsibilities should carry umbrella insurance. The following situations make coverage especially important:

• You have significant assets. If you own a home, have substantial savings, investments, or other valuable assets, umbrella insurance provides an extra layer of protection beyond your standard policies.
• You are at higher risk of being sued. This includes landlords, public figures, or individuals with significant public exposure.
• You engage in activities that increase liability risk. Such as owning rental properties, frequently hosting parties, or participating in sports or activities that could cause injury to others.
• You want peace of mind. Umbrella insurance offers broad coverage, ensuring that your finances are protected in the event of large claims or lawsuits that exceed your primary insurance limits.

You shouldn’t buy umbrella insurance if:

• You have minimal assets. If you don’t own significant assets or have a low net worth, the additional coverage is likely unnecessary.
• Your current policies provide sufficient coverage. If the liability limits on your homeowners, auto, or other insurance policies are adequate to cover your risk exposure, additional umbrella insurance might be redundant.
• You have a low-risk lifestyle. If you don’t engage in activities or have exposures that significantly increase your risk of liability, you may not need the extra coverage.

How does an umbrella insurance policy work?

Umbrella insurance pays the portion of a covered claimAn insurance claim is a request you make to your insurance company for coverage after your car is damaged or you have an accident. You can file a claim online, by phone, or in writing. that has exceeded the liability limits on your car insurance or home insurance, up to the umbrella policy's limits. When a covered loss occurs, your primary insurer pays first, up to its limit, and your umbrella policy covers the remainder.

Without umbrella coverage, you are personally responsible for any costs beyond your home or auto insurance limit. If you can’t pay, the court can place a lien on your home, garnish your wages, and seize savings, retirement investments, and other assets to satisfy the judgment.

Umbrella insurance covers legal fees to defend yourself and the portion of a settlement or judgment that exceeds your homeowners liability or auto insurance liability limits. The standard coverage on a home insurance policy is $100,000, while minimum limits for auto insurance vary by state. Home insurance liability limits can be raised to $500,000 with most carriers, and auto to $250,000 per person and $500,000 per incident for personal property and $250,000 per incident. Umbrella insurance starts at $1 million. To purchase an umbrella policy, your insurer will likely require that you increase your auto liability limits above minimum levels, often to the maximum available.

How does an umbrella insurance claim work?

You can file an umbrella insurance claim when your underlying limits are exceeded or the claim is covered by the umbrella policy and not the underlying policy. The two umbrella claims scenarios are:

• You’ve exceeded the limits of your auto or home insurance policy
• The claim isn’t covered by your auto or home insurance policy but is covered by the umbrella policy

To file an umbrella claim, first exhaust your primary policy, then submit a claim to your umbrella insurer documenting the amount that exceeded your primary limit. The steps for a car accident claim are:

• You file a claim with your car insurance company
• Your auto insurance policy pays up to your coverage limits. You may still owe money depending on the extent of damages, injuries, and lawsuits.
• You can then file a claim with your umbrella insurance company for the excess.
• Your umbrella insurance will cover eligible damages that exceed your auto insurance limits. 
• Your umbrella policy will cover the damages and your legal defense up to your umbrella policy limit; limits start at $1 million.

Let’s say you have $500,000 in total bodily injury coverage on your auto policy. Three people were seriously injured in the accident, which has been deemed your fault. Their total medical bills and costs related to the accident have reached and exceeded $500,000, and you’re being sued for pain and suffering.

If you have a $1 million umbrella policy, you can now file a claim with that policy, giving you a total of $1.5 million in coverage. That coverage will pay not only for the remaining medical bills but also for the legal fees and any judgment against you in court.

What umbrella insurance does not cover

Umbrella insurance does not cover every type of claim. It extends liability coverage beyond your home or auto insurance limits, but it does not replace your existing insurance policies.

Common umbrella insurance exclusionsItems that are specifically denied coverage under the terms of an insurance policy. For example, most auto insurance policies exclude coverage for normal wear and tear, drag racing and intentional acts. include:

• Damage to your own property
• Business-related liability, which is covered by commercial liability insurance
• Professional errors or malpractice
• Intentional or criminal acts
• Contractual liability
• Workers’ compensation claims

For example, umbrella insurance may help pay if you are sued after causing a serious car accident, but it will not pay to repair your own vehicle. Likewise, a personal umbrella policy generally does not cover claims tied to a business you own or operate.

Because exclusions vary by insurer, review your umbrella policy carefully to understand exactly what is and is not covered.

Is umbrella insurance worth it?

Yes, umbrella insurance is worth it for many homeowners and drivers because a serious lawsuit can easily exceed the liability limits on a home or auto insurance policy. Umbrella insurance provides extra financial protection at a relatively low cost compared with the size of a potential liability judgment.

A $1 million umbrella policy costs between $150 and $300 per year, or less than $1 per day, while a single lawsuit can result in damages well into the seven figures.

Here are a few real-life examples of when umbrella insurance can help:

• A driver runs a red light and seriously injures two people. Medical bills and lost wages reach $900,000. The driver’s auto policy covers $500,000. Without umbrella coverage, the driver owes $400,000 personally. With a $1 million umbrella policy, the remaining costs are covered.
• A guest slips at a backyard party and sues for $600,000. The homeowners policy covers $300,000. The umbrella policy pays the remaining $300,000 and covers legal defense costs.
• A homeowner’s dog bites a neighbor, who sues for $400,000 in medical costs and damages. The homeowners policy covers $100,000. The umbrella policy covers the remaining $300,000.
• Someone files a defamation lawsuit over comments posted online. Some umbrella policies cover personal liability claims such as libel or slander that are not included under standard home or auto insurance policies.

Without umbrella coverage, you are personally responsible for any amount that exceeds your policy limits. That can put your savings, investments, future wages and other assets at risk.

Helpful auto insurance tools and calculators

• Car insurance rates by vehicle
• Compare car insurance companies
• Auto insurance coverage calculator
• Speeding ticket calculator
• Traffic ticket calculator
• Used car insurance calculator
• Rideshare earning calculator
• Pay per mile calculator