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An umbrella insurance policy works by extending your liability coverage beyond the limits of the underlying policy, which would be either your home or auto insurance policy, depending on the situation.

"Umbrella insurance is additional insurance coverage that protects existing limits and coverages of other policies, generally when you, the insured, is at fault. Umbrella insurance can provide coverage for injuries, property damage, certain lawsuits, and personal liability situations," says Patrick A. Cozza, executive in residence at Silberman College of Business, Fairleigh Dickinson University.

While home and auto insurance coverage often cap liability insurance at $500,000, umbrella insurance starts at $1 million, which brings the coverage available to you up to $1.5 million. And you can buy much larger umbrella policies if you need more coverage.

Below, we’ll explain how an umbrella insurance policy works.

Key takeaways

  • Umbrella insurance provides additional coverage for liability when your auto or home coverage has been exceeded.
  • An umbrella policy will kick to cover excess medical costs, legal fees, damages or judgments against you.
  • The umbrella insurance coverage is usually secondary to the underlying policy but may be primary when the claim isn’t covered by auto or home but is covered by the umbrella policy.

How does an umbrella insurance policy work?

Umbrella insurance kicks in when you’re facing a claim or lawsuit that has exceeded the liability limits on your car insurance or home insurance. It will pay any additional amount up to the policy limit.

For example, Ronald Moore, a former 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.

Without personal umbrella coverage, you would have to pay out-of-pocket for any costs beyond your home or auto insurance limit. If you can’t pay, you could have a lien placed on your home. Your wages could be garnished, and your savings, retirement investments, and other assets might be up for grabs.

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. Those limits usually top out at $500,000. To purchase an umbrella policy, your insurer will likely require that you increase your auto liability limits above minimum levels and may even demand that you have $500,000 in liability coverage.

How does an umbrella insurance claim work?

You can file an umbrella insurance claim in one of two main situations:

  • 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

Liability awards in legal settlements can be expensive. According to the Insurance Information Institute, 21% of personal injury liability awards and settlements hit the million-dollar mark or higher in 2019. That's where umbrella coverage can be critical.

Here’s an example of the procedure for filing a claim after a car accident:

  • You file a claim with your car insurance company
  • Your auto insurance policy will cover you up to your coverage limits. You may still owe money depending on 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 even your legal defense) up to your umbrella policy limit, which is often between $1 million and $5 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.

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