What is an “umbrella” insurance policy, and how do I know if I need one?
If you have significant assets that you need to protect, standard homeowner’s liability insurance may not be enough. Liability insurance protects you and your family’s finances from major disasters, such as a lawsuit against you. For example, if you crash into someone else, liability car insurance pays for a legal defense and any judgments or settlements. Or if your dog bites someone, homeowner’s liability insurance covers medical expenses.
But the safety net of liability insurance only stretches as far as the coverage amount you have. If you have significant assets that you could lose in a lawsuit, you need higher levels of liability insurance. That’s where “umbrella insurance” policies come in. An umbrella policy will help prevent financial ruin from a catastrophic event that you’re financially responsible for.
Umbrella insurance provides “excess liability insurance,” or significant additional coverage beyond the liability limits you already have in your auto, homeowners and/or watercraft insurance. Umbrella insurance will protect your assets for unusual situations where you could be responsible for another party’s medical bills or repairs that exceed your “base” auto, home or boat policies.
In what situations would you need umbrella insurance?
- You cause a serious auto or boating accident
- Your dog bites someone.
- You drive your car into a building
- You accidentally injure someone
In all of the above situations, medical bills or property damage claims can mount up very quickly. This will soon exhaust the limits of your regular liability polices. Those will always be used first. When the amounts you owe exceed the limits on those policies, that is when umbrella insurance will kick in. There is another situation where an umbrella insurance policy my help you. That is when you are on the board of directors of a charity and are sued for a board-related issue. An umbrella policy may provide coverage for lawsuits against you related to your work on a board of directors.
Umbrella insurance policies provide a lot of coverage and are not prohibitively expensive. According to the Insurance Information Institute, a $1 million umbrella policy will cost about $150 to $300 per year. Generally, the next million will cost roughly $75 and $50 for every million after that.
Understand that umbrella insurance is designed to protect your finances and assets from the costs of damages or injuries you may have caused to others. It will not pay for you own damage or injuries, or losses incurred from theft, business losses, or any damage or injury you may have caused “intentionally.”
Besides providing the comfort and security of additional financial protection, another advantage of umbrella insurance is that it usually will provide coverage for things that are not in your base auto or homeowners policy at all.
What else does it cover?
- Libel, defamation or slander. For example, if you post something defamatory about someone else to a website, they could sue you.
- False arrest, imprisonment or detention
- Malicious prosecution
- Wrongful eviction or entry
- Invasion of privacy
So, for most people an umbrella policy is a very good, and rather inexpensive way to provide some additional piece of mind.