If you’re sued for damages above your primary liability limits, an umbrella policy helps pay what you owe.
Nobody’s perfect. That’s why you buy liability insurance: You can avoid financial ruin if you accidentally cause major injuries or property damage to others. Problem is, your insurance isn’t perfect, either. That’s where a personal umbrella insurance policy comes in.
Think of umbrella insurance — sometimes called personal liability insurance — as a fail-safe for your savings and other assets. If you’re sued for damages that exceed the liability limits of your car insurance, homeowners insurance, boat insurance or some other policies, an umbrella policy helps pay what you owe.
Note that umbrella insurance is similar but not identical to excess liability insurance, which gives you higher limits on the liability coverage you already have. What’s the difference? Most umbrella insurance also provides additional coverage that’s not included in your base insurance policies, such as paying out for legal fees and damages if you’re accused of slander (a false spoken statement) or libel (a false written statement).
How umbrella insurance works
To get a better sense of how umbrella liability insurance can come in handy, imagine the following scenario:
You run a red light and T-bone another car. There is significant damage to the vehicle, and several people are injured. The car needs $25,000 in repairs, and treatment of the injuries totals $275,000. Plus, the driver of the other car is an orthodontist who won’t be able to work for months due to a broken arm and sues you for $200,000 in lost earnings.
You’re on the hook for a total of $500,000. If you carry only $300,000 liability coverage with your car insurance, the remaining $200,000 will have to come out of your pocket.
If you have umbrella insurance, it would pay the difference between what your primary insurance covers and what you still owe. An umbrella policy would also provide coverage for any of your legal costs in the lawsuit.
What does umbrella insurance cover?
Umbrella insurance covers you and members of your household against lawsuits involving personal injury to others, damage to other people’s property and a variety of claims such as defamation, landlord liability and false imprisonment, depending on your policy.
In addition to paying out any damages up to your liability limit, your umbrella insurance will typically also cover associated legal costs over and above that amount. For example, if you have an umbrella policy with $1 million of liability coverage, and you were sued for that full amount, your insurer would pay out the $1 million plus provide your legal defense or cover your fees. A "retained limit" — which is similar to a deductible in that you’re responsible for paying it before your coverage begins to pay out — might apply.
Details and exclusions can vary significantly between umbrella policies, but here are a few sample scenarios that would generally be covered:
Your teenage son gets into a car accident, and the cost of injuries to other drivers is above your auto insurance liability limit.
A houseguest falls down your stairs and sues you for her medical bills plus pain and suffering, exceeding your homeowners insurance liability limit.
A restaurant sues you for writing a negative review online.
» MORE: What is liability car insurance and how much do you need?
What umbrella insurance doesn’t cover
Umbrella insurance doesn’t cover your own injuries or property damage — you’ll need other types of coverage for that (such as health insurance or collision coverage on your auto insurance). Nor will it cover liability associated with your business unless you have a commercial umbrella policy rather than a personal one.
Most umbrella insurance policies exclude liability stemming from the breach of a contract you’ve entered into. For example, if a roofing company sues you because you haven’t paid for the work it’s done under the contract you signed, your umbrella insurance policy is unlikely to help. And if you hurt someone deliberately or commit a crime, you’re almost certainly not covered.
Boats are another common area of exclusions. Some companies cover certain sizes or types of watercraft only, while others don’t cover them at all unless you have an existing boat insurance policy.
Do you need an umbrella insurance policy?
Umbrella insurance isn't required by law but is most often purchased by people who have a lot of assets to protect or a high chance of being sued. It might be worth purchasing umbrella insurance coverage if you:
Have significant savings or other assets.
Are worried about liability claims against you when traveling outside the U.S.
Own things that can lead to injury lawsuits such as pools, trampolines, guns or dogs (check with your insurer to make sure your breed is covered).
Have an inexperienced driver in your household.
Frequently host parties in your home.
Serve on the board of a nonprofit.
Regularly post reviews of products and businesses.
Participate in sports where you could easily injure others (such as hunting, skiing or surfing).
How much umbrella insurance do you need?
It’s wise to have at least enough liability insurance to cover your net worth. To calculate how much umbrella insurance coverage you need, one quick method is to add up the value of your assets (including the value of your property, savings and investment accounts). Then, take a look at the liability insurance you already have through your existing policies and buy enough umbrella insurance to make up the difference. The calculator below can help you figure out your net worth.
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