What Is an Umbrella Insurance Policy?

Some accidents can go over your liability limits. Without an umbrella policy, you may need to pay for it. Here's how umbrella policies work.
Man holding a umbrella over a wooden car

Imagine that you got into an accident and wrecked a rich person’s Mercedes. What if your car insurance can’t cover it? This is where an umbrella policy comes in. An umbrella policy is a type of auto insurance that allows you to add extra liability coverage to your personal policy. This type of insurance is extra and covers more than the basic liability that you may already have.

The purpose of umbrella insurance is to protect you from massive liability claims and expenses that your normal insurance wouldn’t cover. Not having an umbrella policy could cause you to pay large sums of money that could ruin you. There’s no other way to prepare for large claims, as they could hit at any time.

This article will explain the basics of insurance umbrella policies so that you can decide whether they’re right for you. It’ll teach you basic concepts such as:

  • How umbrella insurance policies work
  • What it does and doesn’t cover
  • Who might need it
  • How to buy an umbrella policy

How Umbrella Insurance Policies Work

Umbrella policies are a type of insurance that you stack on top of your liability coverage. This is because it goes beyond your current liability limits to cover super-expensive claims. This means that umbrella insurance only works if a claim maxes out your current liability limits.  

Keep in mind that an umbrella policy only counts as extra liability insurance for when you’re at fault. It won’t cover any other types of claims.

What Umbrella Policies Cover

Umbrella insurance can protect you in plenty of situations. It covers just about everything that basic liability insurance does. Here’s a list of what umbrella insurance covers:

Bodily Injury

Your personal umbrella policy will cover you from injuries to other people in an accident. This doesn’t include injuries to you. But it will most likely cover your passengers because you’re liable for their injuries. Below is a full list of what your umbrella policy covers:

  • Medical costs
  • Income and wage losses
  • Long term medical care e.g., physical therapy
  • Legal fees
  • Funeral costs
  • Pain and suffering

Property Damage

Umbrella policies will also cover any property damage you cause in an accident. Here’s what would count as property damage:

  • Light posts or streetlamps
  • Buildings and structures
  • The other party’s car and property inside it
  • Statues
  • Trees

Note that an umbrella policy will cover the same expenses as liability insurance. And, like liability, you must be at fault for your umbrella policy to kick in. Be sure to check with your agent if you have any other questions about bodily injury or property damage.

What Umbrella Policies Don’t Cover

You don’t have full protection from everything when you have umbrella insurance. There are still some costs that it won’t cover. This is because umbrella policies are only for when you’re at fault. Here is exactly what your personal umbrella policy won’t cover:

  • Personal property
  • Your injuries
  • Damage that you cause on purpose
  • Liability from a business activities (you’ll need a business policy for this)

Who Needs Umbrella Policies?

Umbrella insurance is useful. This is because it can help you save money and stress. But some people need it more than others. Here are a few examples of people that should consider adding an umbrella policy:

People Who Worry About Lawsuits

Lawsuits are one of the main reasons why people choose to buy an umbrella policy. They’re common across the country. Someone could sue you if you’re at fault in an accident. If you’re caught in a suit, you could end up having to pay a large settlement. They can often be so big that they could wipe out your bank account. Attorney fees are also an expense you’d have to pay.

Your liability coverage will take care of a certain amount of legal fees during a lawsuit. But it might not always be able to cover the full amount. It’ll stop covering the expenses once the total cost exceeds your limits.

You should consider buying umbrella insurance if a lawsuit is likely to clean you out. It’ll offer you protection from having to pay for what your liability insurance won’t cover. An umbrella policy is a smart choice if you’re not very rich.

Those Who Have an Inexperienced Driver or Teen on Their Policy

New drivers are higher risk than those who’ve been doing it for years. Insurance companies even reflect this in their rates. Chances are, you’re the one who’s responsible for this new driver on your policy. They could go out and get into a wreck that you’d be liable for. The other party could even sue you.

Umbrella insurance is a good idea for people with a new driver on their policy. This is because it’ll protect you from having to pay what your car insurance won’t already cover. It’s a smart choice if you’re looking for a little extra protection with a new driver.

Someone Who Lives in a Wealthy or High-End Area

You might consider buying umbrella insurance if you live in an expensive area. Wealthier areas are more likely to have expensive property and cars that you could get into an accident with. Your liability insurance might not be able to cover the damage costs to a high-end or exotic car.

Rich people are also more likely to sue you after an accident because they can afford to. Umbrella insurance would make sure you don’t have to shell out thousands of dollars for a lawsuit.

How to Buy Umbrella Insurance

Umbrella insurance isn’t a part of your regular insurance policy. To buy it from a specific insurer, you usually need to carry a minimum amount of liability insurance with them. Most providers offer umbrella policies for both auto and homeowner’s insurance. Make sure to check with your agent to make sure you’re able to buy umbrella insurance from them.

Note: according to the Insurance Information Institute (III), many insurers want you to carry about $250,000 of liability insurance before you can buy umbrella. Insurers may also want you to carry $300,000 of homeowner’s insurance. This is because they want you to already have an underlying amount of insurance before you buy any more.

How Much Does an Umbrella Insurance Policy Cost?

The cost of umbrella insurance is unique to every driver. Providers consider a variety of factors when they calculate your rates. Below is a list of the most common factors that insurers use:

  • Driving record
  • Age
  • Marital status
  • Gender
  • Credit rating
  • Where you live
  • Type of car you drive
  • Car mileage

Auto insurers all calculate their rates using factors like the ones above. But that doesn’t mean each company will give you the same prices. Your best bet is to shop around and compare quotes so that you don’t pay too much for insurance.

What Insurance Companies Sell Umbrella Policies?

Just about any insurance company will sell you an umbrella personal liability policy. Each one is a bit different. And they all set different rates. But you’ll seldom pay much. Below is a partial list of companies that offer umbrella coverage:

What About Business Umbrella Policies?

Most people only need a personal umbrella policy. But there are others might need to buy a business policy. These work the same way as personal ones. They add extra liability protection on top of what you already have.

Business policies are a good idea if you have employees that drive using a company car. They could get into an accident and your business would be liable to pay. They also would protect your business from lawsuits after an accident. Consider buying an umbrella policy for your business if you want to add extra coverage.

Frequently Asked Questions

Q: Is umbrella insurance the same as excess liability?

A: No, they’re not the same. Many people talk about the two as if they’re the same thing. Excess insurance is similar because it kicks in when expenses go over your limits. Typically, excess will only cover one of your liability policies, while umbrella can cover multiple. Umbrella insurance also covers a wider variety of things. Be sure to check with your insurer before buying either one to see what’s right for you.

Q: Is an umbrella policy worth it?

A: It depends. An umbrella policy can be really helpful, but it can also get expensive to have. You should consider an umbrella policy if:

  • You added a teen or new driver on your policy
  • You worry that a lawsuit could wipe out your bank account
  • You live in an expensive or high-end area
  • You just want the extra protection, or you can afford it

Generally, you should buy as much insurance as you can afford. Umbrella insurance just adds that much extra protection. You never know when disaster can strike. Consider buying it if any of the above describes you.

Q: How much coverage do I get with umbrella insurance?

A: An umbrella policy can give you anywhere from $1,000,000-$5,000,000 in coverage. This will ensure that you have protection from any major claims or lawsuit settlements that you’d otherwise have to pay for.

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