Umbrella Insurance: Extra Liability Coverage for Peace of Mind
SmartFinancial Offers Unbiased, Fact-based Information. Our fact-checked articles are intended to educate insurance shoppers so they can make the right buying decisions. Learn More
Umbrella insurance is an insurance policy that provides additional liability coverage if you file a claim and exhaust the limits of your homeowners insurance, auto insurance, business insurance or some other type of liability policy. This coverage is ideal for those who are lawsuit-prone due to their jobs, lifestyles, assets or high-risk activities like owning a pool or rental properties.
Learn how umbrella insurance works and whether it’s a good purchase for you.
How Does Umbrella Insurance Work?
Umbrella insurance comes in two types: personal and commercial. Personal refers to coverage like homeowners insurance, auto insurance and boat insurance. Commercial is for business purposes and can include general liability insurance and professional liability insurance.
Umbrella policies become effective once you've exceeded the basic liability coverage limits of a primary policy. For instance, say you live in Maryland and you’re responsible for causing a major car accident resulting in $75,000 worth of damages. However, you’re carrying only the state-mandated liability coverage of $60,000. If you have umbrella insurance, your auto insurance policy would pay the first $60,000 and then umbrella insurance would cover the remaining $15,000.
Without umbrella coverage, any costs surpassing the limits of your homeowners insurance, auto insurance or business insurance would be your responsibility. In such cases, the court might resort to confiscating assets like your life savings, stocks, bonds or even garnishing your wages to compensate the affected parties.
What Does Umbrella Insurance Cover?
Since umbrella insurance provides excess liability coverage, it will cover many of the things already insured in the primary policy. Assuming you’re an individual with homeowners insurance, auto insurance and landlord insurance (because you have a rental property), umbrella insurance would cover you for the following:
- Other people’s medical bills if somebody is injured while visiting your home or a car accident you caused
- Other people’s property damage if it happened while at your home or in a car accident you caused
- Dog bites that happen away from home such as at the dog park
- Libel and slander
- Certain tenant injuries and property damages if you’re a landlord
- Legal expenses including attorney fees, settlements and court fees if you’re sued for any of the above incidents
What Isn’t Covered by an Umbrella Insurance Policy?
An umbrella insurance policy provides only additional liability coverage, meaning it will not cover any type of property damage. Homeowners will need to look to their homeowners insurance if their home’s structure burns down or their personal belongings are vandalized or stolen. Similarly, business owners will need to rely on commercial property insurance if their equipment and inventory suffer physical loss.
In addition, umbrella insurance will not cover liability expenses incurred as a result of criminal or intentional actions. That means if you’re a financial advisor and knowingly commit fraud for personal profit and you’re sued for it, then filing an umbrella insurance claim will likely result in a denial. As a driver, you may also be denied coverage if you, in a fit of road rage, intentionally cause a car accident.
Like your primary policies, your umbrella liability insurance will have a coverage limit and you will not be paid for costs that exceed the coverage limit. So if you have an insurance claim that costs $1.5 million and your primary policy only has $300,000 in liability coverage and your umbrella insurance has $1 million in liability coverage, then you will not be covered for the remaining $200,000.
Finally, breach of contract is another exclusion you will likely see in commercial umbrella policies. For example, if you’re a homebuilder and you’re sued because a house was not built up to the required safety standards outlined in the contract, you may not be covered by the umbrella insurance company. As the business, it is your responsibility to fulfill the terms of your contract and it is not the umbrella insurance policy’s role to be a financial safety net if you fall short.
Do I Need Umbrella Insurance?
In general, umbrella insurance is recommended for individuals with high liability exposure. For example, if you’re a homeowner who throws many parties, has a pool and a trampoline and doesn’t have the best driving record, then umbrella insurance may be a good purchase. Umbrella insurance can help if several people get injured at one of your pool parties or if you are responsible for causing a multi-car accident.
Remember: your insurance policies will only cover your liability expenses up to the limits you buy. If you only have $100,000 in liability coverage and you’re sued for $200,000, then you may have to liquidate your rental properties and vehicles to cover the difference.
Those with residential properties, whether if they are long-term housing or Airbnbs serving short-term tenants, should also look into buying umbrella insurance. As a landlord, you can be held liable for losses resulting from wrongful eviction or lack of maintenance of common areas like stairwells and walkways. Umbrella insurance can help cover these costs.
If you’re a business owner, then you should look into commercial umbrella insurance if your business is in a high-risk industry. For example, if you’re a roofing company or a manufacturing company, then umbrella insurance can be useful for covering workers’ compensation claims when employees are injured or product liability claims if something you manufacture malfunctions and injures your customers.
How Much Umbrella Insurance Should I Get?
It is recommended to purchase at least $1 million worth of umbrella coverage or your net worth, whichever is higher. If your net worth is $5 million, then you should purchase at least $5 million in umbrella coverage.
How Much Does Umbrella Insurance Cost?
The cost of a personal umbrella policy can range from $200 to $350 per year for $1 million additional liability protection, although this cost can change based on the insurance company. For example, Hanover Insurance sells umbrella coverage starting as low as $20 for $1 million in coverage. Commercial umbrella policies generally cost more, with small businesses paying around $74 per month for the same amount of coverage.
Other factors that can affect how much you pay for umbrella insurance include your risk exposure and how much coverage you buy. Naturally, the higher your risk profile and more coverage you want, the more you pay.
Is Umbrella Insurance the Same as Excess Liability Insurance?
While excess liability insurance offers added protection for a singular, designated insurance policy, umbrella insurance’s coverage scope extends across multiple liability policies. For example, if you’re a business owner with commercial auto insurance, general liability insurance and errors and omissions insurance, excess liability policy can be attached to only one of these policies. If you attach it to your commercial auto policy, excess liability insurance may only cover liability costs related to driving your business vehicle.
Meanwhile, if you buy umbrella insurance, you have coverage any time you exceed the liability expenses of any of those policies, whether it’s related to a car accident or a customer slip-and-fall inside your office.
How To Get Umbrella Insurance
The easiest way to get umbrella insurance is by using SmartFinancial. Just fill out our questionnaire about your budget and coverage needs and we’ll connect you with an insurance agent who can help set you up with whatever you need, be it home, auto or commercial coverage. Get your free insurance quote today.