Umbrella Insurance: Extra Liability Coverage for Peace of Mind

Umbrella insurance 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 individuals who are at a higher risk of lawsuits due to their job, lifestyle, family members, assets or high-risk activities such as owning a pool or rental properties.

Learn how umbrella insurance works and whether it’s a good purchase for your needs.

On This Page

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  How Does Umbrella Insurance Work?

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  What Does Umbrella Insurance Cover?

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  Do I Need Umbrella Insurance?

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  How Much Does Umbrella Insurance Cost?

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  Is Umbrella Insurance the Same as Excess Liability Insurance?

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  How To Get Umbrella Insurance

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  FAQs

How Does Umbrella Insurance Work?

Umbrella insurance comes in two types: personal and commercial. Personal umbrella coverage applies to policies such as homeowners, auto and boat insurance. Commercial umbrella coverage is designed for businesses and may include general liability insurance and professional liability insurance.

Umbrella policies activate once you exceed the liability coverage limits of your primary policy.

For instance, say you live in Maryland and are responsible for causing a major car accident resulting in $75,000 worth of damage. However, you’re carrying only the state-mandated liability coverage of $60,000.^[1] 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, a 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 typically covers items already insured under 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, such as if somebody is injured while visiting your home or a car accident you or a teenage driver in your household caused
• Other people’s property damage, such as 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^[2]
• Libel and slander, such as a libelous message a family member leaves in a chatroom about a classmate^[3]
• Specific 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 must rely on commercial property insurance if their equipment and inventory suffer physical loss or damage.

Additionally, umbrella insurance does not cover liability expenses resulting from criminal or intentional actions. That means if you’re a financial advisor and are sued for knowingly committing fraud for personal profit, 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, 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 sued as a homebuilder 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.^[4]

Do I Need Umbrella Insurance?

In general, umbrella insurance is recommended for individuals with high liability exposure. For example, umbrella insurance may be a good purchase if you’re a homeowner who throws many parties, has socially active teenagers, owns a pool, has a trampoline or doesn’t have the best driving record. Umbrella insurance can help if multiple people are injured at one of your pool parties or if you or your teen driver are responsible for causing a multi-vehicle accident.

If you have considerable assets, then umbrella insurance can help protect them in the event of a lawsuit. Keep in mind that 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 are sued for $200,000, you may have to liquidate your rental properties and vehicles to cover the difference.^[5]

Those with residential properties, whether long-term housing or Airbnb rentals serving short-term tenants, should also consider purchasing umbrella insurance. As a landlord, you can be 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.^[6]

If you’re a business owner, you should look into commercial umbrella insurance if your business is in a high-risk industry. For example, suppose you’re a roofing company or a manufacturing company. In that case, umbrella insurance can help cover workers’ compensation claims when employees are injured or product liability claims if a product manufactured by you malfunctions and injures your customers.

How Much Umbrella Insurance Should I Get?

Umbrella policy coverage limits typically start at a minimum of $1 million in coverage, but can range up to $5 million.^[7] As the amount of coverage you need will vary between individuals, determine the total value of your assets, including the value of cars, jewelry, home equity and retirement savings. Discuss these calculations with an insurance agent to help determine the right amount of coverage, and remember to recalculate the value of your assets from time to time to make adjustments as needed.

How Much Does Umbrella Insurance Cost?

A personal umbrella policy can range from $200 to $350 per year for $1 million in additional liability protection, although this cost may vary depending on the insurance company.^[8] For example, Hanover Insurance offers umbrella coverage starting at $20 for $1 million in coverage.^[2] Commercial umbrella policies typically cost more, with small businesses paying approximately $74 per month for the same level of coverage.^[3]

Other factors that affect the cost of umbrella insurance include your risk exposure and the amount of coverage you purchase. Naturally, the higher your risk profile and the more coverage you require, the higher your premiums will be.

Is Umbrella Insurance the Same as Excess Liability Insurance?

While excess liability insurance offers added protection for a singular, designated insurance policy, umbrella insurance coverage 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, an excess liability policy can be attached to only one of these policies.

If you attach excess liability insurance to your commercial auto policy, it will only cover liability costs related to driving your business vehicle.

Meanwhile, if you buy umbrella insurance, you have coverage anytime you exceed the liability expenses of any of those policies, whether related to a car accident or a customer's slip-and-fall inside your office.

How To Get Umbrella Insurance

The easiest way to get umbrella coverage is through an insurance marketplace like 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.