How does an umbrella policy work?

Just like an actual umbrella that provides protection against rainy days, an umbrella policy is designed to provide additional coverage for large liability claims that your underlying insurance policies (home, auto, boat, motorcycle, etc.) won’t cover. It sits on top of all of the things you insure as an added layer of protection, like an umbrella.

Before you can qualify for an umbrella policy, insurance carriers usually require a certain level of underlying coverage on your primary policies. Typically, homeowners should maintain a minimum of $300,000 in liability coverage on their home insurance policy, while auto insurance policies should carry $250,000 for bodily injury per person and $500,000 per accident, along with $100,000 for property damage. These thresholds can vary by insurer and line of business being covered, so it's important to confirm with your insurance provider what the specific requirements are to be eligible for umbrella insurance coverage.

Imagine if a family friend comes to your home and is injured, they (or their medical insurance company) may deem you to be responsible for their injuries since it occurred on your property. The average homeowner only carries $300,000 in liability coverage under their home policy. If you’re sued and the settlement is over $300,000, you’re responsible for covering anything above that amount out of your own pocket.

You may also need an umbrella policy to protect your family against “rainy day situations.” Rather than having to cover any excess claim payout out of your own pocket, you’re able to use your umbrella policy to cover any losses above and beyond your normal homeowner’s liability limit. Even an entry-level umbrella policy will provide up to $1 million in coverage.
 

Premises Only Umbrellas

Premises Only Umbrellas give additional liability protection for just your home or rental property, but they do not extend to your car or other assets like a standard umbrella policy does. In order for your umbrella to cover any liability claims involving your car insurance, you typically have to carry at least $250,000 in liability coverage to cover any damage you cause to someone else. Insurance companies want to make sure their clients have a solid foundation of coverage to use in the event of a claim so that an umbrella only has to be used for especially serious claims.
 

What does an umbrella policy cover?

There are different types of liability claims that are covered under an umbrella policy:

  • Property Damage Liability: This covers the cost to repair the damage or loss of another’s physical property. Most often this refers to damage you caused to another’s vehicle or other property in an at-fault accident.

  • Bodily Injury Liability: Similar to property damage liability, except this covers the costs to repair any damage you caused to another person’s body. This can involve medical bills, the cost of physical therapy after an accident, pain and suffering lawsuits, and more.

  • Rental and Investment Properties: Like liability coverage under your homeowner’s policy, an umbrella policy can also cover any liability claims involving any rental properties you own. For those who own rental properties, each unit is an extension of liability. An umbrella policy is a wise investment, especially for those who have these additional extensions of liability. Be sure to list all of your additional properties on the umbrella and that your investment policies carry the minimum underlying liability coverage so there is no gap from that policy to the umbrella.

  • Cost of Litigation and Other Legal Fees: Covers you in the event that you are held liable for another person’s damages. Having an attorney represent you in court can cost a pretty penny, especially if they have a specialized practice. An umbrella policy not only adds extra coverage in the event of a large lawsuit payout, but also for the cost of going to court itself.

Your umbrella can also cover you for other types of liability if you’re sued for slander (defamation through a spoken word), libel (defamation through written word), and false arrest, detention, or imprisonment.
 

What does an umbrella policy not cover?

An umbrella policy does not provide coverage for the basic parts of your homeowners policy, like the cost to repair or rebuild your home, the cost to repair or replace your personal belongings, and any damages that result from criminal or intentional acts to others. Additionally, it does not cover medical expenses for your own family since you’re covered under your health insurance.
 

Who needs an umbrella policy?

Nobody ever plans to cause a serious accident or be sued, but there are times where life can be unexpected. An umbrella policy is an effective way to protect your household in the event of a serious situation. Whether you have several large assets (e.g., rental properties, boats) or only have the essentials, you can still benefit from an umbrella policy to protect your current and future wealth.
 

Are umbrella policies expensive?

Most umbrella policies give you an additional $1 million in liability coverage and can go as high as $10 million in coverage. The average umbrella policy costs between $150 to $300 per year depending on the amount of risk you carry and other underwriting factors. Speak with your insurance agent to discuss your options regarding an umbrella policy.


The contents of this article are for informational purposes only. You should not act or refrain from acting based on this information without first consulting a Goosehead licensed agent. We disclaim all liability for actions taken or not taken by you based on the contents of this article which is provided "as is." Goosehead makes no representation that this content is error-free.