What Is Umbrella Insurance, and How Does It Work?
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Umbrella insurance is extra liability insurance beyond what’s on your existing policies.
An umbrella policy can pay what you owe if you’re found to be at fault for someone else's injuries or property damage.
The cost of umbrella insurance typically starts around $200 per year for $1 million of coverage.
Umbrella insurance is extra liability insurance beyond what’s on your existing policies.
An umbrella policy can pay what you owe if you’re found to be at fault for someone else's injuries or property damage.
The cost of umbrella insurance typically starts around $200 per year for $1 million of coverage.
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.
What is umbrella insurance?
Think of umbrella insurance — sometimes called personal liability umbrella insurance — as protection for your savings and other assets. If you're responsible for damages that are above the liability limits of your car insurance, homeowners insurance or other policies, an umbrella policy helps pay what you owe.
Umbrella insurance provides extra liability coverage beyond the limits on your existing policies. It pays out if you're at fault for injuries or damage and your other policies aren't enough to cover the costs.
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 extra coverage that your base insurance policies don't include. For example, it may pay for legal fees and damages if someone accuses you of slander (a false spoken statement) or libel (a false written statement).
Key terms in this article | |
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Liability insurance is a type of coverage that protects you financially in case of a lawsuit or claim against you. It will pay to defend you if someone sues you for injuring them or damaging their property. It's a standard part of most homeowners, auto, renters, condo and manufactured home policies. | |
Legal damages | If you're found to be at fault (or "liable") for someone else's injuries or property damage, you may need to pay damages to that person. Damages are an amount of money that compensates someone else for what they lost. Damages could pay for things like medical bills, lost wages and property repairs. |
Anything you own that has financial value is an asset. Examples include bank accounts, stocks, your house and your car. If you have to pay damages after someone sues you, your assets could be at risk. |
How umbrella insurance works
To get a better sense of how umbrella liability insurance can come in handy, imagine this 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. She 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 in liability coverage with your car insurance, the remaining $200,000 will have to come out of your pocket.
If you had umbrella insurance, it would pay the difference between what your primary insurance covers and what you still owe. An umbrella policy could also cover your legal costs in the lawsuit.
What does umbrella insurance cover?
Depending on your policy, umbrella insurance can cover you and members of your household against claims or lawsuits for things like:
Injuring someone else.
Damaging someone else’s property.
Defamation.
Landlord liability.
False imprisonment.
In addition to paying damages up to your liability limit, your umbrella insurance will typically also cover associated legal costs beyond that amount. Say you have an umbrella policy with $1 million of liability coverage, and someone sues you for that full amount. If a court finds you liable, your insurer would pay the $1 million plus provide your legal defense or cover your fees.
You might have to pay a "retained limit," which is similar to a deductible. It’s an amount you’ll have to cover before your policy begins to pay out.
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.
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 business umbrella policy rather than a personal one.
Most umbrella insurance policies won’t cover liability stemming from the breach of a contract you’ve entered into. Say 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 exclusion. Some companies cover certain sizes or types of watercraft only. Others don’t cover them at all unless you have an existing boat insurance policy.
Umbrella insurance usually covers | Umbrella insurance usually doesn't cover |
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Do you need an umbrella insurance policy?
There’s no law requiring you to buy umbrella insurance. But if you have a lot of assets or a high chance of being sued, you might want an umbrella policy. It might be worth buying umbrella insurance coverage if you:
Own property.
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 it covers your dog’s breed.)
Are a landlord.
Have an inexperienced driver in your household.
Coach kids’ sports.
Often host parties in your home.
Serve on the board of a nonprofit.
Regularly post reviews of products and businesses.
Take part in sports where you could easily injure others (such as hunting, skiing or surfing).
Are a public figure.
Umbrella insurance pros | Umbrella insurance cons |
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How much umbrella insurance do you need?
It’s wise to have at least enough liability insurance to cover your assets. To decide how much umbrella insurance coverage you need, add up 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.
You may also want to consider potential income if you’re likely to earn much more in the future than you do now — if you’re a medical student, for example.
When considering potential lawsuits, keep in mind that employer-sponsored retirement accounts such as 401(k)s are protected from most lawsuits under the federal Employee Retirement Income Security Act of 1974. IRAs aren't, except for funds rolled over from an employer-sponsored account.
However, state laws may partially protect your IRA accounts and the equity you have in your home. Check your local laws before deciding how much umbrella insurance you need.
Insurers typically sell umbrella insurance in million-dollar increments. This means the cheapest policy available provides $1 million in coverage, the next-cheapest policy offers $2 million in coverage, and so on — so you get a decent amount no matter what you choose.
» MORE: The best financial advisors to grow your assets
How much does umbrella insurance cost?
The cost of an umbrella policy starts around $200 per year, with an average cost of about $380 for $1 million of coverage, according to Trusted Choice, a network of independent insurance agents. With its high coverage limit, umbrella insurance generally offers good value for the cost. However, you may also end up paying more for your other insurance policies if you need to increase your liability coverage to meet the minimum limits required for umbrella insurance.
How to buy umbrella insurance
Almost all major insurers offer umbrella insurance. Most require that you carry your auto, homeowners, condo or renters insurance with them, too. You generally must buy a minimum amount of liability insurance on those policies before you can buy an umbrella policy.
For instance, to add umbrella coverage to your car insurance, your policy may need to have $300,000 of bodily injury liability coverage and $100,000 of property damage liability coverage. To add umbrella coverage to a homeowners policy, you often need $300,000 of liability insurance.
RLI and Auto-Owners Insurance are two companies that offer stand-alone umbrella insurance policies, meaning you could carry your auto or homeowners coverage with someone else. Availability may vary by state, so consider reaching out to an independent agent or broker to find options from these companies or others.
Another factor to look at when shopping is the maximum limit a company offers. Most umbrella policies stop at $5 million, but some go higher. Liberty Mutual and Farmers, for instance, offer umbrella insurance up to $10 million, while Chubb's umbrella limits go up to $100 million.
Remember that the best umbrella insurance for you will cover your hobbies and other activities. For example, if your idea of a fun vacation is renting a Jet Ski and hitting the water, know that some umbrella insurers won’t cover these watercraft.
Below is a sampling of umbrella insurance offerings from major carriers.
Allstate
Coverage limits: $1 million to $5 million.
States available: Washington, D.C., and all states except Alaska and Massachusetts.
Eligibility requirements: You must have underlying policies with at least the following limits:
Home |
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Auto |
OR
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» MORE: Allstate home insurance review
Amica
Coverage limits: $1 million to $5 million.
States available: Washington, D.C., and all states except Hawaii.
Eligibility requirements: Requirements vary by state. Generally, your underlying policies must meet the following minimums:
Home |
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Auto |
OR
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» MORE: Amica home insurance review
Chubb
Coverage limits: $1 million to $100 million.
States available: All 50 states and Washington, D.C.
Eligibility requirements: Minimum limits for underlying policies vary by state.
» MORE: Chubb home insurance review
Farmers
Coverage limits: $1 million to $10 million, except in Florida and California, where the maximum limit is $5 million.
States available: All states except Alaska, Delaware, Hawaii, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, New Hampshire, North Carolina, Rhode Island, Vermont, Washington, D.C., and West Virginia.
Eligibility requirements: If you own a car, Farmers must insure it with bodily injury liability limits of at least $250,000 per person and $500,000 per accident. You can insure your home with any company as long as it has at least $300,000 of liability coverage. However, if you don’t own a car, Farmers must insure your home.
» MORE: Farmers home insurance review
Liberty Mutual
Coverage limits: $1 million to $10 million.
States available: All 50 states and Washington, D.C.
Eligibility requirements: You generally must have a Liberty Mutual auto policy with at least the limits below, but requirements may vary by state. The other policy types are optional, but if you have any of them, the liability limit must be at least $100,000.
Auto |
OR
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Homeowners, dwelling, watercraft, farmer's personal liability or general personal liability |
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Nationwide
Coverage limits: $1 million to $5 million.
States available: Washington, D.C., and all states except Alaska, Hawaii, Louisiana, Massachusetts and Oklahoma.
Eligibility requirements: It depends on where you live. In most cases, all vehicles and your primary home must have Nationwide policies with at least the following limits:
Home |
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Auto |
OR
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» MORE: Nationwide home insurance review
State Farm
Coverage limits: Policies start at $1 million. There’s no set maximum limit; coverage is evaluated on an individual basis.
States available: All 50 states and Washington, D.C.
Eligibility requirements: Minimum liability limits for underlying policies vary by state.
» MORE: State Farm home insurance review
USAA
Coverage limits: $1 million to $5 million, with higher limits available through the USAA Insurance Agency.
States available: All 50 states and Washington, D.C.
Eligibility requirements: The following limits apply to underlying policies:
Homeowners, renters or rental property |
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Auto |
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Watercraft (if applicable) |
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» MORE: USAA home insurance review
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