What Does an Umbrella Policy Cover?

Personal umbrella insurance (PUP) is a type of liability insurance. It shields you from financial liability if you cause harm to another person or their property and they sue you. Umbrella insurance is typically a low-cost form of coverage that can be purchased in $1 million increments. However, most insurance companies require that you have auto or homeowners insurance before purchasing an umbrella policy.

What Does Umbrella Liability Insurance Cover?

Umbrella policies shield you from financial liability if you injure another person or damage their property. The following are some examples of incidents for which umbrella insurance may provide coverage:

• A car accident in which you are at least partly to blame
• Someone on your property slips and falls or is otherwise injured.
• Your dog has bitten someone.
• Your bathroom floods, causing water damage to the home of your downstairs neighbor.
• In a defamation lawsuit, you are found guilty.

It is critical to understand that umbrella insurance only provides secondary protection. This means that if you have another policy that provides primary coverage, you must exhaust the limits of that policy before your umbrella coverage kicks in.

• Assume a visitor falls on your property and is critically injured; they successfully sue you for $1 million in damages. If the liability coverage limit on your homeowners insurance policy is $250,000, that will be paid out first. The remaining $750,000 in damages would be covered by your umbrella policy. You would be personally liable for that amount if you did not have a personal umbrella policy.

What's Not Covered by an Umbrella Policy?

Personal umbrella insurance only provides liability protection—legal protection in the event that you unintentionally cause damage to another person or their property. Your PUP insurance will not cover you if you or someone else causes damage to your own property.

• For example, if someone drives into the side of your house, the driver's property damage liability insurance would cover the damage. Alternatively, if the driver lacked auto insurance, the damage may be covered by your standard homeowners insurance policy. In contrast, suppose your dog bites a visitor and that person files a lawsuit against you, and the lawsuit exceeds the liability limits of your home insurance policy. In that case, your umbrella insurance policy would come in handy to make up the difference.

Aside from your own property and medical care, your personal umbrella policy may not cover the following scenarios.

• Business liability: Property damage, injuries or losses for which your business is liable, such as malpractice, are not insured. Instead, these may be covered by the business's liability policies.
• Liability resulting from criminal behavior: For example, if you intentionally assault a visitor in your home.
• Contractual liability: For example, injuries sustained while a contractor performs home repairs in exchange for payment.
• Liability for injuries caused by the use of recreational vehicles: Some umbrella insurance policies may exclude coverage for injuries caused by the operation of certain vehicles, such as a dirt bike or jet ski.

Do I Need an Umbrella Insurance Policy?

If you have a significant amount of at-risk assets or engage in high-risk activities on a regular basis, you should consider purchasing a personal umbrella policy.

You Have a Lot of At-Risk Assets

If you have significant valuable assets, you should consider purchasing a personal umbrella policy.

• For example, if your total net worth is $1 million and you're at fault for a car accident that results in significant injury to another driver and their passengers, you'd be a prime target for a lawsuit. Assume you have $100,000 in bodily injury liability insurance under your auto insurance policy (much more than the state minimum). If the other driver sues you for $1 million in damages, you'll be on the hook for the $900,000 difference. However, if your umbrella policy is worth $1 million, it will cover the $900,000 that exceeds the limit of your auto insurance policy. You would only be responsible for the deductibles for your claims.

Umbrella insurance policy limits typically start at $1 million and can be increased in $1 million increments. A $1 million policy will cover the majority of policyholders. Plaintiffs, on the other hand, are more likely to file a lawsuit if they believe the defendant will be able to pay out a claim. If you have significant assets in the form of non-retirement investments and real estate that you do not use as your primary residence, you may require a higher limit.

Most states protect certain retirement funds, such as money saved in 401(k) plans, from lawsuits up to certain limits. Other assets, such as real estate equity or even future wages, could, however, be garnished.

You Regularly Participate in High-Liability Activities

If you regularly engage in activities that may expose you to liability for the damages of another party, you may be a candidate for umbrella insurance. For example, if you run a blog where you post reviews of local businesses and a particularly negative review results in a defamation lawsuit, your umbrella policy may cover you. Alternatively, if you regularly drive your child's friends to their sporting events, you could be held liable for exorbitant medical bills if you cause a serious accident.

Even if you don't have many assets, you could be sued for a sum greater than your entire net worth. In such cases, a personal umbrella policy can help to protect you.

Others Who Should Consider Umbrella Coverage

• Long-distance commuters
• People who carpool
• Rideshare drivers
• Owners of restricted dog breeds

How Much Does an Umbrella Policy Cost?

The premiums for your umbrella policy will be determined by the amount of coverage you require as well as a number of personal risk factors, such as:

• Location
• Covered drivers' ages and accident histories
• Net worth
• Credit history

Most major insurance companies offer umbrella insurance coverage. However, they typically require you to carry a minimum amount of auto or homeowners insurance with them to provide primary coverage. Fortunately, by bundling multiple types of policies with the same insurance company, you may qualify for a discount.

The following companies offer umbrella policies:

• Geico
• State Farm
• Allstate
• Farmers Insurance
• Progressive
• Liberty Mutual
• USAA
• American Family
• Nationwide
• Travelers