Umbrella Insurance: the Insurance Policy you Should have, but Don’t




Umbrella insurance is not top of mind for most people like other forms of insurance. I rarely hear anyone mention it (definitely not our trusted personal finance gurus). Up until about a year ago, I had little knowledge about what umbrella insurance was either. It’s actually quite boring (most good things in personal finance are).

However, as part of a recent shift in how I view the value of insurance policies, I am now an umbrella insurance policy holder and view it as an essential form of insurance for just about everyone. And it’s super cheap for the coverage it offers. Unfortunately, it’s probably one of the least utilized types of insurance. So… I wanted to pull back the veil a bit through an umbrella insurance basics post to give you something to chew on to determine if it’s right for you.

What is Umbrella Insurance?

umbrella insuranceUmbrella insurance offers protection from the unexpected. Well, I guess that’s true for all insurance policies, isn’t it? Specifically, an umbrella insurance policy is protection against loss that may result from litigation against you. You’ve probably noticed with your auto and home insurances that there is a part of your coverage that pertains to liability. Primarily, umbrella insurance coverage is meant to protect you in the event that you are deemed at fault for damages to property or people above and beyond your home and auto insurance liability (or motorcycle, watercraft, or other vehicle) coverage levels. It covers other areas as well – but more on that later.

If you have assets (home, savings, retirement accounts, etc.), umbrella insurance protects those assets in the event that you lose a lawsuit. If you have minimal assets, does this mean you should tune out now? Not exactly. Being forced to sell your home for its equity or even garnished future wages could be a result of not having assets to pay off a settlement. Damn!

Here’s an example of umbrella insurance at work: you back out your car and accidentally run over that rotten neighbor kid (the one who’s way too old for his Huffy with training wheels that throws rocks at your dog). The kid only suffers a few bruises, but his parents slap you with a $1,000,000 “kid has nightmares” lawsuit so they can finance their midlife crises. You lose. Your auto insurance covers $200,000 of the damages, but you are responsible for the other $800,000 – more than your entire net worth. But wait! You have a $1,000,000 umbrella insurance policy, which swoops in and covers the $800,000 you owe. You don’t lose a dime.

Bottom line – unfortunately, we live in a very litigious society, and if nothing else, an umbrella insurance policy can offer you a bit more peace of mind so you can sleep better at night knowing you have some protection against losing everything you have worked (or will work) so hard for.

What Does Umbrella Insurance Cover?

In addition to extending home and auto (and other vehicle) insurance liability coverages, umbrella insurance also commonly covers you in the following areas:

  • property damage liability
  • landlord liability (for owner’s of rental units)
  • bodily injury liability
  • libel/slander/defamation lawsuits
  • false arrest
  • malicious prosecution
  • violation of privacy rights
  • wrongful eviction or wrongful entry
  • other types of lawsuits

Payment of defense costs, attorney fees and other expenses associated with the lawsuit, even if the lawsuit is groundless or frivolous in nature, are also covered. The coverage of those costs and fees is in addition to the policy limits in my policy, but some insurers include it as part of the coverage limit.




Who is Covered by an Umbrella Policy?

When you purchase an umbrella insurance policy, it doesn’t just cover the person making the phone call, but also:

  • the spouse, if the spouse is living with the insured
  • resident relatives (i.e. children, elders)
  • household residents under the age of 21 who are under the care of the insured
  • anyone using a vehicle owned by the insured
  • any person or organization that is legally responsible for the insured, while the insured is using a covered motor vehicle

What Does Umbrella Insurance Not Cover?

Umbrella insurance is a liability coverage. It is not a “go out and commit any crime and we got your back” coverage. I can’t list everything out here, but I’ll list out a few of the common areas of liability that are not covered by umbrella coverage:

  • malpractice
  • business pursuits (outside of landlording)
  • worker’s compensation
  • damage intentionally caused by any insured

Check with your potential insurer for a more exhaustive list.

How Much Does an Average Umbrella Insurance Policy Cost?

Umbrella insurance is commonly sold in $1 million dollar increments, up to $5 million typically. The cost for a policy, at those dollar levels, is actually extremely reasonable.

My insurer (who I have home and auto insurance with) gave me the following quotes:

  • $1 million: $216
  • $2 million: $345

Premiums will vary for everyone, given unique risks, but those quotes are in line with umbrella insurance policy average costs. According to an independent agent quoted by Kiplinger, a $1 million umbrella policy typically runs $175 to $300 a year for a family with a house and two cars and no special risks.

Not bad, eh?

With each ascending $1 million you add, you will see the price drop, because less and less lawsuit verdicts will come in at the higher levels.

How do you Qualify for Umbrella Insurance Policy Coverage?

Anyone can get umbrella insurance, but some insurers don’t sell it in certain states.

Providers of umbrella insurance often require that you have a base level of minimum bodily injury and property damage liability coverage for both your auto and home insurance. These limits do vary by insurer, but you generally must have:

  • $250,000 per person for bodily injury and $500,000 per accident on your auto insurance policy
  • $100,000 per accident for property damage on your auto insurance policy
  • $300,000 per occurrence for personal liability, bodily injury, and property damage liability on your homeowners insurance policy

Do I Need an Umbrella Insurance Policy?

I can’t give a prescriptive one-size-fits-all answer to whether you need an umbrella insurance policy, but I’ll give some pointers. There’s a reason that umbrella insurance is tied to vehicle and home insurance policies. If you own either, there is a greater likelihood that you are at risk for litigation. And the more people you have using your vehicles (and the more you use those vehicles), the greater you are at risk as well. I guess the same could be said for how often people visit your home or simply walk by it.

If you don’t drive a vehicle, your risk for an event that would result in litigation against you goes down.

If you don’t own a home, your risk for an event that would result in litigation against you also goes down.

If you don’t drive a vehicle or own a home, you are a low risk profile. You are not untouchable, but the likelihood that you would be found liable in a lawsuit goes down quite a bit. However, that’s also going to kick the cost of an umbrella policy down quite a bit for you.

If you do own a home or drive a vehicle, you’re at much greater risk for litigation and should strongly consider getting umbrella coverage.

Umbrella Insurance Discussion:

  • Do you have an umbrella insurance policy? Why or why not?
  • Have you or someone you known been covered by an umbrella insurance policy? Share the story.

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