We buy insurance to protect us against the unexpected. Most of us don’t realize that all our insurance policies have dollar limits, and rarely consider the consequences of the insurance we have doesn’t quite cover the liability incurred.
Consider this scenario.
You get into a car wreck and total another car that happens to be a BMW X7. Thankfully, you and the other driver survived with minor injuries. The BMW is totaled and you owe the other driver $75,000 for his totaled BMW. The other driver is unable to work for 6 months and sues you for lost wages. Since he is a surgeon who makes a $1 million year, you owe him $500,000. Your total liability is $575,000 ($75,000 for the totaled car + his lost wages). But your insurance only covers $250,000. You are personally liable for the remaining $325,000.
Though the above situation is kind of extreme, it’s not out of the realm of possibility. I see very expensive cars on the road every day that my auto insurance won’t cover if I ever get into an accident with them.
What Does Umbrella Insurance Cover
Bodily Injury – If your dog bites someone or if someone is injured in your swimming pool, umbrella insurance provides coverage beyond what’s covered by your home owner’s insurance.
Property Damages – Any damage to auto or other property that’s not covered by auto or home insurance policy will be covered.
Damage To Reputation – If you are sued for libel or slander, umbrella insurance will cover your damages.
Court Costs – If you have to defend yourself in court, umbrella insurance will compensate you for legal costs in certain cases
Dependent Children – If your children cause auto accidents, umbrella insurance will provide them the same coverage
Add-On Policy
Umbrella insurance is extra liability insurance that will provide coverage beyond what’s provided by your home or auto policy. You cannot buy umbrella insurance on its own.
Most insurance providers require a base insurance coverage of $150,000 to $250,000 for auto insurance and $250,000 to $300,000 for homeowners insurance before adding umbrella coverage.
For example, if your auto policy coverage is $250,000, and if you buy umbrella insurance for 1 million dollars, you will have total coverage of $1 million. All you will have to pay is your deductibles in your home or auto policy in case something happens.
Umbrella may also cover things that are not covered under the base policy. These include claims like false arrest, libel, slander, and liability coverage on vacation or rental properties.
Umbrella policy is usually very cheap if you buy it from your home or auto insurance provider. According to data from the Insurance Information Institute, an umbrella policy costs $150 to $300 per year for $1 million in coverage costs. It’s possible to buy an umbrella policy for up to $5 million. An umbrella policy is typically available in million-dollar increments.
Who Needs Umbrella Insurance?
Umbrella insurance is appropriate for people who generally fall under these categories
People with significant wealth – If you have significant net assets, you have high exposure if you ever get sued
Landlords – You own rental properties, and have exposure to lawsuits from tenants
Volunteers – You volunteer at school or serve on non-profits boards. You have the possibility of getting sued by other parents or other people involved.
Participants in sports or other activities – You hunt or play sports where there is a chance that you could accidentally injure the other person
Host parties at home – If you frequently have friends over at your house for parties. Your liability is higher if your home has a swimming pool.
Online reviewers – You often post online reviews, especially negative reviews. You are at the risk of getting sued by the product manufacturer or the website.
Children in College Fraternities – If your kids are in a fraternity at college, and they get sued, the claims are typically paid out of your home insurance policy. Beyond that, an umbrella policy may provide additional coverage. This NPR article provides more details on how fraternities shield themselves from liability.
What does Umbrella Policy Not Cover
Umbrella policies don’t cover damages incurred from your businesses. Those are covered by your business insurance policy.
It will not cover any punitive damages in case of judgments against you.
As with any insurance policy, it will not cover any intentional acts such as sexual harassment, bodily injury, discrimination, and other malicious acts.
In addition, your own property or belongings are not covered by an umbrella policy. It doesn’t cover your own costs. It only covers if you are found at-fault for somebody else’s damages.
It also does not cover as recreational motor vehicles, truck tractor-trailers, farm tractors or trailers. Check with your insurance provider for exclusions.
How Much Umbrella Policy Do You Need?
You need enough coverage to at least protect your net worth. Depending on your situation, and the activities you are involved in, you may need more coverage.
Bottom Line
We live in a very litigious society. As your net worth goes up, umbrella insurance provides peace of mind. It’s cheap and doesn’t break the bank. With its high coverage limits, umbrella insurance gives you good value for your money.
