What Is Umbrella Insurance and How Much Does Umbrella Coverage Cost?

It is a common assumption that umbrella policies are only for the wealthy, but that couldn’t be further from the truth. An umbrella policy can help you financially protect your current and future assets from liability claims that exceed the limits of your existing auto and home policies. Everyday events, such as becoming a dog owner or throwing a party, can increase your level of risk. Umbrella insurance may be a relatively affordable way to reduce risk and find peace of mind.

What is a personal umbrella insurance policy?

A personal umbrella policy is a form of liability insurance that is designed to extend the standard coverage provided by your underlying policies — including your home insurance policy, renters insurance, auto insurance and other policies like boat or motorcycle policies. It provides a kind of safety net for individuals who might find themselves facing substantial liability claims.

If you have to file a liability claim and the loss exceeds the limit of, say, your home insurance policy, your umbrella policy could kick in to provide additional coverage for your legal costs. It is ultimately designed to fill gaps and provide extra protection to your existing policies.

How does umbrella insurance work?

As mentioned, umbrella insurance acts as an additional layer of insurance protection and covers you and those living in your household. It can help cover legal costs if you’re found responsible for damaging someone else’s property or if someone gets hurt on your property.

If you experience a loss — whether it’s related to your auto, home or another insurance policy — you typically file the initial claim on the corresponding policy first. You would not file a claim for a new incident directly on your umbrella policy unless coverage isn’t available from your underlying policy but is under your umbrella policy.

In rare cases, you may be able to purchase an umbrella policy as a primary policy, but you may be responsible for a self-insured retention (SIR) fee that must be paid for the umbrella policy to become operational.

What is the difference between umbrella insurance and excess liability insurance?

Both umbrella insurance and excess liability insurance aim to provide additional insurance coverage over your base policies, but they do so in different ways. Excess insurance simply extends the financial limits of your existing policy without changing its terms or coverage. It provides extra protection for the same potential risks and only comes into play when your main policy’s limits have been exhausted, often in cases of significant claims.

Umbrella insurance, on the other hand, actually broadens the scope of coverage and can cover situations not covered by your base policies. It has the ability to extend protection across multiple primary policies and can potentially offer higher liability limits. Unlike excess insurance, umbrella insurance may have its own unique restrictions and exclusions.

What does an umbrella policy cover?

An umbrella policy could ease your fears if you face expensive liability claims, but it is important to understand what it does and does not cover. Most umbrella policies cover:

• Bodily injury: Umbrella policies may provide additional liability coverage for injuries you cause to others, whether in an at-fault auto accident, at your home or off your premises. If you are found liable for injuries, your umbrella may help pay the costs.
• Landlord liability: Some umbrella policies provide some coverage for landlords. For instance, if you rent out your home, you could be found liable for injuries that occur there. Say the concrete sidewalk to the front door is heaved and a tenant’s guest trips and breaks an arm. Your umbrella policy might help cover the damages after your landlord policy reaches its limit.
• Property damage: Umbrella coverage could apply to property damage that you cause to others. Like liability claims, coverage would also only apply if the damage exceeds your underlying policy limits.
• Personal injury: Personal injury coverage typically covers legal expenses when someone sues you for libel, slander or wrongful eviction. The liability coverage in homeowners policies often excludes personal injury coverage, although an endorsement can sometimes add it. This is a scenario where your umbrella coverage might kick in without a claim being filed on an underlying policy. That said, personal injury coverage in umbrella policies varies by company, so check the specifics of your policy.

In general, umbrella policies cover liability claims that go above and beyond the limits of your underlying policies. In rare circumstances, an umbrella policy may offer coverage for instances not covered by your underlying policies.

Examples of situations covered by umbrella insurance

What does an umbrella insurance policy exclude?

Umbrellas may be helpful policies, but it doesn’t cover everything. Here are some scenarios that typically aren’t covered by personal umbrella insurance:

• Property damage that you sustain: The only kind of property damage that umbrellas may cover is damage you cause to the property of others. Your own property is not covered by umbrella policies. Umbrellas provide extra liability coverage, not extra personal property coverage.
• Personal belongings: The personal property coverage of your homeowners policy will pay to replace belongings like clothing and furniture following a covered loss, but an umbrella policy won’t. Umbrella insurance only covers the personal belongings of others when you’re at fault for a loss.
• Business-related losses: A personal umbrella policy will not typically cover any losses related to a business unless the business is covered under your home insurance policy. Likewise, umbrella insurance will not cover court costs or attorney fees associated with lawsuits filed against your business unless the business is covered by your home insurance. Some home insurance policies may cover certain small business operations, but you’ll likely need to buy business insurance, including a business umbrella insurance policy, to get the coverage you need. Talk to your insurance agent to learn more.
• Losses caused by criminal acts: Similar to the liability coverage of home and auto policies, an umbrella policy does not cover losses caused by a policyholder’s illegal or intentional activity. For instance, if you operate an illegal, homemade fireworks business and an accidental explosion burns down your neighbor’s home, or if you deliberately damage your neighbor’s property, your insurer would likely deny the claim.
• Oral or written contracts: If a contractor sues you for not honoring oral or written contract terms, your umbrella policy likely won’t cover your legal expenses.

Keep in mind that all policies are different. To make sure you understand what your umbrella insurance does and doesn’t cover, you might want to talk to your insurance agent or company.

How much does umbrella insurance cost?

How much an umbrella policy costs depends on many variables. Many of the factors that affect your home insurance and auto insurance costs may also affect the cost of your umbrella policy. These could include:

• Location
• The features in your home (swimming pool, dogs)
• Types of cars you drive
• Having teens in the home or on your auto policy
• Occupation
• Prior claim history

The cost of umbrella insurance will also vary based on how much coverage you purchase. Most insurers offer umbrella policies in the range of $1 to $5 million, but some offer limits of up to $10 million. According to a study by ACE Private Risk Services (a division of Chubb insurance), $1 million in umbrella insurance costs an average of $383 per year in premiums. For $5 million in umbrella coverage, the typical annual premium goes up to just $608.

Additionally, the number of underlying policies that an umbrella covers may also affect costs. If you have $1 million in umbrella coverage for a home and auto policy, your premium may be on the lower end of the spectrum. On the other hand, if your $1 million umbrella policy covers a home policy, an auto policy, a vacation home policy and a boat policy, your premium could be considerably more costly. This is because the more policies that are likely to trigger an umbrella claim, the greater the risk for the insurer.

Where can I purchase an umbrella policy?

In rare cases, you can purchase a personal umbrella policy as a standalone policy, but most carriers require you to purchase coverage on top of an existing policy. In this case, you usually bundle your policy with an existing auto, home or renters policy. Regardless of where you buy your umbrella policy, your insurance company will likely have certain requirements for your underlying coverage. The most common requirement is for your auto policy to have liability limits of 250/500/100 and for your home insurance to have a personal liability limit of $300,000.

Not having an active auto insurance policy can be a significant roadblock when looking for an umbrella policy. If you do not own a vehicle and want an umbrella policy, inquire about non-owner insurance. This type of policy can usually meet the requirement of an underlying auto policy without the additional expense of comprehensive or collision coverage.

Some auto and homeowners insurance companies may enable you to increase your liability limits to $1 million, which may eliminate the need for an umbrella insurance policy. However, increasing liability limits on your auto and home policy doesn’t change the liability limits on your other policies. Nor does it provide additional coverage for liability losses those policies won’t cover. Your insurance agent should be able to talk you through any scenarios you might be concerned about.

Who needs umbrella insurance?

Generally, you might want to consider an umbrella policy if you have any personal factors that pose greater liability risks or if you have high-value assets. However, many people don’t comprehend that something as common as having children increases their liability risks. Additionally, it isn’t always about what assets you have in the present, but what you could have in the future. Or what you stand to lose if your wages are garnished to pay for an insurance settlement. We asked an insurance claims expert for her thoughts on who needs an umbrella policy, and her answer may surprise you.

Other indicators that an umbrella policy could be beneficial to you are:

• Amenities or attractive nuisances on your property, such as hot tubs, swimming pools, trampolines and treehouses
• Rental properties
• Extensive savings that you need to protect
• A high earning potential
• A lifestyle or job that indicates wealth even if you aren’t rich, such as driving a high-end car, being a doctor or owning a business
• Frequently entertaining guests, especially if alcohol is served in your home
• Having children or often having children in your care

Umbrella coverage provides an extra layer of financial protection against liability claims. Even if you don’t have high-value assets or elements that pose a higher level of risk, it might be worth looking into umbrella coverage. If you’re not sure if an umbrella policy is right for your needs, consider talking with a licensed insurance agent or financial advisor.

Frequently asked questions

• Does having children increase my liability risk?
  

  Having or frequently caring for children may be a commonly overlooked factor in the umbrella coverage decision-making process. Whether you have one child or many, the inherent liability risk that comes with children of any age means that parents, guardians and caregivers may want to consider an umbrella policy. Parents and guardians of children are usually legally and financially responsible for the child’s actions through vicarious liability, for scenarios such as these:

  • Your young child pushes another child off the slide at the park, causing severe injuries.
  • Your older child posts slanderous comments on a social media platform, causing another child mental anguish or embarrassment.
  • Your teen throws a house party and serves alcohol while you are out of town. A party-goer is injured or killed on the way home due to underage drinking and driving.

• Should I purchase umbrella coverage if my home has a swimming pool?
  

  While purchasing a policy is always a personal choice, having a swimming pool makes you a good candidate for umbrella coverage. Home features like swimming pools, fire pits, hot tubs and treehouses can increase your liability risk. If a guest sustains an injury on your property, there is a chance that your standard homeowners insurance policy won’t have adequate liability coverage to protect you if you’re found negligent. Umbrella insurance may help cover medical expenses and legal costs that exceed your primary policy’s limits.

• How much umbrella insurance do I need?
  

  Like all forms of insurance, there’s no exact formula to determine how much umbrella coverage to buy since everyone’s needs are different. Ultimately, insurance offers financial protection from the unexpected. But there are some steps you can take to help plan for the unknown. Before you purchase a policy, you might want to determine how much all of your assets are worth and what elements of your home or lifestyle might invite more risk. Then, you may want to discuss your financial goals with an insurance agent and financial advisor to ensure you’re not over or under-insured.

• Are liability coverage and an umbrella insurance policy the same?
  

  Liability coverage and an umbrella insurance policy both offer liability protection. However, an umbrella is its own policy, while liability coverage is a component of an underlying policy. The umbrella insurance policy typically only gets used if you exhaust the underlying liability coverage on your home, auto or other applicable policy. However, an umbrella policy may be used in instances that are not covered by the underlying policy, such as personal injury. The umbrella insurance policy acts as a second layer of liability protection to back up your other insurance policies.

• Can I get umbrella insurance for my business?
  

  Yes, you can get business umbrella insurance. These are called commercial liability umbrella policies or professional liability umbrella policies. You’ll likely have to purchase other forms of business insurance as well because business umbrellas work just like personal umbrellas — the coverage only kicks in after the liability limit on the underlying policy is exhausted. Many of the best home and car insurance companies also offer business insurance, which might make it easier to get a quote and manage your policies. If you think you need umbrella coverage for your business, the best course of action is to speak with an agent about your coverage needs.