Key Takeaways
- Umbrella plans extend the coverage of other property and casualty insurance policies you own.
- In most cases, before an umbrella plan starts paying, your first liability plan must pay out first.
- Insurance firms set the rules for these plans. The wording on these policies will clearly state the lowest amount of liability you must hold to obtain a policy.
- Once you add up the costs and legal fees of being held at fault for someone else’s person’s injuries, standard liability coverage may fall short. That is why you may need an umbrella plan.
Definition and Examples of Umbrella Insurance
Property and casualty plans have limits on the amount of coverage they provide. If your policy limits don’t cover the entire amount you’re responsible for, you will need to pay them out of pocket unless you have an umbrella policy.
- Alternate name: Excess liability insurance.
For example, you might have comprehensive and collision coverage on your vehicles. These policies have limits on the amount they will pay out for any given circumstance. You could purchase an umbrella policy that covers any amounts that your primary coverages do not.
How Umbrella Insurance Works
Umbrella insurance coverage begins where your other coverages end. It protects you over the limits on your house, condo, boat, car, or other policies. It can save you from financial ruin if you are held responsible for the costs of injuries and damages that your policy won’t pay for.
An umbrella plan can protect you from:
- Being sued for property damage and injuries
- Legal defense costs that come from being sued
- Having to sign over your future earnings to settle a claim
- Seeing your assets taken away to pay for a loss
In most cases, before your plan starts paying, your main liability policy must pay out first. For instance, a home policy will pay out first in the event of damages. The umbrella portion kicks in once the amount of money in your home liability coverage is exhausted.
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Even if you have no assets, you can still be liable for damages. You may have to pay them off with your future earnings.
Suppose you are in a car accident and are found to have been at fault. Your auto policy has $500,000 per accident liability coverage. One of the people in the car you were driving at the time of the crash was hurt, and she can no longer work at her job. Her earning power from her has been taken away due to the crash you caused. She has no choice but to sue you for the loss of income.
Depending on what she does for a living, you could be on the hook for a lot more than $500,000. If your insurance and the person who got hurt settle for $750,000, you would have to pay the difference unless you had an umbrella plan. It would pay the rest up to its plan limits. Your first policy would pay the $500,000, and the umbrella plan would pay the $250,000.
Insurance companies set the rules and limits for umbrella policies. The wording of your policy will clearly state the least amount of liability you must have to be able to obtain a policy.
For example, almost all states require drivers to carry minimum liability coverage in auto policies. These amounts are often very low and would not cover very much in the event of a crash. A minimum policy may not be enough to meet the requirements of the umbrella plan. In that case, you would need to increase your liability limits on the main policy and then add the umbrella.
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Some companies require you to insure all of your assets with them before they agree to give you umbrella coverage. They may add it as an endorsement to your primary policy.
Umbrella policy underwriting rules and methods vary among companies. Most companies will require you to have plans with coverages of $250,000 on your vehicle and $300,000 on your home before they will provide umbrella coverage of up to $1 million. Try getting quotes for a few policies before deciding how much coverage you need.
What It Means for You
Property and casualty policies have limits on the liability they will cover. This is the portion of your policy that pays for costs that may arise from an injured person’s:
- Medical bills
- Rehabilitative therapy
- Current and future lost wages
The liability portion of a policy also covers legal defense fees. Once you add up all the costs and the legal fees, the standard liability you can get in a home or auto policy often isn’t enough.
Almost every state has financial responsibility laws, which hold drivers at fault for injuries and damages that result from the accidents they cause. The at-fault driver could be sued for the damage, and their assets could also be seized.
An umbrella policy can give you extra protection without paying more. It’s estimated that a $1 million policy may only cost a few hundred dollars a year. More liability insurance doesn’t cost a lot if you compare it to the value of the coverage you get. You’ll also be paying for peace of mind—a hundred few dollars per year in exchange for $1 million of financial protection is the cheapest million dollars you’ll ever buy.