What it Is/What it Covers

An umbrella policy is excess liability insurance coverage over and above that which is covered by basic homeowner or automobile insurance. In picking up where homeowner and automobile policies leave off, it is an extra layer of protection against lawsuits resulting from damage to someone else’s property or injuries as the result of an accident. It also protects against false claims and intentional acts such as libel, slander and vandalism by minors, and covers false arrest, wrongful entry, invasion of privacy and more.

Why You May Need It

Lawsuits abound. Incidents such as an auto accident in which you’re sued under your auto insurance policy; or in which your neighbor falls on your property and you’re sued under your homeowner’s insurance; or even a natural disaster in which a tree on your property crashes down on a neighbor’s vehicle or home are becoming more and more prevalent. The amount that juries award in these cases are often unpredictable and expensive.

It is a good idea for those who have underlying wealth and assets that need to be shielded against such lawsuits to consider an umbrella policy. If you have average assets and low-risk exposure, you most likely do not need the additional coverage an umbrella policy offers. But, if you have substantial income, whether your assets are built up or not, or if your lifestyle exposes you to higher lawsuit risks, an umbrella policy may be well worth your investment. Even officers or board members for not-for-profits may be sued for the activities their organizations are involved in.

A good question to ask yourself is whether you have assets that you don’t want to put at risk in the event of a catastrophic liability.

What You Should Know Before You Buy

The premium costs of an umbrella policy are usually much lower if the policy is purchased from the same provider with which you hold your automobile and homeowner’s policy. The average cost for most umbrella policies is approximately $150 to $300 a year for about $1 million in coverage. The policyholder is usually required to have $250,000 to $500,000 in base liability coverage under your homeowners insurance policy, as well as a minimum automobile policy of $100,000 to $250,000 per person, and $300,000 to $500,000 total occurrence for bodily injury and $100,000 to $250,000 for property damage. This amount varies among insurance carriers.

How it Works

Example: You are sued and have settled for $1 million. You pay a $1,000 deductible for your basic policy (auto or homeowners), which, in turn, pays $299,000. The umbrella policy will then pay the remaining $700,000 because the $300,000 deductible has been met. You pay nothing but the initial $1,000 deductible for your basic policy.