In an increasingly litigious society, it can be scary to think about what might happen if you are responsible for an accident and get sued. It’s true that your auto insurance policy probably has liability coverage, but are the limits high enough? Adding more liability coverage to a homeowners policy or auto policy can cost quite a bit of money and result in thousands of extra dollars over the life of your policy. Unfortunately, if the liability coverage is not sufficient, a lawsuit could result in someone coming after your assets. If you are concerned about your liability coverage and want a way to increase your protection, you need to purchase umbrella insurance.

What is a Liability Coverage?

First, it helps to understand liability coverage. Liability means what you are responsible for. So, if someone gets hurt through your negligence or some other action of yours, you are responsible for paying the costs.

• On an auto insurance policy, your liability insurance is listed as three numbers sequence, like 25/50/20. The 25/50/20 liability coverage means that the insurance company will pay up to $25,000 for bodily injury liability claim to each person to a maximum of $50,000 total per occurrence and up to $20,000 in property damage liability claim. The 25/50/20 liability coverage is the state minimum for Virginia, and in my opinion, the coverage is way too low. For someone considering an umbrella insurance policy, I recommend a minimum auto liability coverage of 250/500/250.
• On a homeowners policy, your liability coverage is listed under “Section 2, Coverage L”. This coverage is meant to help cover the costs related to someone becoming injured on your property. So, if you fail to keep your walkway free of ice, and someone slips and breaks a hip, you might be held responsible for covering the cost of the hospital stay.

In many cases, the costs of taking on such responsibilities are higher than most people could pay out of their pockets. Liability coverage can help pay those costs. Liability coverage also usually pays legal fees and judgments — up to the limit specified by your policy — if there is a lawsuit. That way, your assets are protected if a civil case goes against you.

What is an Umbrella Insurance?

Umbrella insurance acts as a policy that offers you broader liability coverage (protect against a greater variety of claims) and increases your limit (protect against higher claim amounts). Umbrella covers a multitude of liability shortfalls (which is why it’s referred to as an “umbrella” policy) that is not covered by either your homeowners or auto insurance policy.

Many umbrella policies provide an additional $1 million to $5 million in liability coverage. It’s even possible to get additional coverage of up to $10 million or more, depending on your level of risk. The umbrella policy provides you with extra protection after the liability limits have been reached on your homeowners or auto policy, or the coverage is excluded from those policies. It is important to remember that umbrella coverage doesn’t “kick in” until after the limits on your primary policy have been reached. 

Understand that umbrella coverage probably won’t cover business-related activities. If you have a business, you will need a commercial insurance policy. You can speak with your insurance agent to find out about some of your options. In some cases, you can add an endorsement to your existing policies to get the desired coverage. But you shouldn’t assume that claims related to business (even if it is just a home business) activities are automatically covered.

Frequently Asked Questions

How Much Does an Umbrella Insurance Cost?

As with all insurance, umbrella insurance premiums are based on how much coverage you get and how much of a risk you represent to the insurance company. Different insurers will also offer you different premiums, so it is best to shop around for the best policy at the lowest price. Regardless, an umbrella insurance policy is considered one of the best deals in the insurance industry — meaning it doesn’t cost much to get good coverage.

Some companies won’t let you add umbrella coverage unless you have both auto and homeowners policies with them. This can actually be an advantage. If you have multiple policies with one company, you will likely get a multi-policy discount, and there is less chance that your insurer will deny your claim. 

Additionally, you can raise your deductibles on your homeowners and auto policies to help afford the cost of the umbrella coverage. Just make sure you have an emergency fund that is sufficient for handling the increased out of pocket expenses, should it become necessary.

Do You Need an Umbrella Coverage?

Not everyone needs umbrella coverage. You will need to evaluate your position to determine whether or not umbrella coverage makes sense for you. There are two primary considerations as you assess your need for umbrella coverage:

1. What risk do you represent? 

Consider your risks:

• Do you own rental properties under your name?
• Do you have a pool in your backyard?
• Do you have a dog?
• Do you have teen drivers?
• Do you have a long commute?

All of these items represent risks to others. These are situations that could also result in a lawsuit, and if you’re found negligent, you could end up being responsible for a rather large sum of money. The higher the risk you represent, the greater the likelihood that you need umbrella insurance.

2. Do you have assets you need to protect? 

If you live in a rental and have few assets, there isn’t much that someone can go after you for, should he or she decide to sue. However, if you have a large number of assets, including savings, retirement, multiple homes, and cars, you might want to protect them. A lawsuit can result in your assets being diminished. If you are concerned about your assets, an umbrella policy can help. Even someone with relatively modest assets might consider an umbrella policy.

Take a few minutes to figure out whether or not umbrella coverage makes sense for you. A little extra coverage might not hurt if you are concerned that your dog might bite the neighbor kid, or if you are worried that your teenager will put someone in the hospital in a moment of inattentive driving.

Umbrella coverage isn’t for everyone, but for many, it provides peace of mind at a fairly reasonable price.

Do you have an umbrella policy? If yes, why did you decided to get one?