Umbrella Insurance: How it Works & What it Covers

By Randy Luton | Last Updated: 10/05/2021

What is the purpose of auto insurance? Why do we need auto insurance even if we know that we might not need it? The answer is to feel secured. We know that even if we are driving safely, we can get into trouble because of others as well. But we know that our auto insurance will cover all our expenses.

What if the damages are soo high that your auto insurance or health insurance can not cover the expenses? This is another stress that we all have for our insurance policy. The best solution for this is Umbrella Insurance.

This blog can be your go-to guide

  • to know and understand everything about Umbrella insurance.
  • Is it actually important?
  • Do we really need it?
  • How much should you pay for it?

We have all the answers for you. Let’s start with a quick introduction:

What is umbrella insurance?

In very simple terms, Umbrella Insurance is to get extra liability coverage on your existing policy to get you extra protection. Umbrella insurance is basically important when the claim cost exceeds the limit on your auto insurance.

Generally in such situations, you will have to pay from your pocket. But if you have Umbrella insurance then you don’t have to worry about the extra costs. It will also help you cover defense costs if some other driver or pedestrian is suing you. In case you have caused damage to some else’s property or injuries then you will have to cover the expenses.

How umbrella insurance works?

Let’s understand how umbrella insurance works with some examples.

  • Your German shepherd attacked someone and that person is injured severely. Now that person needs $35,000 for medical bills and that person is not able to work for the next 3 months so his lost earnings will be covered by you as well. But your insurance liability coverage has a $20,000 limit. The rest of the money will be paid from your pocket.
  • If you had umbrella insurance then the extra claim after your liability coverage would have been covered by it.

All you had to do is inform your insurance company about the claim and they will take care of the rest. If your umbrella insurance is from a third party then you will have to ask your insurance company to connect with them as well.

Third-party insurance might take some extra time to get the claim resolved. This is because your insurance company will first connect with the victim and then with the third party. But if your umbrella insurance is from the same company then you will get the claim resolved quickly.

What does umbrella insurance cover?

One of the most important concerns with Umbrella insurance is what exactly does it cover? Generally, your personal umbrella policy will cover you from liabilities that can be potentially devastating to the driver.

Umbrella insurance comes into the picture only after your liability policy limits are over. It provides coverage for

  1. Injuries caused during an accident
  2. Damage caused to the property of another driver or person (House, fence, or car)
  3. Lawsuits filed against you
  4. Personal liability requirements

One major confusion that arises here is; we think that our auto insurance or health insurance covers all these scenarios so we don’t need Umbrella insurance. We need it even when we have all the other policies.

If you need a detailed description of what exactly you will get coverage from then here are some examples for better understanding:

Property Damage Liability:

If in an accident you have caused damage to the tangible property of another person then you will be liable for the expenses. Now you must be thinking I have enough coverage for that in my property damage liability coverage. But you don’t know the value of another person’s property.

What if you crashed into a Jaguar? We all know the cost to repair a Jaguar is going to burn a deep hole in your pocket. Your insurance will cover the claim but only up to the limit. After that, you will have to pay the rest from your pocket.

Lawsuits:

The best benefit of an umbrella policy is it protects you from unwanted lawsuits filed against you. If someone filed a lawsuit of malicious prosecution, mental anguish, or false detention with you might get thousands of dollars bill.

Even with a slander lawsuit or libel lawsuit, you can get a huge bill and without umbrella insurance, this will be paid from your pocket.

Bodily Injury:

Bodily Injury Liability coverage type is majorly for the injuries you have caused to other drivers or pedestrians. Let’s say you are at fault in the accident and the other driver and passengers are seriously injured then you will be responsible for their entire medical bill.

If your auto insurance limit is not able to cover the entire medical bill then umbrella insurance will save you.

Overall, when all your other insurance types fail; umbrella insurance comes to the rescue.

What umbrella insurance doesn’t cover

This is also one of the most frequently asked questions; What is not covered in an umbrella policy? There are some situations or scenarios where umbrella insurance will not work.

  1. Personal property damage of the driver
  2. Personal injuries of the driver
  3. If the driver tries to cause damage to another person intentionally
  4. If you are under a contract and have some liability with it.

These are some common situations where umbrella insurance is not applicable.

Explore more >> Difference between Personal vs Commercial Auto Insurance

What are the pros and cons of Umbrella Insurance?

The best way to make a decision is by checking the pros and cons of any insurance type. The same goes for Umbrella insurance. Here is the list of all the advantages and disadvantages you will get with your personal umbrella insurance policy:

Umbrella Insurance ProsUmbrella Insurance Cons
You will get extra coverage for your claims after the limit of your existing auto insurance is exhausted so you don’t have to pay from your pocket.The driver is required to buy the minimum amount of auto insurance liability coverage before adding umbrella coverage to the existing policy.
You will get coverage from situations like slander and liberal which are not applicable in the other policies.It is compulsory to have auto insurance to get umbrella insurance coverage.
The minimum coverage limit is $1 million for every policyholder.The cost of umbrella policy premium might increase based on the extra liability coverage you adopt for the existing policy.
Umbrella policy coverage is applicable to almost anywhere in the world
It may also provide coverage for rentals as well. If you don’t have coverage on rental items like motorboats then umbrella insurance will provide coverage.
Affordable when compared with the liability coverage it provides.

Do you need an umbrella insurance policy?

Who needs umbrella insurance policy? The simple answer is everyone. This is not compulsory as per the law of the country but advisable. An umbrella policy is usually recommended to people who have many valuable assets that require protection. Or people who are more likely to get sued by others for claim money.

Here are some things to check if you need an umbrella policy:

  • Do you have a new or inexperienced driver at home?
  • Can you be sued with liability claims while traveling outside the country?
  • Do you host parties frequently?
  • Are you a landlord?
  • Are you a coach to sports especially for kids?
  • Do you have significant assets or bank balances?
  • Do you own a property?
  • Are you a public figure?
  • Do you post reviews of other people’s businesses or products frequently?
  • Are you involved in sports that can lead to serious injuries like surfing or hunting?
  • Do you own things that can cause any injury to others like trampolines, pools, or guns?
  • Do you have a dog that might cause injury to others?

How much umbrella insurance do you need?

We understand your confusion on how much umbrella insurance is actually required to keep all of your assets safe. The best way to calculate how much umbrella insurance you need is to calculate your net worth.

  • Add up the value of all your assets; it can be your savings, investments, properties everything. Now check your liability insurance limits.
  • Do you think the difference between the limit of the liability insurance and your net value is significant? If yes, then you will have to increase your coverage and the best way for that is Umbrella insurance.
  • Another thing you have to consider is the potential lawsuits. List out all the lawsuits that you might get and then list out their approximate claims. Based on this amount you can calculate the extra coverage you need from your umbrella policy.

Most of the times insurance companies provide umbrella insurance in million-dollar increments only. Confused? The insurance company will increase your umbrella policy limit by the gap of 1 million dollars. If you have 2 million dollar coverage as of now and you want to increase it then you can increase it by 3 million dollars not 3.5 or 3.7 million.

Make sure to get in touch with your company and clear out all these terms before buying the policy.

How much does umbrella insurance cost?

The cost of any insurance policy depends on a lot of factors and can vary from person to person. Factors like the age of the driver, the assets you have, your net worth, etc play a very important role in the cost of umbrella insurance.

As per the insurance information institute, the cost of a $1 million insurance policy is between $165 and $350 per year. And with an extra cost as low as $80 you can increase this coverage to $2 million. And then $60 for another $1 million policy.

It is clear that umbrella insurance provides much more valuable benefits than its yearly cost. 

How to buy umbrella insurance

Wondering how to get the best deal on Umbrella insurance? The best way to buy umbrella insurance is to get quotes from different companies and compare them as much as you can. Umbrella insurance policies can be tricky sometimes. You might be wondering that you got everything covered and then you will get to know one of your most important assets was not covered. There is always a fear of loopholes in the policies and some insurance companies try to leverage that fact.

  1. Hence; before buying your policy first step is to get umbrella insurance quotes from different companies.
  2. The second step is to compare the quotes and coverages from different companies. This will help you to get clarity on which company is most suitable as per your needs. Also, you will have a better understanding of the charges of different companies. Some companies might be charging $300 per year and are covering all your assets. While some other companies might be providing umbrella insurance at $150 but with limited coverage on your assets. Hence it is important to check the coverage and charges of each company thoroughly.
  3. Now that you have checked and compared quotes from different companies; it is time to finalize the top 3 insurance companies. Start calling each company and get clarity on the terms and conditions. With umbrella policy terms and conditions also plays a very important role. But understanding the T&C of each company can take hours so better to finalize the top 3 as per your requirements.

Once you are clear on all the terms and conditions then you can move forward and buy the policy from any one company that is the most suitable to your requirements.

Umbrella insurance versus excess Liability insurance

Most of the drivers get confused and considers umbrella insurance and excess liability insurance as the same. But that is not correct. There is a huge difference between excess liability and umbrella insurance.

In simple terms, excess liability is when you extend your existing liability coverage. It applies to all the risks that are covered in your existing policy. For example, if you take excess liability on your auto insurance then the limit of your auto insurance will increase it will not provide coverage if someone sues you for crashing into their car.

While on the other hand; umbrella insurance provides coverage for risks other than your liability coverage.

Over To You!

Compare quotes from different companies for your personal umbrella insurance policy today. All you have to do is enter some basic details and you will get quotes from all the top companies in your area.

Do you want to add umbrella insurance to your policy? Confused between your present company and a third-party insurer? Our team is here for your support. Get in touch with us today.

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Editorial Guidelines: The above is meant as general information to help you understand the different aspects of auto insurance. This information does not refer to any specific auto insurance policy. Coverages and other features vary between insurers, vary by state, and are not available in all states. References to costs of coverages/repair, average or typical premiums, amounts of losses, deductibles, etc., are indicative and may not apply to your situation. We encourage you to speak to our insurance representative and to read your policy contract to fully understand your coverages.

Randy Luton is the Founder and CEO of RateForce. He is passionate about InsurTech services and has in-depth knowledge about the auto insurance sector of the USA.