Umbrella Insurance Policy: How Does it Work


Bryan Huynh

- Updated February 23, 2024

Umbrella Insurance Policy: How Does it Work

Have you ever worried about what would happen if you exceeded your business liability insurance coverage limits? Liability claims can be devastatingly expensive.

An umbrella insurance policy is a great way to provide financial protection and peace of mind in case someone files a liability claim against you and the expenses go over the amount your insurance policy covers.

In this guide, we’ll go over in depth what you need to know about umbrella insurance policies, including what they are, what coverage they offer, and how you can benefit from having an umbrella insurance policy.


What is an umbrella insurance policy?

Before diving into what is an umbrella insurance policy, it’s important to first understand what liability insurance is.

Liability insurance helps cover expenses if you are found liable for damages, be that property, car, or other kinds of damages. This means that if someone else sues you and you’re found liable, liability insurance of the appropriate type can help you pay off these costly expenses.

Liability insurance coverage can help keep individuals from needing to file for bankruptcy. Successful liability claims against you can be extremely expensive. Lawsuit settlements can be hundreds of thousands of dollars.

However, liability insurance coverage has limits. The insurance company will only cover expenses up to this limit (usually, the limit resets annually).

An umbrella insurance policy will cover claims that are in excess of the other insurance coverage you have. It won’t protect you or your family if you caused the damages on purpose, but it will typically cover excess claims for policies like homeowners insurance and auto insurance.


How does umbrella insurance work

Your umbrella insurance coverage will kick in to provide financial assistance once your other insurance policy has proven to be inadequate (i.e. the coverage limits have been met and exceeded). If you are at maximum coverage levels for other kinds of insurance policies (e.g. auto, property & casualty), then you may be issued an umbrella insurance policy.

Umbrella insurance coverage works for liability claim excesses, so the liability claim might involve suing you for someone else’s medical bills, lost wages, as well as emotional damages. Umbrella insurance typically covers the policyholder’s family as well as themselves.

Here are some example personality liability claims that might take place:

  • A visitor gets injured while visiting your property
  • Your pet injures them
  • Your negligence results in someone else’s bodily injury or property damage
  • They have been defamed as a result of your slander or libel

What does an umbrella insurance policy cover?

Umbrella insurance policies provide broad coverage for personal liability claims. This means that as long as your claim isn’t something specifically excluded from the policy, you should be covered. This kind of all-risk coverage (also called open perils policy) differs from named perils coverage, which only covers specified incidents.

An umbrella insurance policy will supplement you with extra business liability coverage on top of your usual business and auto insurance policies. Renters insurance is another kind of policy for which umbrella insurance can up the coverage limits. If you are buying watercraft liability insurance for your vessel, umbrella insurance can also provide additional coverage there.

So the next question is, what does an umbrella insurance policy _not _cover?

Here are some of the more common exclusions that you might see in your umbrella insurance policy:

  • Your own property damage: Remember, liability claims happen if someone else sues you. Umbrella insurance policies won’t cover damage to your own property.
  • Liability that you agreed to assume contractually: If you signed a contract agreeing to assume liability for something, then your insurance policy won’t cover it. This includes both written and oral contracts. ** **
  • Commercial business liability excess: If you want business liability insurance coverage, it’s important to make sure the policy you’re buying is for commercial liability. Business and professional liability is covered under other special policies.
  • War or armed conflicts-related liability: If your liability is related to war, terrorism, or nuclear radiation, you won’t be covered by umbrella insurance. ** **
  • Liability damages that you caused on purpose: Most umbrella insurance policies only cover excess liability expenses for non-criminal, accidental damages.
  • Communicable disease: If you transmitted a disease (e.g. herpes) to someone else who is now suing you, umbrella insurance usually will not provide any coverage.

These above excluded cases will typically not be covered by your umbrella insurance policy.

In general, if your expenses are a result of an accidental, non-criminal event, they are more likely to be covered by an umbrella insurance policy. If you cause injury or damage intentionally or criminally, you should not expect your insurer to help you financially.


Umbrella insurance examples

Looking at umbrella insurance examples can help you better understand what the policies are all about.

Bodily injury liability claims

If someone files a liability claim against you and you are found liable, umbrella insurance policies generally cover bodily injury liability expenses. This could either mean the umbrella insurance covers the medical bills, the liability claim expenses, or both.

Bodily injury liability coverage might be necessary if:

  • You are found at fault for a severe or multi-car auto accident
  • Your pet injures someone else or someone else’s property
  • Someone gets injured on your property (e.g. by your pool, at a house party you’re hosting, due to a slip and fall)

Should you own an animal that has a higher chance of hurting other people, such as a horse or a larger dog, you might want to see whether your liability insurance policy will provide enough coverage. If your pet causes serious injury or death to someone else, the bodily injury liability claim can be very costly.

Car accidents that have multiple vehicles or pedestrians involved often have significant medical bills that need to be paid. If you end up being liable for the crash, it is unlikely that a standard personal liability policy for auto accidents will be enough for the expenses. This is a situation that, albeit uncommon, can be devastating if it does occur. That is where umbrella insurance comes the most helpful: when the worst case scenario happens.

Property damage liability claims

Another useful scenario where umbrella insurance kicks in is when there is property damage you’re found responsible for. If you damaged someone else’s property and you’re found to be at fault (this is typically determined in car accidents), umbrella insurance might be able to help you out with the property damage liability claim expenses.

Slander and libel claims

Slander and libel are both considered defamation. If you are sued for making defamatory statements, umbrella insurance might be able to help you with the expenses.

Similar lawsuits that might also be covered include invasion of privacy claims.

Legal defense fees

Umbrella insurance policies will usually provide coverage for legal defense fees whether you’re found at fault/liable or not. An attorney can help you significantly with your case, but legal defense fees can rack up over time, especially if it’s a long liability claim battle. An umbrella insurance policy could be helpful in this situation.

Other claims

Other situations where your umbrella insurance policy can come in handy include:

  • False arrest
  • Incidents happening outside the United States
  • Malicious prosecution
  • Shock and mental anguish

What an umbrella insurance policy will cover can depend on the insurer you’ve chosen. Make sure to be aware of the specified exclusions or inclusions when shopping for umbrella insurance.

Umbrella insurance cost

An umbrella insurance policy can greatly vary in cost depending on what you’re looking for, as well as your individual circumstances.

An insurance company giving you a quote will typically look at factors such as your credit history, your location, and the risks of you filing an umbrella insurance claim. If you’re worried about whether umbrella insurance is expensive, you can typically expect your umbrella insurance premium to be cheaper than other insurance premiums.

Umbrella insurance can usually cost anything from $100 to $400 every year.

Buying umbrella insurance coverage

Purchasing insurance is often viewed as a hassle, which is understandable. Comparing quotes between top companies can be hard, and it might seem even more challenging when it comes to umbrella insurance. How do you know which policy will suit your needs the best, while still being affordable?

If you’re deciding on umbrella insurance, it can be essential to first go over all of the details of your liability insurance policy. Are the limits enough for your needs already? Then, assess your risks. Do you personally have a higher risk of getting sued for liability, for large amounts?

There are two more things to consider: the value of your assets and what the potential losses may be. A common rule of thumb that people follow is to have an umbrella insurance policy that covers their net worth based on their asset valuation.

If you are concerned about losing all of your money and assets due to a lawsuit, it may be worth buying umbrella insurance. As always, this article is meant to serve as a general guide, and not as official advice or professional counsel.

Who needs umbrella insurance coverage?

Here are common situations or careers people find themselves in where they might have higher chances of getting sued:

If you are wondering whether umbrella insurance is a fitting kind of coverage for you, it could be a good idea to see whether others in your industry or in similar positions carry umbrella insurance for extra protection.

The average person generally does not have to worry about exceeding their personal liability coverage limits, but that doesn’t mean it’s impossible to reach maximum coverage limits in case of an unexpected event, such as a car collision.

When it comes to auto insurance, drivers are usually required to carry a minimum, reasonable amount of liability insurance, but umbrella insurance could be helpful for some drivers who are more concerned about liability.

Key Takeaways

At the end of the day, an umbrella insurance policy can be a helpful type of coverage for those seeking extra protection against liability claims.

Umbrella insurance FAQs

When is umbrella insurance worth it?

If you have significant assets and chances of getting sued for liability, you may wish to consider umbrella insurance.

Are umbrella insurance and excess liability insurance the same?

Yes. Umbrella insurance and excess liability insurance usually refer to the same kind of insurance coverage.

How much umbrella insurance do I need?

This will entirely depend on your personal financial situation and needs. When you buy umbrella insurance, the policy coverage is usually in increments of $1 million.

Usually, people add umbrella insurance to their insurance coverage when they are worried about substantial liability claim-related expenses.

How much does umbrella insurance cost?

It typically costs a few hundred dollars a year per $1 million in coverage.

Where do I buy umbrella insurance?

You can find an insurance company or agent to help you find the optimal umbrella insurance policy options that suits your individual (or familial) needs. Many insurers offer optional umbrella insurance coverage on top of their other insurance products, so if you want to save the hassle of shopping from new companies, you can first consider the umbrella insurance options of insurers you already buy insurance from.

About The Author

Bryan Huynh

Bryan Huynh

Product Tester & Writer

Bryan Huynh is a dedicated Product Tester & Writer. Just as insurance has your back, Bryan works to review and inform you about the wide range of insurance products available, ranging from business, auto, health, home, pet, to life insurance.

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