Why Do You Need an Umbrella Insurance Policy?


Bryan Huynh

- Updated February 22, 2024

Why Do You Need an Umbrella Insurance Policy?

An Umbrella Insurance Policy is a type of business insurance policy that covers what auto and business liability insurance does not.

No one knows what will happen tomorrow. Granted, if you are well-informed, then you can make educated predictions. However, not many people can accurately forecast the future. Crystal balls are no substitute for proper planning when it comes to managing your liability risks.

Protecting your personal and professional interests generally begins with assessing what liabilities you want to shield from claims. Taking stock of your liabilities can guide you toward the practices that can protect your assets. You can take measures that make your home safer. In a business setting, you can form and activate risk management plans. However, incidents you never planned for can strike, circumventing your best efforts. Alternatively, the magnitude of events you expected could eclipse your expectations. The unexpected can lay your plans to waste.

Acquiring insurance in any situation remains a tried and true method to protect against claims and lawsuits as well as cover damages. From personal to commercial liability coverage, insurance can be a simple way to cover tomorrow's uncertainties. You might not be able to get rid of all of your risks, but you can use insurance to ease the pain of financially destructive events like auto incidents and extreme weather. You can also strengthen your coverage with an Umbrella Insurance Policy.

Read this article to learn what an Umbrella Insurance Policy is, why you might need one, and more. Learning as much as you can now help you plan to protect your assets from random and volatile events.


What is an Umbrella Insurance Policy?

A business Umbrella Insurance Policy covers what your existing auto and business insurance typically does not, picking up where those types of coverage leave off. For example, if your auto insurance only pays $10,000 of medical expenses per claim and you have an accident that causes $50,000 of medical expenses, you could be responsible for the difference ($40,000). If you have an Umbrella Insurance Policy that pays $50,000 of medical expenses, then the difference should be covered. Both policies complement each other to help protect your personal assets. A commercial Umbrella Insurance Policy works the same way.

If your company is sued for $2 million and your existing liability coverage totals $1 million, then your company might have to cover the remaining $1 million itself. A commercial Umbrella Insurance Policy with $1 million in coverage can supplement your existing liability insurance to offset the entire cost of the lawsuit.

An Umbrella Insurance Policy goes beyond your current policies to fill in the gaps so you remain protected against costly claims and litigation.


Why Do You Need an Umbrella Insurance Policy?

To protect your assets

At its core, insurance aims to protect current and potential assets, usually money. A typical liability policy might have adequate limits for your specific circumstances. You could get by with standard coverage. However, what if you get into a car accident and are seriously injured? What if all of your standard coverage only covers a percentage of your medical bills? You might have to pay these expenses out of pocket. Can you afford that? How will your future look if you drain your savings?

An umbrella insurance policy can cover most or all of the difference depending on the policy's terms and limits. This supplemental coverage can ease the financial burden of an unexpected event like an accident or sudden lawsuit.

Companies can also protect their assets with umbrella insurance policies. For instance, if a consulting agency is sued for a professional mistake it committed that caused a client to lose money, then a professional liability insurance policy can help pay legal fees and damages if a judgment is passed down. However, depending on the severity of the lawsuit and the amount of fees, a professional liability policy might only cover a specific portion of expenses. An umbrella insurance policy can cover the rest, ensuring the agency continues operating uninterrupted and on stable financial footing.

To protect against the unexpected

Life is full of unforeseen events. Many of these events have consequences that can devastate not only finances, but reputations and peace of mind. You can reduce your liability risks as much as you can, but you can never erase them. Your personal life contains many. Your vehicle, home, and property can damage others or be damaged. Companies must contend with the risks their industries and employees create. A construction firm might have more risks than a florist because of the often-dangerous work involved with the field. A storm can sweep through your area and damage your home. It can damage your place of business. Personal and commercial property insurance can help you cover repair costs in both cases. An Umbrella Insurance Policy can remove much of the worry when an adverse event suddenly arises to threaten you, your home, and your business. You can rest easier knowing that you have sufficient coverage to assist you through tough times.

To meet contractual requirements

Despite being rare in personal circumstances, an Umbrella Insurance Policy might be required to meet contractual requirements. For example, a marketing agency wants to partner with a web design company. The agency requests that the web design company own professional liability insurance and an umbrella policy to make sure maximum protection is available in the event of a lawsuit. The web design company can either acquiesce to meet the agency's requirements or disregard the request, which will probably end the arrangement before it ever begins. An Umbrella Insurance Policy can help businesses connect and work together.

To cover what your existing policy can not

Your current insurance limits might be high, but legal fees and other damages you could be held responsible for could quickly surpass what your insurance will pay. Paying the remainder of these balances out of pocket could strain your finances and place you at a severe disadvantage should another significant event occur. For example, if you are forced to pay for damages from your assets after your regular policy covered a substantial portion and you are sued for something entirely different, you might not have the resources to come through this new bout of litigation unscathed. You might not have anything left once the dust settles. An Umbrella Insurance Policy could have helped you cover the costs of the previous lawsuit to help you weather future storms.


What Are Examples of Umbrella Insurance Claims?

Bodily injuries

One medical bill can be an unpleasant surprise. Several can drain nearly anyone's assets. Imagine having to cover medical expenses for someone that you injured? An Umbrella Insurance Policy can take some of the sting from a liability claim that involves injuries to other people due to:

  • an auto accident where the policyholder is at fault.
  • a pet owned by the policyholder.
  • an accident that occurs on the policyholder's property.

Property damage

An Umbrella Insurance Policy can cover property damage that you or a dependent cause. For example, if you are found to cause an auto accident that damages other vehicles, then your Umbrella Insurance Policy can cover relevant costs that your current policy can not. Another example concerns a dependent who also causes damage, accidental or not, to other people's property. If you have a child and they cause property damage when they attend school, then your Umbrella Insurance Policy can kick in if the expenses exceed your current policy's limits.

Personal liability

You can also be sued for damages that go beyond the physical. An Umbrella Insurance Policy can help cover you if you are sued for committing slander or libel against another person. This type of policy can also cover lawsuits alleging false imprisonment, malicious prosecution, and mental anguish.

Legal expenses

You should not overlook legal expenses you might have to incur if you are sued. Regardless of the validity of a lawsuit, lawyers and courts want to get paid what is owed to them. What if these expenses surpass what your current policy will pay out? You can use an Umbrella Insurance Policy to take care of the rest of your legal fees.

Your dependents' actions

Not only does an Umbrella Insurance Policy cover you, but it also covers your dependents if they are found liable for a covered event. For example, if your spouse is listed as a dependent on your policy and they injure someone in a car accident they cause, then your umbrella policy can go into effect when your regular policy pays out according to its limit.

Commercial liability costs

Commercial Umbrella Insurance generally covers the same costs as commercial business insurance. This type of coverage can take care of claims involving physical injuries and damages stemming from company products, services, and operations. Here are some common types of business insurance and examples of claims they cover:

General liability insurance

This coverage deals with physical injuries and damage that happen during the regular course of business. For example, if a customer slips and falls in your store, a general liability insurance policy can help pay for their medical bills.

Professional liability insurance

This type of insurance covers claims of professional negligence that caused a customer or client to lose money. For instance, if you own a consulting agency and one of your employees gives a client incorrect business advice, professional liability insurance can cover legal fees and damages if the client sues your agency.

Commercial property insurance

Insurance not only covers other people's property, but also yours. In a business setting, commercial property insurance can cover a company's physical assets, including its building (if it operates in a physical location), everything inside the location, and the surrounding property. This coverage can help pay for repairing and replacing damaged furniture, equipment, signs, documents, and inventory that are affected by fire, storms, theft, and vandalism.

Commercial auto insurance

Company vehicles are liabilities that should almost always be properly covered. Car accidents are unfortunately too common in our society. Commercial auto insurance can pay for the damage company vehicle drivers cause while working as well as damage to company vehicles.

When Do You Not Need an Umbrella Insurance Policy?

If you do not have assets, property, or a business that could be at risk if you or your company are found liable for physical, property, or professional damages, then you might not need an Umbrella Insurance Policy. However, you should remember that you could be sued even if you do not have many assets. Forgoing an umbrella policy could jeopardize the assets you do have.


Can an Umbrella Insurance Policy Help You?

Whether you seek a personal or commercial Umbrella Insurance Policy, you can not disregard the importance of financial protection during these unstable times. Sue-happy plaintiffs and growing weather threats can strike when you least expect them to, harming you financially. An Umbrella Insurance Policy might seem optional, but it can prove essential should you experience an event that can devastate your assets.

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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