What is an umbrella liability policy?
In our litigious society, it's worth considering excess liability protection
Your standard auto insurance or homeowners insurance will provide you with some liability coverage. If you are sued, those policies will pay up to your policy limits for legal judgments against you, as well as the related attorney's fees.
However, in our litigious society when a lawsuit settlement could very well wipe out your
financial assets, you may want the extra protection for your assets that a personal umbrella liability policy provides.
An umbrella policy kicks in when you reach the limit on the underlying liability coverage in an auto, homeowners, renters or co-op / condo policy. It will also cover you for additional types of claims, such as libel and slander.
Because the personal umbrella policy pays out after the underlying coverage is exhausted, most insurers will want you to have about $250,000 of liability insurance on your auto policy and $300,000 of liability insurance on your homeowners policy before they will sell you an umbrella policy.
Umbrella insurance even covers certain liability claims those policies may not, such as libel, slander, and false imprisonment. And if you own rental property, umbrella insurance provides liability coverage beyond what your renter's policy covers.
How Does an Umbrella Policy Work?
Here are some examples of incidents an umbrella policy could cover if your homeowner's insurance or auto insurance wasn’t enough:
Your dog runs out of the house and viciously attacks a neighbor who was going for a walk. Your neighbor sues you to cover her medical bills, lost wages, and pain and suffering.
Your daughter gets into a fight at school and punches another girl, breaking her nose. The girl’s parents sue you.
You cause a 10-car accident and your auto insurance property damage coverage isn’t high enough to replace all 10 accident victims' vehicles. Nor is your personal liability coverage high enough to pay for their medical bills.
You send sandwiches to your son’s school for a field trip lunch. Several students develop food poisoning and their parents sue you.
Your teenager throws a party at your house while you’re out of town. Someone brings alcohol to the party, and one of the guests is arrested for driving under the influence on the way home. You are sued.
Umbrella policies also cover malicious prosecution, wrongful entry, invasion of privacy, and other hazards.
But some people are more likely to need an umbrella policy than others. If you engage in some activity that puts you at greater risk of incurring excess liability, you’re an even better candidate for an umbrella policy. Personal liability risk factors include owning property, renting it out, employing household staff, having a trampoline or hot tub, hosting large parties, and being a well-known public figure.
Having a teenage driver in the family also puts you at increased risk, as does owning a dog or owning a home with a swimming pool. Basically, the more likely you are to be sued, the more strongly you should consider purchasing umbrella insurance. But anyone who is risk-averse will sleep better at night knowing they’re protected by an umbrella policy.