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It is hard to anticipate whether you will win or lose a case involving an auto accident or a “slip-and-fall” accident on your property. Nor is it possible to foresee the amount that someone may be awarded, when you are found liable by accident. To guard against the chance of suffering catastrophic financial loss as a result of these unforeseen circumstances, you may wish to obtain an personal umbrella policy.

How Is an Umbrella Policy Defined?
An umbrella insurance insures your existing and future personal assets (such as salary, an inheritance) against the risk of losing a lawsuit resulting from an auto accident or liability claim on your property. If you lose such a lawsuit, you would almost certainly be required to compensate the other individual for costs such as medical expenses and missed wages, which can quickly add up (often into the hundreds of thousands).

You do not need to be affluent” to benefit from an umbrella insurance; even if you have no assets, your salary (future wages) may be garnished to fulfill a settlement.

An umbrella policy fills in the gaps left by your vehicle and homeowners insurance plans. Insurance premiums will range from  few hundred dollars a year for this insurance, depending on the coverage needed ($1 million to $5 million limits are most common).

What It Includes
An umbrella policy provides additional coverage in addition to what your homeowners and vehicle insurance plans provide. As an illustration, suppose your auto insurance covers $500,000 in medical expenses per accident and your umbrella policy covers $1 million in medical expenses. If you are sued for $900,000 in damages, your auto insurance will cover $500,000 and your umbrella policy will cover the remaining $400,000.

Legal Fees
What about the legal fees that will be incurred if you are sued? Umbrella plans pay legal expenditures in addition to the policy’s face value. Additionally, the policy may compensate you if your appearance in court results in a loss of pay from work (for example, if you are an hourly employee or if you do not have any available personal or vacation days). Because the insurance company’s money is at stake when you are sued, it will want to protect it with its own legal team, maybe one that is more capable than you can pay on your own.

Taking Care of Your Dependent Children
Along with covering you for accidents on your property or car accidents for which you are found to be at fault, an umbrella policy can protect your dependent children (for example, if your daughter kicks a soccer ball and permanently injures another players eye), accidents caused by you or your dependent children while operating a watercraft, accidents that occur on rental property you own, and personal injury lawsuits arising from slander, libel, defamation of character. 

What Is Not Covered
Because an umbrella policy is a type of personal insurance, it will not protect you from lawsuits arising from the operation of a business that you own. This includes the insured’s babysitting, or “compensated child care,” as the insurance industry refers to it (because that would be considered a business). However, if your children babysit part-time on someone else’s property, your policy may still cover them.

Prohibited Activities
Umbrella insurance does not cover high-risk, unnecessary use of your car, such as drag racing. Additionally, it may not apply to all vehicle categories, including recreational motor vehicles, truck tractor-trailers, farm tractors or trailers, or, more broadly, vehicles exceeding a specified weight limit, such as 12,000 lbs.

Intentional Acts and Crimes
If you are convicted of a felony (such as driving while intoxicated) and ordered to pay restitution, an umbrella policy will not protect you.

Due to the fact that an umbrella policy is a form of secondary insurance, it will be subject to underlying insurance requirements. This implies that in order to be approved for an umbrella policy, you must have a particular amount of auto and homeowners insurance coverage. The underlying insurance requirements differ according to the business from which you purchase your umbrella, but standard coverage covers the following:

  • Automobile insurance coverage for bodily injury is $250,000 per person/$500,000 per accident.
  • Property damage coverage of $100,000 per accident is included in auto insurance.
  • Personal liability coverage of $300,000 on homeowners insurance
  • Additionally, some umbrella insurance providers ask that you have auto and homeowners insurance with them before issuing an umbrella coverage. Having all of your policies with one insurer can save you money on occasion, but not always—transferring your homeowners and vehicle insurance policies to the umbrella provider can possibly cost more than the umbrella insurance premium alone. If you do not already have the underlying insurance that an umbrella policy requires, this effectively increases the cost of your umbrella coverage.

In Summary
Simply because you are not at a high risk of being sued does not mean you are completely protected. Even if you exercise extreme caution, umbrella insurance can be considered “bad luck” insurance. Insurance is the prudent course of action. Additionally, keep in mind that as your financial condition changes, you may need to increase your umbrella insurance coverage (eg. Bitcoin windfall).