What is umbrella insurance and how does it work?

May 29, 2020

Umbrella insurance provides you with liability protection beyond your basic policy limits

A wooden cutout depicting a family and their assets covered by umbrella insurance.

If you drive a car, you probably have auto insurance. If you own a home, you have homeowners insurance. So what is umbrella insurance for? Hint: it's not insurance for your umbrellas! Umbrella insurance is a type of additional liability coverage that extends beyond the limits of other policies. But how does that work and who needs it? We'll tell you all you need to know!

What is umbrella insurance?

Lawsuits can happen when you least expect them. While many lawsuits can be covered by standard insurance policies, the awarded amount can often exceed the limits of those policies, and there are certainly some incidents that they will not cover. 

Simply put, an umbrella insurance policy is an extra layer of liability insurance that extends beyond the limits of your auto, home, or boat insurance policies. Umbrella insurance is designed to pick up where your other policies leave off and protect your assets. 

How does umbrella insurance work?

So umbrella insurance is basically extra liability insurance. How does that work exactly? In what circumstances would you need that and what does it cover? Let's take a look.

What does umbrella insurance cover?

The liability portion of your homeowners or auto insurance policy typically covers a variety of scenarios. For example, if someone falls down the stairs at your house and decides to sue you, your homeowners liability would help cover the costs. If you are responsible for an auto accident, the personal liability portion of your auto insurance would help pay for that.

Umbrella insurance expands upon standard liability offered by those policies, but typically covers other scenarios that they do not. For example, an umbrella policy might also cover you in the event that you are sued for libel, slander, or defamation. While coverage certainly can vary from company to company, an umbrella policy usually covers anything that isn't explicitly excluded in the policy.

You can typically break down umbrella insurance coverage into the following categories:

Bodily Injury Liability Coverage: This generally refers to bodily harm, sickness, disease or death that you caused to the other party involved due to an accident and that you are legally responsible/liable for. 

Property Damage Liability Coverage: This generally means physical damage to, destruction of or loss of use to someone else’s tangible property that you caused and are legally responsible/liable for as a result of some type of accident. 

Personal Injury Coverage: This can provide coverage in the event you are sued for libel, slander, defamation of character, false arrest, etc. 

Coverage for Legal/Defense Costs: This would provide for court and legal fees, and other related costs. While some aspects of a standard homeowners policy can provide liability coverage for incidents that occur away from your home, umbrella coverage may be applicable anywhere in the world for people covered under the policy.

Umbrella insurance can also extend coverage beyond just the policyholder to other members of your household or family. For example, if your teenage child causes a car accident and you are sued for an amount beyond the limit of your auto policy, an umbrella policy can offer coverage for that as well.

Examples of umbrella insurance use cases

Now that we have a better understanding of what umbrella insurance actually covers, let's take a look at some examples of how that might work.

Let's say you just got a new dog and unbeknownst to you, it's a little defensive. You accidentally leave the door ajar and it rushes out to bite the mailman walking down the street, and he decides to sue you for medical bills and lost wages. An umbrella policy could cover this assuming your homeowners insurance isn't enough. 

As another example, let's say you have a teenage driver. He hasn't quite got the hang of driving just yet, and he gets into an accident with an expensive car. The total amount of damages, including the other driver's injuries, comes to $1,000,000. However, your auto policy only provides up to $300,000. In this case, if you had an umbrella policy of a $1,000,000, it would provide the additional $700k to cover the other person's losses. Without it, you would be responsible for coming up with that amount out of pocket. 

If the incident is covered by another policy, you'll usually have to pay that policy's deductible before it covers it and the umbrella policy kicks in. Using our above example, if you had a $5,000 deductible, you would pay that, the auto policy would pay $295,000, and the umbrella would pay the rest. However, if the incident is not covered by another policy, there will likely be a separate umbrella deductible, which should be arranged at the start of the policy. 

Who should have umbrella insurance?

When you are sued, your assets are put at risk. A jury could potentially award a massive settlement, which could require you to give up your savings, investments, retirement, or more. Umbrella insurance can be a lifesaver in scenarios like this and help protect what you've built over the years. 

Generally, the idea is that if the total value of all of your assets (i.e. your home, savings, car, investments) is greater than the limits of your insurance policies, you should have umbrella insurance. This thought process is intended to make sure that you have enough protection to cover your assets in the event of a lawsuit. 

But even if your assets don't exceed your standard insurance policy limits, you can still be sued for an amount greater than those limits. For this reason, looking at the total value of your assets compared to your current insurance is only one part of the equation.

Another consideration you should take into account is your level of risk. If you rent a single apartment, don't own property, aren't married with children, or don't have a pet, your risk is much lower. That doesn't mean you can't be sued or that you won't have use for umbrella, but you have fewer opportunities to be held liable for something.

However, if you're a landlord with multiple properties you rent out, the chance that someone could get hurt on one of those properties is certainly greater than someone without those risk factors. Similarly, if you have a dog, or a teen driver, the risk of being sued for losses caused by those factors is higher in comparison to someone without them.

So the answer is more complex than a simple assessment or rule of thumb. It's a combination of your assets, the limits of your current insurance policies, and your general level of risk. If you need help deciding whether or not to purchase umbrella insurance, speak to your insurance agent and/or a financial advisor to help you assess your risk. 

How much does umbrella insurance cost?

As with most types of insurance, the amount of your annual premium will depend on your level of coverage, as well as other factors that go into determining your risk.

That having been said, umbrella insurance is usually much cheaper when compared to other types of insurance. This is generally because most insurance companies require you to have other insurance policies (like auto and homeowners) before they will issue umbrella. As such, you can typically get a fairly high amount of coverage for a comparatively low premium.

Germania Farm Mutual Insurance Association logo on wood background.

Germania makes umbrella insurance easy! Get a quote or talk to one of our trusted agents for more information and make sure you're prepared for the unexpected.

Since 1896, Germania Insurance has been the Insurance Texans Trust for great coverage and outstanding customer service. But don’t take our word for it! Hear what our customers have to say

Read more: Interested in learning more about insurance in Texas? Check out our auto, homeowners, and boat insurance blogs!

by Geoff Ullrich

About the Author

Geoff Ullrich is a writer and Content Marketing Strategist at Germania Insurance.

What do you want to read more about? For suggestions, questions, or content-related inquiries, contact us at content@germaniainsurance.com!

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