Umbrella insurance is a way of buying extra liability insurance that protects you in a broader way than the liability coverage in your home or auto policy.

There are two main reasons you might need umbrella coverage. One would be you have greater risk of being sued due to your profession or activities you engage in. The other is if you have above average wealth and may be a target for a lawsuit.

Save Me Time!

  1. Umbrella insurance protects your assets if you get sued. Don’t want to risk losing your life’s savings to a lawsuit? Buy an umbrella policy.
  2. Umbrella insurance is very affordable, especially if you are wealthy enough to need it.
  3. You should assess your relative risk when deciding whether you need an umbrella. If you are an aggressive driver, entertain a lot, or have children at home, you likely have greater exposure and should buy more coverage.
  4. If you already have umbrella insurance, but your coverage amount hasn’t changed in years, now is a good time to revisit your needs.

The Rest of the Story

What exactly does umbrella insurance do? In its simplest form, it pays if you are found liable for damage or injury to others.

While your home and auto policies also have liability insurance, they have two limitations.
– Your auto liability only applies to auto accidents you cause while your home liability covers many, but not all, other
causes of liability.
– The most liability you can buy under those policies is $1 million and most people buy less than that.

Umbrella allows you to buy larger liability limits with broader coverage. It also pays your legal defense costs which can be a significant burden even if you win the suit.

If you have assets of greater than $1 million or annual earnings into six figures, you will likely want to consider an umbrella policy to protect your wealth.

How Does It Work?

Umbrella insurance is extra coverage beyond your auto and home policies. So let’s say you have $500,000 of auto liability coverage and a $1,000,000 umbrella policy.

If you cause a serious auto accident and were found responsible for $1.2M of liability, your auto policy would pay $500,000 (less your deductible) and your umbrella would pay the remaining $700,000.

If you didn’t have that umbrella, you would have to pay the other $700,000 yourself. What if you don’t have $700,000 of assets? It is possible you could be required to pay out of future income.

Think this won’t happen to you? Maybe it won’t, but auto insurance judgments have gone up substantially in recent years. Verdicts north of a million dollars are not rare anymore and there have been judgements against individuals of over $50 million!

Lawyers will often target those they know can pay. If you have $3M in assets and your neighbor has $300,000, and you both caused the same severity accident, the lawyer is going to sue you first!

Am I A Greater Risk?

Most advice about umbrella insurance focuses on how much wealth you have to protect. But there is another consideration, which is how much risk do you take.

Auto Accidents 

– Do you drive aggressively? In a sports car? You definitely need an umbrella!
– Do you drive to work rather than take the train? You’re a greater risk.
– Do you Uber everywhere because you don’t like to drive? Less of a risk.

But there are plenty of other risks beyond auto accidents. Do you have people come to your home a lot? Now you have a risk of someone getting injured due to your negligence. You need an umbrella.

Injuries To Your Guests

– More specifically, do you have a pool? Definitely need an umbrella!
– Do other families come over frequently to use your pool? Better increase the amount of coverage!
– Do you host barbeques for the neighborhood? Do you have a fire pit? Or backyard play set to entertain the neighbor’s kids? These all put you at greater risk.
– Have teenagers? Could one of their friends have left your home under the influence? Absolutely need an umbrella!

Injuries Away From Home

Have a nanny or babysitter? If they weren’t watching your kids closely and your child is injured, that does not qualify for umbrella (you are not covered if you are responsible for harm to you or your family).

However, what if the nanny takes your friend’s children to the park, along with your kids, and isn’t paying attention when the kids are climbing something they shouldn’t and the neighbor’s child falls? The negligence of the nanny can get you sued and you may need an umbrella.

Do you have a pet? If your dog (or pet snake?) bites someone, you can be sued, so you should have an umbrella. Home insurance will provide you some coverage here, but it often excludes aggressive breeds and non-traditional pets.

And Risks You Probably Never Considered

What about activities you do outside the home? These can also be a risk.

– Do you coach your kid’s sports team? You can definitely get sued for that (a player has a serious injury and the required medical treatment wasn’t available).
– Do you volunteer at a nonprofit? Better yet, are you on their board? That is a liability risk (e.g. if there is discrimination or misuse of funds).
– Do you say things you shouldn’t on social media? You can be sued for disparagement or slander which umbrella insurance would cover.
– Did you cause a hunting accident? Run into someone with your bike?

These are all things umbrella insurance will pay for (and your auto and home coverage may not!), so if you participate in these activities, get an umbrella.

How Much Do I Need?

Everyone’s coverage needs will differ. A rough rule of thumb is typically to buy umbrella limits equal to your net worth. However, nothing stops an aggressive lawyer from suing you for more than the umbrella limits.

That said, if you have $2M of umbrella coverage and $3M of net worth, the lawyer will often decide taking a $2M settlement is a better use of their time than going to court for $5M (the $2M + the $3M) and maybe getting $0.

There is also a counterargument that some believe that attorneys seek defendants with large umbrellas to sue over someone who only has basic auto liability limits.

Thus, having too big a policy can make you more likely to get sued. While insurance will pay, it can still be a stressful experience you want to avoid.

Ideally, you want your umbrella to be big enough to discourage a plaintiff’s attorney for suing for more than your umbrella limit. This keeps your assets safe.

The good thing about umbrella insurance is it’s very affordable at only a few hundred dollars for a million or more of coverage.

What Else Should I Know?

One thing to be aware of when you look to buy umbrella is most of the time the insurance company will require you to have both your auto and home insurance with them as a bundle.

This isn’t required and there are some companies who are more flexible, but most will insist that to buy an umbrella from them, you have to also insure your home and auto with them to ensure the coverage is seamless.

Don’t Set It and Forget It

It is important to note, as mentioned earlier, that court judgments have spiked significantly in recent years.

If you have had the same amount of umbrella limit forever and your wealth has gone up with the stock market over the last few years, it’s probably a good time to revisit whether you should increase that umbrella limit.