What if someone sues you for millions of dollars and your car insurance or homeowners liability coverage tops out at $300,000?
You’ve got trouble.
Your insurance company stops paying when your limits are reached, leaving you personally liable for the rest.
The answer, especially for those whose high net worth makes them a more tempting target for lawsuits, is typically an umbrella liability policy.
What is an umbrella policy?
A personal umbrella policy provides liability coverage above home or auto insurance limits — to anywhere from $1 million to $10 million.
It is sometimes referred to as a catastrophe policy, and for good reason: “The claims are not frequent, but they’re severe,” explains Ken Kitzmiller, vice president of underwriting for insurer Mercury Group. “It’s for one of those things that only happens once in a while, but when it does, it’s expensive.”
What does a Personal Umbrella Policy cover?
A personal umbrella policy covers injuries or damage to property that you cause others, as well as attorney’s fees in the event you are sued. It covers the same things that home and auto liability insurance does, but expands to extras like slander, libel, lost wages, or occurrences on foreign trips or a tenant’s property.
You’re also typically covered for damages or legal defense in cases of:
• False arrest
• False imprisonment
• Invasion of privacy
• Malicious prosecution
• Wrongful entry
What is not covered by an umbrella policy?
A personal umbrella policy is a liability policy, which means it doesn’t cover your own medical expenses or property damages. It is also not intended for business activity, although gray areas exist when professionals are personally named in lawsuits. Like any insurance, it doesn’t cover intentional, or criminal, acts.
When does an umbrella policy kick in?
An umbrella policy kicks in after the limits are reached on your first line of insurance: the homeowners, renters, condo or auto policy, for example; or to cover something that this first, so-called primary, line of protection doesn’t, such as libel. You personally are covered, as are your spouse and other relatives or dependents living with you. If you die, your legal representative is covered.
Is an umbrella policy expensive? Are there discounts?
Personal umbrella policies are relatively cheap, given the high amount of coverage. A $1 million policy can be had for $150 to $300 a year, according to the Insurance Information Institute. Another million in coverage may add just $75. Insurers can afford this because big liability payouts are relatively rare.
“It’s classic insurance, in that they’re charging you a small amount for a very small chance of an extremely catastrophic event,” says Kathy Kristof, a personal finance columnist with Kiplinger and CBS News. Many insurance companies will offer a discount on the underlying homeowners or auto policies if you bundle an umbrella policy with them.
What if I’m a renter and don’t own a home?
You can buy an umbrella policy as a renter if you’ve purchased minimum levels of renter’s insurance. Whether you need one depends on the value of your assets, which can include property, retirement accounts or even future earnings; and your risk of being sued. Do you:
• Have a dog?
• Have children?
• Have a trampoline in the yard?
• Have young drivers in the household?
• Coach youth sports?
• Drive a lot of miles?