What to know about umbrella insurance
Just as an umbrella covers your head and your clothes from the rain, umbrella insurance throws a cover over your assets and protects them from a judgment that may exceed the limits of your other insurance policies.
What is it?
An umbrella policy, also called an excess liability policy, is a type of supplemental or extra coverage that kicks in if you have liability that exceeds the limits in other policies, such as your auto or homeowners insurance.
Who is it for?
Anyone can get an umbrella policy, and many financial experts recommend that everyone have one. But it makes the most sense for high net worth individuals who could have significant financial exposure if hit with a judgement that exceeds their insurance coverage. Business umbrella coverage also is a good idea for professionals whose normal duties could expose them to lawsuits, such as doctors or lawyers.
How does it work?
Umbrella coverage kicks in if a claim exceeds the liability limits in your home or auto insurance. For example, say you have $300,000 worth of liability coverage for bodily injury in your auto insurance, but someone injured by you in an accident sues and gets a judgement for $500,000. In that case, your auto insurance policy would cover the first $300,000 of liability, and then your umbrella policy would kick in and pay the remaining $200,000.
Types of policies
There typically are two types of umbrella policies, personal and business. A personal umbrella policy pays for liability claims that exceed the limits in your homeowners insurance policy. A business umbrella policy offers extra protection beyond the limits of your malpractice or errors and omissions insurance.
The main benefit of umbrella insurance is protection of not only your assets but also future earnings should you be hit with a court judgment that exceeds your other liability coverage. An additional benefit of umbrella coverage is that it is very inexpensive because the risk of using the policy is low. You usually can get $1 million of umbrella coverage for around $200.