Legal responsibility is a tricky thing. Whether you're at fault for an auto accident or someone is injured on your property, you can be held responsible for other peoples' medical expenses, pain and suffering, property damage, and even lost wages. And here's the thing: You don't have to be a millionaire to get sued like one.
That's why liability coverage is such a vital part of your homeowners or auto insurance policy.
The truth is, anyone can get hit with a costly lawsuit, regardless of age or income. And if you're found liable for damages, more than your savings could be at risk. Your property, investments, and even future wages could be on the line if damages exceed the amount covered by your homeowners or auto liability insurance.
Learn how an umbrella insurance policy can protect you, your loved ones and your finances from the potentially devastating impact of a liability claim.
What's umbrella insurance?
A personal umbrella policy, or PUP, offers extra liability coverage beyond the limits of your homeowners, auto or renters insurance. After you reach the limits of other policies, umbrella insurance kicks in so you don't have to pay for additional damages out of pocket.
Umbrella coverage also can protect you against other types of claims such as libel, slander and invasion of privacy, which aren't covered by your home or auto policy.
Do you need an umbrella insurance policy?
“Major liability can arise easier than you might think,” says JJ Montanaro, Military Affairs Director and CERTIFIED FINANCIAL PLANNER™ professional.
“Let's say you crash into and total a $100,000 sports car driven by a heart surgeon who, ... as a result, can't go back to work,” Montanaro says. “Or maybe there's a pool accident at your house. Or your dog bites someone. It happens, and it can get very expensive — even exceeding what your auto or homeowners insurance would pay.”
Adding umbrella coverage can provide a higher level of protection for your assets and wages — as well as any loved ones in your household.
A good rule of thumb is to have enough liability protection to cover your net worth — everything you own minus everything you owe. If your net worth exceeds your limits on your auto and home insurance, get an umbrella policy.
What does an umbrella policy cover?
A claim can exceed the limits of your home and auto liability coverage. Personal umbrella insurance can help pay the rest. It may even cover legal fees in the event of a lawsuit.
Umbrella policies typically offer four general categories of coverage:
- Bodily injury liability refers to the cost of injuries to other people. This can include other drivers or passengers injured in a car accident, a guest injured on your property, or a person injured by your pet. Keep in mind that some pet breeds may not be covered by your policy.
- Property damage liability refers to the cost of damage to another person's property caused by you or a member of your household.
- Other personal liability covers other types of claims beyond bodily injury and property damage. If you're sued for slander, libel, pain and suffering, or lost wages, an umbrella policy can help cover damages and legal fees.
- Landlord liability helps protect owners of rental units against liability. For example, an umbrella policy can help cover bodily injury or property damage that occurs on your rental property — or even by a tenant's pet.
How does an umbrella policy work?
Let's say you're traveling on the highway when you suddenly realize that the traffic ahead of you has slowed down. Unfortunately, you notice too late and cause a five-car pile-up.
Your auto policy has bodily injury limits of $300,000 per person and $500,000 per accident, plus $100,000 in property damage liability. But it's still not enough to cover the total medical expenses for the 10 people injured in the accident. There are costly auto repairs, too. Plus, what if one of those people decides to sue you for lost wages or mental anguish?
Without an umbrella policy, you'd likely have to cover the additional damages, which could add up quickly.
A similar situation could play out at your home or rental property. Someone could slip on ice on your walkway and rack up enormous medical bills. If those bills go above and beyond the coverage limit of your homeowners or rental property policy, an umbrella policy could help cover the rest.
Or what if you or someone in your household posted a negative online review of a local restaurant? If the business owner felt the review harmed their revenue, they could initiate a costly lawsuit that your other insurance wouldn't cover.
What isn't covered by umbrella insurance?
Since the boundaries of umbrella coverage can be a bit nebulous, it's also helpful to know what isn't covered. Here are a few examples:
- Damage to your personal property or vehicle. Umbrella insurance is a liability policy. That means it only applies when you're held liable, or responsible, for damage to another person's property. Your home or auto policy would have to cover damage to your own property.
- Intentional or criminal acts. If you or a member of your household intentionally cause property damage or bodily injury to another person, your umbrella policy won't cover legal costs, restitution or any other financial consequences.
- Business losses or liability. Umbrella policies don't cover lawsuits associated with professional activities or damage to business property. Even if your business is home-based, you'll need a separate insurance policy for commercial or professional liability.
- Contracts. If you sign, or even verbally enter into, a contract, any associated liability will probably not be covered by personal umbrella insurance.
How much does umbrella insurance cost?
Believe it or not, umbrella insurance isn't expensive. In fact, you can get $1 million of coverage for about $1 a day from USAA. See note 1
Keep in mind that some insurers will require you to purchase a certain amount of liability coverage on your underlying policies before they'll sell you an umbrella policy. The typical requirement is about $250,000 of auto liability coverage and $300,000 of liability insurance on your property policy, according to the Insurance Information Institute Opens in a New Window. See note 2
Of course, the amount you pay will depend on your financial situation and the amount of coverage you need.
To determine the right amount of umbrella coverage, you'll want to consider your income, assets and your potential exposure to risk. For example, if you have a lot of assets to protect or a high chance of being sued, you may want the extra protection that umbrella insurance provides.
Ultimately, the decision to purchase umbrella insurance is up to you. But for many people, it can provide great peace of mind to know that their family has a secure financial future.
Help protect your financial security.
Umbrella insurance provides extra liability coverage that can help protect your family and finances. See how USAA can give you greater peace of mind.