How Does Umbrella Insurance Work?

Umbrella coverage works by extending the safety net of your existing insurance policies by boosting liability coverage. An umbrella policy can increase the liability coverage of many types of insurance policies including:

Car insurance
Homeowner’s insurance
Motorcycle insurance
Boat and RV insurance
Landlord insurance

To demonstrate how umbrella coverage works, imagine you cause a traffic accident and the injuries to other parties total $650,000. The bodily injury limit on your car insurance policy is just $300,000 but you have a $1 million umbrella policy. In this case, your car insurance policy would cover $300,000 of the injuries and your umbrella policy would cover the remaining $350,000.

When Does Umbrella Coverage Take Effect?

An umbrella policy can be used in a wide range of situations in which you face legal liability. It can cover:

Lawsuits
Physical damage to someone else’s property
Injuries to other people that you cause
Injuries to someone else caused by your dog
Other injuries for which you are liable, such as a guest falling on your property

Do You Need Umbrella Coverage?

While umbrella coverage isn’t legally required, it’s a smart investment if you want to protect your assets against potential claims. Without enough liability coverage, your home, car, and retirement savings may all be at risk. Umbrella coverage doesn’t just protect you against damage or injuries for which you are legally liable; it also protects you if you are not at fault but faces a costly lawsuit to defend yourself.

A basic umbrella policy can add millions in liability coverage to all of your existing policies with a cost that’s generally much lower than increasing the limits on each policy. Rather than raising your limits on your homeowner’s, car, and boat insurance separately, an umbrella policy can achieve the same effect at a lower cost.