The liability portion of any insurance policy is the coverage that responds if you are sued for causing damages to other people or property.
For example, the liability portion of your auto insurance policy would respond if you were at-fault in a car accident, injured the other party, and were sued as a result. If the injuries were serious enough, such as an individual being left handicapped for life, the resulting lawsuit could be for hundreds of thousands, or even millions, of dollars.
An umbrella policy is extra liability insurance.
It is designed to help protect you from major claims and lawsuits, by supplementing the liability protection provided by your home, auto, and other insurance policies. An umbrella policy does so by providing coverage above and beyond the limits of those policies.
The way in which this is accomplished is when you purchase an umbrella policy the insurance company will have requirements for how much liability coverage is maintained on what is known as your “underlying policies” – your home, auto, and other insurance policies. Typically this requirement is $500,000 and you then purchase extra liability coverage in $1 million dollar increments on the separate umbrella policy.
Returning to our earlier example, if you were successfully sued for injuries resulting from an auto accident in the amount of $750,000 then your auto policy would pay the first $500,000 while your umbrella policy would pay the additional $250,000.
The purpose of an umbrella policy is to protect your assets – including your cars, home, savings and investments, retirement accounts, and even your future income – from possible financial ruin due to an unforeseen accident.
Your umbrella policy will respond if you are liable and need to pay for damages – or if you are sued and need to pay for your legal defense, even if you are not found to be responsible for damages.
The last statement is worth highlighting as by purchasing an umbrella policy you are effectively buying the legal department of an insurance company. If you have $2.5 million dollars of liability protection between your auto and umbrella policies you can be assured the insurance company is going to provide a vigorous defense on your behalf for any liability claim, whereas if you only had $100,000 of liability coverage from an auto policy for the same claim the insurance company isn’t going to expend nearly the same time and effort as their potential outlay would be much smaller.
The cost of an umbrella policy will depend on a few factors such as the number of properties and vehicles you own. A $1 million dollar umbrella policy typically costs $150 – $200 a year.