Understanding Umbrella Liability Insurance

Umbrella liability insurance is a sort of add-on to regular insurance that covers much larger, and much less likely, loss.  It is insurance that kicks in when your homeowners, automobile, renters, corporate liability, and other insurance reaches its limit, or doesn’t cover something.  It is purchased most often by corporations and at least moderately well-off people looking for an extra layer of protection against being wiped out financially by some unforeseen catastrophe.

Let’s say, for example, you have a standard automobile insurance policy, with $200,000 in liability coverage.  You also have an umbrella liability insurance policy with a limit of $2,000,000.  You are involved in an auto accident in which the driver in the other car is killed, and a passenger is left paralyzed.  You are sued, and lose in court, with a judgment of $500,000, plus attorney and other fees of $30,000.

The details will depend on the details of your policies of course, but roughly speaking, what should happen is your automobile insurance policy pays its maximum of $200,000, and then the remaining $330,000 is covered by your umbrella policy.

So you always go through your regular insurance first.  The umbrella insurance is intended for what’s left to be paid after that.

Umbrella insurance is for extreme and unlikely events.  Maybe someone wins a slander lawsuit against you for large damages, or a friend of your daughter is seriously injured in your swimming pool.  Or your dog breaks his leash, runs through a neighbor’s open door, topples a table holding a priceless Ming vase, and it smashes onto the floor.

Because umbrella insurance is for situations that arise extremely infrequently, the cost tends to be low.  It can be as little as $20 or $30 a month for $1,000,000 or more of coverage.  But it can provide a certain amount of peace of mind, for those who financially have the most to lose.  A company, for instance, might obtain umbrella insurance so as to avoid situations that could otherwise literally drive it out of business.

On the other hand, there are those who fear that having a high amount of coverage like that might draw frivolous lawsuits.  A “professional plaintiff”-type might be more apt to insist he was injured on the property of someone he knows has $5,000,000 in liability coverage than someone with only $20,000 in coverage, or no insurance at all.

But this is probably not something to worry about.  Typically such people will go after anyone they perceive as very rich, instead of first trying to find out how much insurance they have.