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Insurance

What is umbrella insurance and how does it protect you from lawsuits?

Umbrella insurance can cover you beyond your existing homeowners and auto insurance if you're sued.

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DusanManic | iStock | Getty Images

Umbrella insurance gives you additional coverage beyond your other insurance policies, such as homeowners insurance and auto insurance. If someone injures themselves on your property and sues you (for example), umbrella insurance can help you protect your assets, like your home and investment accounts, and can also cover legal expenses beyond the limits set by your other insurance policies. Umbrella insurance can also help cover your legal fees and expenses if you're sued for libel or slander.

Here's what you should know about how umbrella insurance works and whether you need it. 

What does an umbrella insurance policy do?

An umbrella insurance policy can help cover your assets and pay for legal fees and expenses if you're sued for an amount beyond your underlying insurance coverages. 

Homeowners insurance and auto insurance both limit how much the policy will cover. Generally, you choose these limits when you buy your policy.

How auto and homeowners limits work

For auto insurance, limits are often written with slashes between the numbers, like "50/100/25." In this example, your liability coverage would pay up to $50,000 for bodily injury per person, up to $100,000 per accident, and up to $25,000 worth of property damage. With comprehensive or collision car insurance — both parts of full coverage car insurance — the limit is generally the cash value of your car. Cash value is equal to the amount it would cost to replace your vehicle minus the depreciation. 

With homeowners insurance, you can generally find your limits by looking in your homeowner's policy documents. Generally, you'll have six different coverage types, one of which is personal liability coverage. This coverage has a limit that's separate from the one for your home's structure, other structures, and your personal property. 

Umbrella insurance would help to cover the costs, usually after you first pay the deductible on your homeowners, auto, or other insurance policy and your costs reach the limit of that policy.

From there, an umbrella insurance policy will cover the rest (up to the umbrella policy's limit). If you're being sued for something that doesn't involve your other insurance policies and still want to use your umbrella policy, you may first have to pay self-insured retention, which acts similarly to a deductible for umbrella insurance policies. 

If you're looking for homeowners insurance or car insurance, CNBC Select has listed some of the best on the market. Nationwide was our top homeowners insurance pick overall for its discounts and easy online access. Those looking for car insurance might want to consider Geico, our top pick with affordable coverage and good scores for customer service and financial strength.

Nationwide Homeowners Insurance

  • Cost

    The best way to estimate your costs is to request a quote

  • Maximum coverage

    Not disclosed

  • App available

    Yes

  • Policy highlights

    Policy covers home and property damages caused by theft, fire and weather damage. It also covers personal liability, loss of use and unauthorized transactions on your credit card

  • Does not cover

    Water damage, earthquakes, flood insurance, identity theft, high-value items, rebuilding home after loss (these can all be purchased as add-ons for extra coverage)

Terms apply.

Geico Auto Insurance

  • Cost

    The best way to estimate your costs is to request a quote

  • App available

    Yes

  • Policy highlights

    Geico coverage and services are available in all 50 states and the District of Columbia and there are 16 different types of discounts available. In addition to the standard coverage options, Geico offers various optional add-ons, such as emergency roadside assistance, rental car reimbursement and mechanical breakdown insurance.

  • Terms apply.

What does an umbrella insurance policy cover? 

Umbrella insurance covers a variety of situations. And, the coverage extends to your family members in your household, too. Some common scenarios umbrella insurance could cover include: 

  • Other people's injuries
  • Damaging someone's property
  • Certain lawsuits, including landlord liability and false imprisonment

What does an umbrella insurance policy not cover?

An umbrella insurance policy doesn't cover several notable things, including:

  • Your injuries or personal property damage
  • Criminal actions or intentional harm
  • Liability under a contract
  • Liability while operating a business

Who needs umbrella insurance?

If you own a lot of assets, including property or savings, an umbrella policy might be able to help protect them if you're sued.

There are several scenarios where you might want to consider an umbrella insurance policy, including: 

  • Owning a pool or trampoline where people could get hurt 
  • Owning a pet 
  • Being a landlord
  • Working as a volunteer
  • Having young or new drivers in your household 
  • Coaching children's sports
  • Participating in sports that could cause an accident with others
  • Frequently hosting parties or having guests on your property

You may also be required to have certain limits on your insurance policies before you can buy umbrella insurance. Most insurers will want you to have $250,000 worth of liability coverage on auto insurance policies and $300,000 of liability insurance on your homeowners policy before selling you an umbrella insurance policy. 

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What does umbrella insurance cost? 

Umbrella insurance generally costs about $200 in premiums per year for $1 million of coverage. 

But, the cost of umbrella insurance will vary based on how much coverage you purchase, where you live, and how many other insurance policies are underneath the umbrella policy. Your risk factors might also influence the cost.

Bundling your policies, like your homeowners and auto insurance, with your umbrella insurance policy could help give you a discount. 

Bottom line

Umbrella insurance could protect your assets and cover you beyond your homeowners or auto insurance policy if you or a member of your household is involved in a lawsuit. It could be a good option for those with a high net worth, and those with additional risk factors. 

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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