One of the main reasons you have car insurance is to protect you financially if you’re involved in an accident. However, what happens when if the liabilities exceed the coverage limits provided by your policy? This is where umbrella insurance would come into play. A personal umbrella insurance policy makes sure that you won’t lose your life savings and assets in the event of a large legal judgment or liability claim.
What Is an Umbrella Insurance Policy?
Also called a personal liability insurance policy, an umbrella insurance policy is an optional policy that gives you an extra layer of asset protection beyond what your personal liability coverage does. If your personal liability coverage maxes out when a claim is filed for injuries, the umbrella insurance policy kicks in and can cover the balance.
Depending on the type of coverage, umbrella insurance policies start at $1 million in coverage and have limits up to $5 or $10 million. Most umbrella insurance policies cost from $150 to $350 annually for the $1 million coverage, with each additional $1 million in coverage costing an additional $50 to $75 each year. The reason that umbrella insurance is relatively inexpensive is partly that you still have to carry auto insurance before you can even purchase umbrella insurance.
While umbrella insurance is similar to excess liability insurance, which provides higher coverage on regular liability insurance, it’s not the same. The difference is that most umbrella insurance policies also give extra coverage that’s not found with your base insurance policies. This can include court fees as well as damages if you’re accused of giving a false statement (slander) or a false written statement (libel).
How Does an Umbrella Insurance Policy Work?
An umbrella insurance policy extends your auto insurance policy coverage. To better understand how an umbrella insurance policy works, imagine the following situation:
You accidentally hit another vehicle from behind, causing significant damage to the vehicle and injuries to the other vehicle’s riders. The car needs about $15,000 in repairs, while the treatment for the injuries reaches $200,000. You’re responsible for the $215,000. However, if you only carry $150,000 for your liability coverage with your car insurance, you will need to pay for the remaining $65,000 out of your pocket.
The umbrella insurance policy would cover that $65,000 so you wouldn’t need to pick up another job, expunge your savings, or take on a loan to cover that cost.
What Does an Umbrella Insurance Policy Cover?
If you have umbrella insurance, this policy covers the difference between the primary insurance coverage and what you would owe. The main benefit of this type of policy is it applies to a wide range of situations that aren’t covered by a normal auto insurance policy. Examples of what it covers include the following:
- Costs that exceed the car insurance limits
- Libel and slander
- Legal defense costs for covered losses
- Mental anguish and personal psychological harm
- Malicious prosecution
- False arrest
This type of policy is extremely useful if you’re worried about a serious financial loss as the result of a claim. For instance, if you’re involved in a serious car accident that results in severe injuries, you could be on the hook for fees that aren’t covered by your regular insurance. An umbrella insurance policy would pay the difference.
What Doesn’t an Umbrella Insurance Policy Cover?
While an umbrella insurance policy covers numerous aspects, there are certain areas that it doesn’t cover. Keep that in mind before you purchase the policy and think that you’re covered in more areas than you are. Some aspects the umbrella insurance policy doesn’t cover include the following:
- Your own injuries
- Injuries or property damage that you intentionally caused
- Injuries or property damage that you caused while you were doing business-related or professional activities
- Property damage to your own property
- Any liability you assumed through a contract
Remember that an umbrella insurance policy is a liability policy, so it will only cover the costs associated with someone else’s property as long as you didn’t intentionally cause the damage. Also, damage that occurs while you’re doing business or professional activities is covered under a business liability insurance policy and not an umbrella insurance policy. Most umbrella insurance policies won’t cover costs associated with your medical bills or damage done to physical property. Also, certain policies won’t cover damage or injuries caused by recreational vehicles.
Is an Umbrella Insurance Policy Necessary?
Many states require drivers to carry mandatory minimum car insurance, and failing to do so could cause a violation of the law. While a handful of states don’t require you to buy car insurance, they do specify that you need to show financial responsibility in some way such as a cash deposit with that state, a surety bond, or a certificate of self-insurance.
Because it’s a supplemental type of coverage, you have to get the maximum level of coverage available on your other liability policies before you can purchase umbrella insurance. The mandatory insurance policies typically follow the minimum amounts listed such as 25/50/25. This translates to $25,000/$50,000/$25,000 with those numbers corresponding to the following:
- Personal injury damages
- All personal injury damages pertaining to one accident
- Add property damages pertaining to one accident
While some insurance companies might state you need an umbrella insurance policy because of the lawsuit-happy society, it’s not mandatory coverage. These companies typically say that if the value of your total assets, which includes your checking and savings accounts, home equity, and investment accounts, is greater than the limits of your auto liability insurance policy, it’s best to purchase an umbrella insurance policy. You should also consider purchasing one if you engage in activities that cause you to incur excess liability, such as having a teenage driver in your house.
Your auto insurance policy can protect you financially if you injure someone or cause property damage. If the liabilities exceed your policy’s coverage, you might be on the hook for tens or even hundreds of thousands of dollars. Protect yourself and your assets by purchasing an umbrella insurance policy, and if you’ve been involved in an accident, use the FIXD app to receive cost estimates for specific repairs.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.