UPDATED: Aug 5, 2013
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An umbrella policy has nothing to do with staying dry in the rain. Instead, it’s a type of personal liability coverage that can protect you and your assets from a lawsuit in the event that you’re ever responsible for damaging someone’s property or injuring a person in the future. Umbrella policies are usually sold as part of homeowner’s insurance, and they’re meant to provide overall liability coverage against various perils that may result in a lawsuit against you.
Although umbrella insurance is usually sold as part of a homeowner’s policy, its coverages dovetail with auto insurance. Depending on your situation, carrying an umbrella policy is a smart financial move. For other insureds, it may be an unnecessary expense.
How an Umbrella Policy Works
Umbrella insurance is generalized liability coverage. Unlike the liability coverage that you carry on your car, umbrella insurance isn’t limited to a specific location or vehicle. It follows you wherever you go and protects you regardless of what you’re doing: driving another person’s vehicle, skiing in the Alps, holding a party in your home or visiting with friends out of state.
There are a number of perils that may be covered by an umbrella policy, and the specifics of those perils might vary somewhat between insurers. The general rule, however, is that the damage is committed by you or someone in your household, and it’s accidental in nature. This means that an umbrella policy will cover the injuries sustained by your neighbor if your dog bites them, but not if you intentionally start a fistfight with them. Umbrella policies also cover injuries that happen when people interact with your property. For example, a mechanic who’s injured while repairing your vehicle or a visitor who falls and breaks a leg while crossing your property may both be compensated by your liability insurance.
In most cases, umbrella insurance is a secondary coverage. This means that it comes into effect after other, more specific coverages have been exhausted. For example, if you are involved in an auto accident, your car’s liability policy will pay for the damages and injuries you cause. If the value of the claim climbs past the amount of liability insurance you carry on your vehicle, your umbrella policy can be used to pay the excess.
Who Needs Umbrella Insurance?
The primary purpose of liability insurance is protection against lawsuits. The people who most need umbrella insurance are those who are attractive targets for lawsuits. This means both people with substantial personal assets and individuals who are at a particularly high risk of causing harm or damage to another party.
If you have few personal assets and are not a particularly valuable target for a suit, you may be better served by purchasing a vehicle liability policy with higher limits rather than opting for an umbrella policy. You can discuss your options with your agent to see what will save you the most money while protecting you from financial upheaval in the wake of an accident.