Umbrella Personal Liability Policy

What is 'Umbrella Personal Liability Policy'

An umbrella personal liability policy is extra liability insurance coverage that goes beyond the limits of the insured’s home, auto or other liability coverage. It provides an additional layer of security to those who are at risk of high loss if they injure someone else, or someone’s property.

BREAKING DOWN 'Umbrella Personal Liability Policy'

Umbrella personal liability insurance is often referred to as excess liability insurance. It protects savings and other assets from a major lawsuit because if a policyholder is sued for damages that exceed the liability limits of car insurance, homeowners insurance or other coverage types, an umbrella policy kicks in to pay damages, up to the limit in the contract.

An umbrella policy provides broad coverage, meaning that some claims that would not be covered by a standard policy may be covered under the umbrella policy. Generally, the insured's standard policies must contain minimum levels of liability coverage that are specified by the insurance company in order to add an umbrella policy, and therefore, greater liability coverage. Depending on the provider, the policyholder who wants to add an umbrella insurance policy is required to have a base insurance coverage of $150,000 to $250,000 for auto insurance and $250,000 to $300,000 for homeowners insurance.

Umbrella policies usually do not add significantly to the premium since the risk of a claim that large is small. And the premium may be less expensive if the policy is purchased from the same insurer that provides the original auto, home or watercraft insurance. The policies do not cover business losses, contract disputes or damages resulting from criminal actions.

Umbrella Policies Protect People With a Lot to Lose

The added coverage of an umbrella policy is most useful to wealthy individuals who are at significant risk of loss lawsuit. For example, if a driver with $5 million in assets hits and severely injures a pedestrian, they could be liable for damages that far exceed the typical car insurance policy limit of $250,000. Beyond medical bills, the driver could be liable for lost income of the injured pedestrian. If the pedestrian happens to be a high earner and can no longer work, the liability could easily reach into millions of dollars, wiping out the driver’s fortune.

Umbrella policies typically start at coverage of $1 million, and are sold in increments of $1 million each. There is little point in buying coverage for more assets than you own. While it’s technically possible for a judgment higher than your net worth, federal law puts strict limits on the garnishment of wages for civil damages, and many states do not allow the taking of primary residences in such cases.