Umbrella Personal Liability Policy: What It Is, How It Works

What is an Umbrella Personal Liability Policy?

An umbrella personal liability policy goes beyond the limits of home, auto, or other liability coverage. It provides additional security to those at risk of high loss if they injure someone or damage property. The coverage is broad, extending to some claims not covered by a standard policy.

BREAKING DOWN Umbrella Personal Liability Policy

Umbrella personal liability insurance, also known as excess liability insurance, protects assets from major lawsuits that exceed the liability limits of existing coverage. If a policyholder faces a damages lawsuit, the umbrella policy kicks in to pay damages, up to the stated contract ceiling.

Before adding umbrella personal liability to an existing policy, the insured must meet the minimum liability levels set by the insurance company. Typically, auto insurance requires a base level of $150,000 to $250,000, while homeowners insurance requires $250,000 to $300,000.

Umbrella policies usually don’t significantly increase premiums as the risk of a major claim is minimal. It may be more cost-effective to purchase the umbrella policy from the same insurer that provides the original auto, home, or watercraft insurance. However, umbrella personal liability policies do not cover business losses, contract disputes, or damages resulting from criminal actions.

Umbrella Policies Protect People With a Lot to Lose

Umbrella coverage is most useful for wealthy individuals at significant risk of loss from a lawsuit. For example, if a driver with $5 million in assets severely injures a pedestrian, they could be liable for damages that exceed the typical car insurance policy limit of $250,000. The liability could quickly reach into millions of dollars, potentially wiping out the driver’s fortune.

Umbrella coverage starts at $1 million and can be increased in increments of $1 million.

In a lawsuit, an individual can technically receive a judgment higher than their net worth. However, federal law limits the garnishment of wages for civil damages. State laws vary on asset protection, with some states offering unlimited protection for primary homesteads, while others provide limited or no protection. The same applies to annuities and life insurance benefits.