Most homeowners know that their home insurance protects them against some of life’s misfortunes. If a guest trips on a loose rug or falls down your stairs, your policy’s liability coverage offers some protection. But home insurance only goes so far. To best protect yourself against liability for injury or harm inside of the house and out, you’ll need something extra: an umbrella policy.
An umbrella policy offers liability protection on your property and beyond it, whether you’re in your backyard or the parking lot of a shopping mall. It also serves as backup in case someone files a lawsuit that exceeds the amount of your regular coverage.
Imagine, for example, that a neighbor falls off your icy porch and breaks their hip, requiring surgery and a lengthy hospitalization that costs $500,000. “If you have $300,000 in your homeowners policy and you’re sued for half a million and lose the case, the umbrella kicks in for the difference,” says Jack O’Brien, owner of JC O’Brien Insurance Agency in Richmond, Virginia.
What’s more, an umbrella policy is inexpensive, averaging from around 40 cents daily to less than a dollar a day. The policies also tend to be flexible, allowing you to customize a plan that makes sense for you.
What you need to know
Umbrella policies are not your only line of defense. In fact, most insurance companies won’t even offer umbrella coverage unless you already have at least $250,000 of liability protection in your car insurance and $300,000 of homeowners insurance, according to the Insurance Information Institute. Umbrella coverage typically starts at $1 million, although O’Brien says you should consider coverage equal to your net worth if it’s greater than that.
In the current climate, going without umbrella insurance can be risky. “We do live in a litigious society,” says Carole Walker, executive director of the Rocky Mountain Insurance Information Association. “People used to think of umbrella coverage as something for millionaires, but it’s not. It’s an underlying coverage that’s quite inexpensive.”
Insurance companies sell umbrella insurance up to $10 million or more and charge a corresponding premium. Many also offer umbrella policies that protect you against personal liability anywhere in the world. Before buying, Walker says, assess your risk. “Some people live in a higher-risk location. Maybe they have a pool in a neighborhood with a lot of kids,” Walker says. “Consider what your living situation is and what assets you need to protect. Umbrella coverage is going to give you peace of mind.”
Walker says that the idea is not only to protect your existing assets, but also your potential income. That’s because your future earnings could be garnished if you lose a court judgement.
Umbrella policies may also protect you if you’re sued for:
- Accidents on your rental property (such as a lawsuit over a dog bite from your tenant’s pooch)
- Malicious prosecution
- False arrest
- Slander and libel (some people have recently been sued for negative reviews on Yelp)
- Shock or mental anguish
It’s important to know that personal umbrella coverage does not extend to your business or company. For that, you’ll want to look into commercial coverage.
The decision to go with umbrella coverage basically comes down to protecting wealth – whatever the amount, O’Brien says. “The amount of your income or net worth doesn’t matter. What matters is whether you want to protect that. If so, an umbrella is a really good idea.”
Do you have any questions about umbrella policies? Let us know in the comments!
Steve Evans, M.A., covers financial topics such as insurance for MoneyGeek.com. He is an award-winning journalist with more than 20 years’ experience in daily news, investigative, health and business journalism. Among other jobs, he has served as managing editor of the Central Virginia Newspaper Group, as a senior writer for SNL Financial and as a staff writer for The Progress Index and the Richmond Times-Dispatch. He has also written for Benzinga and other financial websites.
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