You have homeowners insurance with liability protection, and you also have an auto policy with liability protection…so why would you need even more insurance?

The truth is, the more complex your finances are, and the more assets you have, the more insurance you need. If an accident were to happen and you were to get sued, you could be forced to pay a legal judgement from both your current assets and future earnings.

For example, let’s say your teenage daughter ran a red light and caused an accident with significant damage to another vehicle ($40,000) plus injuries to others ($250,000 in medical bills). Suppose one of the injured passengers in the other car was a surgeon, who was temporarily unable to perform his work and sued for $200,000 in lost wages. You’d be responsible for a total of $490,000 in damages.

Your auto policy’s liability coverage would kick in and cover up to the limit you have chosen. Some states have required liability minimums as low as $10,000. But even if you had chosen a much higher amount (and $300,000 is often the cap), your insurance wouldn’t cover everything. You’d have to cover the remaining costs out of pocket.   

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This is where umbrella insurance, sometimes known as excess liability insurance, comes in. It sits on top of your existing home and auto coverage (hence the name “umbrella”) and pays the difference between what your primary insurance policies pay and what you still owe. It would also provide coverage for any legal costs in a lawsuit.

Umbrella insurance covers not just the policyholder, but also other members of their family or household. And it covers liability claims that a typical homeowners or auto policy may not, such as those dealing with libel, slander, and false imprisonment.

These policies don’t cover your own injuries or damages to your own property (this would be covered by your health insurance, your homeowners policy, or your auto insurance). And umbrella policies don’t cover liability costs incurred through deliberate negligence or by your business or professional activities.

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There are many scenarios where this type of insurance could be useful to have:

• You have a swimming pool, and at a party, a guest slips and falls and hurts herself badly, requiring surgery and ongoing care that exceeds the limits of your homeowners policy.
• Your large dog bites a neighbor’s child.
• You write a negative review of a local business, and the owner sues you.

The best part of an umbrella policy is that coverage is very affordable, with a $1 million policy typically costing around $150 to $300 per year, the next $1 million in coverage costing about $75 a year, and every $1 million after that costing about $50 per year.

The extra layer of protection it offers can provide peace of mind, which is, of course, priceless.