Umbrella insurance is extra liability coverage in case someone slips on your sidewalk and decides to sue.Astrid860/Getty ImagesUmbrella insurance provides liability coverage on top of other insurance policies, like homeowner's insurance or auto insurance.If you have a high net worth or higher-than-average likelihood of getting sued, umbrella insurance could be a good idea.Umbrella insurance can be surprisingly affordable. A $1 million policy costs around $150 to $300 per year.Read more personal finance coverage.
Do you know what would happen if someone slipped on ice or sand in front of your home and broke their leg? If things work out well, the person will feel silly for hurting themselves, go to the hospital, and move on with their life. But in the worst case, they could sue you for leaving your sidewalk in an unsafe condition.
Your homeowner's insurance policy should cover the bill, but on occasion, people wind up on the wrong end of a lawsuit and their insurance isn't enough. Umbrella insurance is like backup insurance for your other insurance policies.
Let's take a look at how it works and why you may want umbrella insurance.What is umbrella insurance?
Umbrella insurance is extra liability insurance that covers you for losses beyond what's covered by your other insurance policies. The extra insurance is common for people who are concerned that they may be sued for any reason that could threaten their net worth. It covers liability for injuries, libel, vandalism, slander, invasion of privacy, and other scenarios.
If you already have homeowner's or renter's insurance, auto insurance, or other insurance, umbrella coverage offers additional liability on top of your current policy.
If you are sued for more than your current policy covers, umbrella insurance would pick up where the other policy leaves off. This gives you an aggregate liability insurance coverage of your current insurance plus umbrella insurance. These policies are typically relatively low-cost for very high levels of coverage.How umbrella insurance works
Here's an example of how it might work. Let's say you are a doctor and accidentally cause a rear-end collision when the car in front of you slammed on its breaks at a yellow light. When exchanging information, the person sees that you're a doctor. They figure you must have a lot of money so all of a sudden their back hurts. Whether the accident really injures someone in an accident, you are more likely to be sued just because you're a doctor.
Let's say your auto insurance has a $1 million limit, but this person sues you for $5 million. At that point, your potential personal liability is a huge $4 million. If you have a $10 million umbrella policy, your personal liability, in this case, would be effectively zero. Umbrella insurance might even cover legal costs.Who needs umbrella insurance?
Umbrella insurance is very popular with doctors, lawyers, business executives, journalists, public figures, board members, nonprofit volunteers, and anyone with a high net worth or higher-than-average likelihood of winding up on the wrong end of a lawsuit.
While you may think coaching your daughter's soccer team is all fun, if another player trips and gets injured at practice you could be sued. Whether you are liable or not, umbrella insurance could have your back.