But understanding abstract descriptions is only the first step in making such a significant decision. I’ll lay out some of the more nuanced ways umbrella insurance functions in this post. Hopefully, I’ll assist you in your hunt for the correct policy.

I hate to start this way: but it’s essential to understand how the math works. Umbrella insurance is a personal liability policy that covers claims in excess of regular homeowners, auto, or watercraft policy coverage. But since the liability limits on those major policies are already substantially high, you’d have to be pretty wealthy for this type of insurance to make sense. If you’re considering umbrella insurance, your situation should look something like this…

Total Value of All Assets > Total Liability Limit of All Insurance Policies

Because if your assets are worth more than the amount you could potentially owe in an accident – you’re at risk of losing everything.

Since umbrella insurance covers not just the policyholder but other family and household members, your next consideration is family size, and less obviously, staff who spend a significant amount on property owned by you. One of the critical benefits of umbrella insurance is the protection extended to multiple, more-vulnerable Others close to the policyholder. So the more people there are in your “family unit,” – the more you’d benefit from this type of insurance. But if this doesn’t sound like your situation, you should likely consider other policies before umbrella insurance.

There’s also a sense of hierarchy at work here. By this, I mean that there’s a logical order of importance to the insurance policies you purchase. Because there’s such a slim probability you’d ever file a claim, umbrella insurance is one of the last policies people ever purchase. And since it covers injury to others or damage to their possessions, it doesn’t directly protect policyholder property. Which, at this point, is assumed to be separately, already, insured.

In many cases, if you own assets like a home, car, or land, you’re required by law to have insurance on that asset at the time of purchase. So again: umbrella insurance is a supplemental policy – the cherry on top.

Ultimately: the chances are slim you’d ever end up losing a lawsuit for more than what your existing insurance would pay. But, it does happen – and it’s happening more frequently. If you find yourself in one of these “nuclear verdict” situations – where a jury decides you’re personally liable for damages than you could ever hope to repay – Umbrella insurance will pay out damages above the liability limits of your original policies, cover the associated legal costs, and help you protect your savings.

Normal insurance policies will cover car crashes or damages to a home. Umbrella insurance will cover scenarios that protect you against bodily harm, property damage, or personal injury. The differences between insurances may be confusing here are a few common examples of what the policy covers.

Examples of Umbrella claims

Defense Costs
If you find yourself in the unfortunate situation of being sued this policy will help cover attorney and processing fees. A civil case averages $5,000 – $36,000 in total fees and if the case proceeds to trial you are looking at upwards of $109,000. Umbrella insurance will help with these fees so you can defend yourself in court without the worry of losing money.

Even if you are found guilty in a civil suit the policy will continue to pay for any remaining expenses if you did not use your full defense budget.

Indirect Liability
A common indirect liability scenario: You have a friend over. You both drink and become intoxicated. Your friend decides to drive home and gets into a car crash. He is arrested. Depending on the state in which you reside you may be indirectly responsible and charged. This policy will help you with your legal fees and protect you. This is something homeowners insurance does not cover while Umbrella insurance does.

Homeowners liability
Your child invites his friend over to spend the night. In the middle of the night, you wake up to your child screaming for help. The two kids decided to sneak downstairs for a midnight snack but the friend fell down the stairs and broke his arm. The homeowner would be liable for any medical expenses if the family decided to press charges.
Homeowners insurance does cover these types of claims however only for a small amount. The policy will cover the rest of the costs that homeowners insurance does not.

Pain and Suffering
If you get into an altercation and are found guilty then the defendant could sue for Pain and Suffering. The psychological pain that they had received due to the incident affects their day-to-day lives and they will want compensation. You may have to pay hundreds of thousands of dollars directly to the defendant. Umbrella insurance will cover the costs and you will feel safe knowing that they cover up to $1 million.

Why Buy It?
The choice to buy this specific insurance policy is a difficult decision to make especially since you already have other insurances in place to help you when you are in need. Many insurance agencies will guarantee that you need it due to the litigious society we all live in. The fact is, anyone can sue someone for damage and money, even for the smallest offenses. You must ask yourself, with your lifestyle, are you someone who would benefit from this insurance policy?

Are you a public figure or hold some standing in your community? Are you someone who may find themselves in a situation where others could benefit from your assets? Do you have a family you need to protect? These are all questions that you must consider before buying a policy. It’s not as simple as knowing that one day a car crash is inevitable, or a broken pipe might flood the basement. Umbrella insurance is here to protect you for legality purposes. There is no way of knowing what the future holds and if you will be sued. However, if you gather all of your assets together, rationalize your position in your community, and realize what actions your families may cause then Umbrella insurance may be for you.