What is Umbrella Insurance and How it Works?

What is Umbrella Insurance and How it Works

Umbrella is a financial contract between you and the insurance company. This type of insurance is personal liability insurance that is crucial when you find yourself responsible for a claim that is higher than your automobile insurance or homeowner’s insurance cover. If you own a boat, it will cover if your boat insurance policy limits are exhausted.  To own an umbrella insurance policy first you need to have standard homeowners, auto, or boat insurance policy. The umbrella insurance policy works after those policy limits are exhausted.


Why do you need Umbrella Insurance?

A certain amount of fear factor is involved in buying umbrella insurance. The insurance company will try to convince you that you should take this policy. But first, you should think if you really need it. Many will suggest that you should buy this policy if the value of your assets is greater than your auto and homeowner’s liability. But that doesn’t always make sense. Because in case of a lawsuit the awards can easily exceed the insurance policy limits. So umbrella insurance is a good choice. Usually, this type of insurance is cheaper than other insurances. So it is a small price for peace of mind.

Also read: 5 Major Insurance Policies Everyone Should Have!


Who should take this type of policy?

The Umbrella insurance is a type of liability insurance. If you are involved or your family member is involved in some kind of accident then this type of insurance comes to work. It pays for the damages that you have done to other parties. It pays for their damages. So you should take this kind of policy if you

  • Own a house
  • Or Own a car
  • Or Own a boat
  • Have pets
  • Or Have children

By which someone can get affected. We will discuss it later on how the above-mentioned points can affect someone else.


What Umbrella Insurance covers?

It provides coverage beyond the limits of your insurance policies or for those claims that are not covered by your policies. Generally, it provides coverage for

  • Damage of property of others
  • Personal liability
  • Injuries happened to someone when there is your fault
  • Lawsuits

This policy helps you to pay the other party for their damages done by you. People nowadays file cases against each other because we now live in a lawsuit-happy world. So it is always better to get insured in case some unexpected event occurs.

Also read: What to do When Your Insurance Company Won’t Pay?


What is not covered in Umbrella Insurance?

An umbrella policy is a liability policy. So it will give coverage if you are responsible for damaging someone else’s properties. It is advisable that you should have enough insurance to protect yourself. This type of policy doesn’t entertain-

  • Your personal injuries
  • Personal property damage
  • If you intentionally cause damage to others
  • The liability you agreed to assume under a written contract.


How does Umbrella Insurance work?

Let us give you some examples so that you can understand how this type of policy works.

  • Suppose your kid picks up a fight at school and injures someone. The parents sue you for their child’s injury.
  • You own a dog. It runs out and bites your neighbor. The neighbor sues you for the damage.
  • You are driving your car and you get involved in a serious car accident and injure someone. He files a lawsuit for your action and the jury awards him a sum that is beyond your liability coverage, then the umbrella policy will come into work.
  • You made some food for your children going on a field trip. Other students also eat your children’s food and got sick. Their parents sue you.
  • Your child got involved in a car accident and injures someone very badly, then this policy will cover for your losses if your auto insurance exhausts.
  • Your tenant’s dog bites someone and he sues you for that because you are the landlord.
  • Someone fell over a crack in the sidewalk of your property and sues you for that
  • The child of your neighbor falls while he was playing in your garden and their parents sue you

These kinds of unexpected events can occur in your life. For this type of event, umbrella insurance covers you and pays the other party for their losses.

This type of policy also provides coverage if you are involved in

  • Malicious prosecution
  • Slander
  • Libel
  • False arrest, detention or imprisonment


How can Umbrella Insurance protect you?

Suppose you are involved in a car accident. Let’s say you cause damage of $200000 to others. Now your automobile insurance’s limit is $100000. So after paying from auto insurance you still have to pay $100000 to the other party. If you have umbrella insurance then it will pay the rest of the money to the other party. In this way, your umbrella policy works. It pays you after your regular insurance policy exhausts.


How Much Does it cost?

The cost of the policy depends on how much coverage you want to have. The more property or car you own, the more number of family members you have, the more it will cost.

Also read: What is Business Insurance? Is it necessary?

But this type of policy is usually cheap compared to other types of insurances. For $1 Million coverage you have to pay a sum of $150-300 depending on the insurance company. For another million you have to pay a $75 more. The umbrella policy also covers the attorney fees and other expenses related to the lawsuit.



Even a careful person can end up in an accident. The lawsuit filed against him can put him in a huge monetary problem. While such type of incident is unexpected but it can happen to anyone. So it is always a smart decision to stay protected against a huge financial loss. Umbrella insurance can help you in those kinds of situations. It is advised to take suggestions from a financial advisor before you take any policy. Some good insurance companies are Geico, AllState, etc. Ask the agent all your questions related to the policy before signing it. If you have any questions, comment below in our comment box.