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Do You Need Umbrella Insurance?


Umbrella insurance is a type of personal liability insurance that applies to a broader range of situations than conventional business insurance. It's for those who may find themselves liable for a claim larger than what their homeowners or auto insurance will cover. If you own a boat, umbrella insurance picks up where your watercraft liability insurance leaves off.

Umbrella insurance covers certain liability claims those other policies may not, including:

  • Libel.
  • Slander.
  • False imprisonment.
  • Malicious prosecution.
  • Legal defense costs for covered losses.
  • Liabilities when traveling overseas.
  • Liability coverage beyond what your renter's policy covers for rental properties.

Umbrella insurance protects not just you, the policyholder, but also other members of your household. Just make sure you understand how your policy defines a household member so you have the coverage you need.

Insurance companies say you need umbrella insurance because of how prevalent lawsuits are. You want to have enough liability insurance to fully cover your assets so you can't lose them in a lawsuit.

Who is at risk?

Before buying insurance, you should ask yourself whether you're at risk of being sued. Do you engage in an activity that puts you at greater risk of incurring excess liability? Owning property or renting it out, employing household staff, having a trampoline or a hot tub, hosting large parties, being a well-known public figure, having a teenage driver in your household, owning a dog, or owning a swimming pool all are considered risk factors in insurance. If you have one or more risk factors, umbrella insurance may be the choice for you. Umbrella insurance covers the portion of a judgment, including attorney's fees, that your homeowners or car insurance doesn't.

The cost of an umbrella policy depends on how much coverage you purchase, the state you live in and the risk that insuring you presents to the insurance company. The more homes or cars you own and the more household members your policy covers, the more it will cost.

The Insurance Information Institute says most $1 million policies cost $150 to $300 per year. You can expect to pay about $75 more per year for $2 million in coverage and another $50 per year for every extra $1 million in coverage beyond that.

Providers of umbrella insurance may require you to carry the maximum liability coverage available under your homeowners and auto policies before they will sell you a policy. Umbrella insurance provides broad coverage, covering any incident that the policy doesn't specifically exclude. Here's what your umbrella policy likely will not cover:

  • Damage to your property — It will cover you only if you're held responsible for damage to someone else's property.
  • Damage that you or a covered member of your household causes on purpose — If you deliberately push your party guest down the stairs, umbrella insurance won't cover the costs of the lawsuit or judgment.
  • Liability incurred in business or professional activities — You'll need business liability insurance for this.
  • Liability related to war or armed conflicts — Financial losses associated with war are too high for insurance companies to cover.

Like with most types of insurance, the provisions of an umbrella policy can get complicated. Work closely with trusted insurance and financial professionals to make sure you know what you need and what you are purchasing.

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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