What is umbrella insurance?

People buy insurance for the peace of mind that comes from protecting your family and assets. I want to tell you about a type of insurance that adds an extra layer of protection over and above another insurance policy - aptly named "umbrella insurance". 

Umbrella insurance covers you in the event of a large and potentially devastating liability claim or judgment. It would extend beyond the limits of your other insurance policies, such as homeowners or auto insurance. Bodily injury, property damage, personal injury and landlord liability are categories umbrella insurance typically cover. It usually doesn't pertain to personal belongings, intentional or criminal acts or omissions, written or oral contracts, or things that are already covered by other policies.

So how does it work? Let me give an example: imagine you're in a car accident, and you are at fault. The accident unfortunately injures the other driver. That driver's medical bills total $500,000, but your regular auto insurance policy's limit is $250,000. You still are responsible for paying the remaining $250,000. Let's say the driver then decides to sue you. Suddenly, your personal assets are at stake. And the stakes could be higher - let's say the person you injured was a highly paid professional, such as a doctor, and due to the injuries you caused, she could not work. Imagine six months of a six-figure salary. All told, you could be facing a lawsuit of $1 million. Suddenly that auto policy that seemed so substantial isn't - and this isn't assuming you've only bought a policy covering you on the required minimal liability limit of $10,000. Your regular auto policy covers you for the $250,000, but can you think of where you would find an extra $750,000? 

In this scenario, you'll be wishing you'd opted for an additional umbrella policy if you didn't already have one. An umbrella policy can help cover these extra costs, and would save  you from having to try to pay off this incredibly expensive bill. It could make a world of difference to your bank account, home and other personal property. 

Most umbrella policies are offered in million-dollar increments spanning from $1 to $5 million. No state law requires umbrella policies; it is purely voluntary. But as you can see in the above example, it bears some consideration if you have family and assets you'd like to protect. And who doesn't?

Not everything is covered by an umbrella policy, of course. It gets a little confusing so I'll cite some examples below. 

Your personal property. Umbrella insurance typically won't cover you if you cause damage to your own property. It would if you damage someone else's property, but not your own stuff. For example, your bathtub overflows, and destroys drywall in your home. You live upstairs, and the water flows into your downstairs neighbor's home and damages her wall as well. The umbrella policy wouldn't cover your drywall repairs, but it may cover your neighbor's damages, even though it occurred through your own negligence. Please note that your umbrella policy would only kick in once your regular homeowners policy's limits had been reached.

Business losses. Umbrella policies don't generally cover losses related to a business operation or damage to business property, even if your business is home-based and you buy an personal umbrella policy over your homeowners insurance. Let's say you run a day care service out of your house. Any liabilities that occurred out of the course of that business, from the children or their parents for example, would most likely not be covered under your umbrella policy.

It also wouldn't cover you in the event of a malpractice lawsuit, or some other types of business-related liabilties. 

Criminal or intentional actions. Sorry, but if you're growing marijuana illegally in your home and you burn your house down, your umbrella policy probably can't help you. It wouldn't protect you from paying restitution if you're convicted for a crime, or damages you intended to cause through your actions. 

Contracts. Whether oral or written, personal umbrella policies typically don't cover you from contract liabilities. If you face a lawsuit from someone you hired to work on your home, for example, most likely your umbrella insurance wouldn't help you. 

Despite those limitations, it's a good idea to consider adding a personal umbrella insurance policy to your homeowners or auto policy. Especially since approximately 94% of car accidents are caused by human error, it's not unreasonable to think that you might be at fault in a car crash someday. While the good news is modern vehicles are engineered for safety, resulting in fewer deaths, the costs for injuries and damages are rising. Talk to your insurance agent if you want more information about buying a policy. For more information on different auto insurance policies, what they mean and how they work, visit my YouTube channel

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