What Is Umbrella Insurance, and How Does It Work?

If someone sues you for damages above your primary liability limits, an umbrella policy helps pay what you owe.

Sarah Schlichter
Lead Writer | Home insurance, renters insurance, pet insurance

Sarah Schlichter is a NerdWallet authority on homeowners, renters and pet insurance. Prior to joining NerdWallet, she spent more than 15 years in digital media as a writer, editor and spokesperson. Sarah enjoys delving into complicated topics and helping readers understand the ins and outs of their insurance coverage. She lives in the Washington, D.C., metro area.

Brenda J. Cude
Professor Emeritus, University of Georgia

Brenda J. Cude is Professor Emeritus in the Department of Financial Planning, Housing and Consumer Economics at the University of Georgia. Dr. Cude has served in various consumer-focused roles for the National Association of Insurance Commissioners since 1994. She has also been a member of the Advisory Council for the Center for Insurance Policy and Research; a Board Member of the Coalition Against Insurance Fraud; a member of the Federal Advisory Committee on Insurance; and a Board Member for the Insurance Marketplace Standards Association. Dr. Cude’s primary research interest is consumer decision-making, with an emphasis in personal financial literacy.

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Caitlin Constantine
Assistant Assigning Editor | Home insurance, renters insurance, pet insurance

Caitlin Constantine is an assigning editor at NerdWallet, focusing on homeowners, renters and pet insurance. She has more than 15 years of experience in digital media, including as the deputy managing editor at The Penny Hoarder and as a digital producer for a 24/7 news station based in the Tampa Bay area. Caitlin enjoys exploring the ways technology can help people become better informed about the world. She currently lives outside Asheville, North Carolina.

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• Umbrella insurance is extra liability insurance beyond what’s on your existing policies.
• An umbrella policy can pay what you owe if you’re at fault for someone else's injuries or property damage.
• The cost of umbrella insurance typically starts around $200 per year for $1 million of coverage.

Nobody’s perfect. That’s why you buy liability insurance: You can avoid financial ruin if you accidentally cause major injuries or property damage to others. But your insurance isn’t perfect, either. That’s where a personal umbrella insurance policy comes in.

What is umbrella insurance?

Umbrella insurance — sometimes called personal liability umbrella insurance — is protection for your savings and other assets. It provides extra liability coverage beyond the limits on your existing policies, such as car or homeowners insurance . If you're at fault for injuries or damage and your other policies aren't enough to cover the costs, an umbrella policy helps pay what you owe.

Umbrella insurance is similar but not necessarily identical to excess liability insurance. What’s the difference? Excess liability coverage typically provides a higher liability limit on the policies you already have, while umbrella insurance may also add coverage for circumstances your underlying policies don’t include.

For example, umbrella insurance may pay for legal fees and damages if someone accuses you of slander (a false spoken statement) or libel (a false written statement). A typical homeowners insurance policy doesn’t offer this coverage.

Umbrella and excess liability policies vary from one company to another. If you’re confused about your coverage, reach out to your insurance company or agent.

Anything you own that has financial value is an asset. Examples include bank accounts, stocks, your house and your car. If you have to pay damages after someone sues you, your assets could be at risk.

If you're found to be at fault (or "liable") for someone else's injuries or property damage, you may need to pay damages to that person. Damages are an amount of money that compensates someone else for what they lost. Damages could pay for things like medical bills, lost wages and property repairs.

Liability insurance is a type of coverage that protects you financially in case of a lawsuit or claim against you. It will pay to defend you if someone sues you for injuring them or damaging their property. It's a standard part of most homeowners, auto, renters, condo and manufactured home policies.

How umbrella insurance works

Umbrella insurance offers extra liability coverage if you exhaust the limit on an underlying policy. Here’s an example of how it could work:

You run a red light and T-bone another car. There's significant damage to the vehicle, and several people are injured. The car needs $25,000 in repairs, and treatment of the injuries totals $275,000. Plus, the driver of the other car is an orthodontist who won’t be able to work for months due to a broken arm. She sues you for $200,000 in lost earnings.

You’re on the hook for a total of $500,000. If you carry only $300,000 in liability coverage with your car insurance, the remaining $200,000 will have to come out of your pocket.

If you had umbrella insurance, it would pay the difference between what your primary insurance covers and what you still owe. An umbrella policy could also cover your legal costs in the lawsuit.

What does umbrella insurance cover?

Depending on your policy, umbrella insurance can cover you and members of your household against claims or lawsuits for things like:

In addition to paying damages up to your liability limit, your umbrella insurance will typically also cover associated legal costs beyond that amount. Say you have an umbrella policy with $1 million of liability coverage, and someone sues you for that full amount. If a court finds you liable, your insurer could pay the $1 million plus provide your legal defense.

You might have to pay a "retained limit," which is similar to a deductible . It’s an amount you’ll have to cover before your policy begins to pay.

Details and exclusions can vary significantly between umbrella policies, but here are a few sample scenarios that would often be covered:

Your teenage son gets into a car accident, and the cost of injuries to other drivers is above your auto insurance liability limit.

A houseguest falls down your stairs and sues you for her medical bills plus pain and suffering, exceeding your homeowners insurance liability limit.

What umbrella insurance doesn’t cover

Umbrella insurance doesn’t cover your own injuries or property damage — you’ll need other types of coverage for that (such as health insurance or collision coverage on your auto insurance). Nor will it cover liability associated with your business unless you have a business umbrella policy rather than a personal one.

Most umbrella insurance policies won’t cover liability stemming from the breach of a contract you’ve entered into. Say a roofing company sues you because you haven’t paid for the work it’s done under the contract you signed. Your umbrella insurance policy is unlikely to help. And if you hurt someone deliberately or commit a crime, you’re almost certainly not covered.

Boats are another common area of exclusion. Some companies cover certain sizes or types of watercraft only. Others don’t cover them at all unless you have an existing boat insurance policy.

Umbrella insurance usually covers

Umbrella insurance usually doesn't cover

Who needs umbrella insurance?

There’s no law requiring you to buy umbrella insurance. But if you have a lot of assets or a high chance of being sued, you might want an umbrella policy. It might be worth buying umbrella insurance coverage if you:

Own things that can lead to injury lawsuits such as pools, trampolines , guns or dogs. (Check with your insurer to make sure the policy covers your dog’s breed.)

How much umbrella insurance do you need?

It’s wise to have at least enough liability insurance to cover your assets. To decide how much umbrella insurance coverage you need, add up the value of your property, savings and investment accounts. Then, take a look at the liability insurance you already have through your existing policies and buy enough umbrella insurance to make up the difference.

You may also want to consider potential income if you’re likely to earn much more in the future than you do now — if you’re a medical student, for example.

When considering potential lawsuits, keep in mind that employer-sponsored retirement accounts such as 401(k)s are protected from most lawsuits under the federal Employee Retirement Income Security Act of 1974 [0]

However, state laws may offer some protection for your IRA accounts and the equity you have in your home. Check your local laws before deciding how much umbrella insurance you need.

Insurers typically sell umbrella insurance in million-dollar increments. This means the cheapest policy available provides $1 million in coverage, the next-cheapest policy offers $2 million in coverage, and so on — so you get a decent amount no matter what you choose.

» MORE: The best financial advisors to grow your assets

How much does umbrella insurance cost?

The cost of an umbrella policy starts around $200 per year, with an average cost of about $380 for $1 million of coverage, according to Trusted Choice [0]

, a network of independent insurance agents. With its high coverage limit, umbrella insurance generally offers good value for the cost. However, you may also end up paying more for your other insurance policies if you need to increase your liability coverage to meet the minimum limits required for umbrella insurance.

How to get umbrella insurance

Your first step is to call your existing insurer. If you’ve already got homeowners and auto coverage with a certain company, see how much it would cost to add umbrella insurance on top of those policies.

That said, it’s always a good idea to shop around. Consider getting quotes from at least two other insurers to make sure you’re getting the best combination of coverage and price. An independent insurance agent can shop around on your behalf.

Bottom line: Is umbrella insurance worth it?

If no one ever sues you or files a large liability claim against you, you could end up paying thousands of dollars for umbrella insurance without any benefit. But if you do need the coverage, it could save you $1 million or more and keep you from losing your home and investments.

Not everyone needs umbrella insurance. But for those with significant assets or a high lawsuit risk, it can offer both financial protection and peace of mind.

Provides extra liability coverage and legal defense costs once the limits of your auto, home or other underlying policies have been exhausted.

Covers incidents that your main insurance might not, such as libel and slander.

The cost is relatively low compared to the potential payout.

Coverage often applies anywhere in the world.

May cover certain rental items for which you don't have insurance, such as a boat.

You must already carry auto or property insurance, usually homeowners, to qualify.

You may need to have the umbrella policy and all underlying insurance with the same company. This reduces your ability to shop around for better rates on individual policies.

Your total premium costs may go up if you need to add extra liability coverage to your existing policies. (You typically need a minimum amount of liability insurance on underlying policies in order to add umbrella coverage.)

Umbrella insurance is an individual policy you can buy to supplement other policies such as auto and homeowners insurance. While a handful of insurance companies sell stand-alone umbrella policies, most require you to buy at least one of your underlying policies from them as well.

Umbrella insurance generally covers you if you’re responsible for damaging other people’s property, but it won’t pay for damage to your own belongings. Say you get into an accident and cause more damage to other vehicles than your auto liability coverage will pay. Your umbrella policy would make up that difference — but it wouldn’t pay for repairs to your own car.

Yes, umbrella insurance may offer liability coverage if your dog bites someone. Normally, a dog bite claim would fall under the personal liability section of your homeowners, condo or renters insurance. But if the amount of the claim is more than your liability limit, an umbrella policy can help make up the difference. Note that some insurers won’t cover certain dog breeds.

You can get umbrella insurance at any time, but it won’t offer coverage for incidents that happened before you bought the policy. So you can’t get into an expensive car accident one day, buy umbrella insurance the next day and expect the new policy to pay your liability costs.

At any age or life stage, you should consider the value of your assets and your risk of a lawsuit when deciding whether you need umbrella insurance. For example, retirees may own a pricey vacation home or enjoy potentially risky hobbies such as boating, either of which may make an umbrella policy a good idea. Because vision and reaction time can change with age, some older drivers may also appreciate having extra liability coverage in case of a car accident.

Umbrella insurance is an individual policy you can buy to supplement other policies such as auto and homeowners insurance. While a handful of insurance companies sell stand-alone umbrella policies, most require you to buy at least one of your underlying policies from them as well.

Umbrella insurance generally covers you if you’re responsible for damaging other people’s property, but it won’t pay for damage to your own belongings. Say you get into an accident and cause more damage to other vehicles than your auto liability coverage will pay. Your umbrella policy would make up that difference — but it wouldn’t pay for repairs to your own car.

Yes, umbrella insurance may offer liability coverage if your dog bites someone. Normally, a dog bite claim would fall under the

section of your homeowners, condo or renters insurance. But if the amount of the claim is more than your liability limit, an umbrella policy can help make up the difference. Note that some insurers won’t cover certain dog breeds.

Learn more about

dog liability insurance

You can get umbrella insurance at any time, but it won’t offer coverage for incidents that happened before you bought the policy. So you can’t get into an expensive car accident one day, buy umbrella insurance the next day and expect the new policy to pay your liability costs.

At any age or life stage, you should consider the value of your assets and your risk of a lawsuit when deciding whether you need umbrella insurance. For example, retirees may own a pricey vacation home or enjoy potentially risky hobbies such as boating, either of which may make an umbrella policy a good idea. Because vision and reaction time can change with age, some older drivers may also appreciate having extra liability coverage in case of a car accident.

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Sarah is a NerdWallet authority on homeowners, renters and pet insurance. Her work has appeared in numerous outlets, including The Associated Press, MarketWatch and The Washington Post. See full bio.

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