What Is Umbrella Auto Insurance?

Drinking morning coffee while driving to work

If you've selected the right auto insurance policy, you have critical protection against the financial fallout from an accident. But what if an accident causes liability damage that exceeds the limits of your regular auto insurance policy? You might be on the hook for the additional damages—which could be substantial. An umbrella auto insurance policy provides extra liability protection that goes beyond what your standard insurance policy covers.

How Does an Umbrella Auto Insurance Policy Work?

Umbrella insurance picks up where your regular insurance policy leaves off. So, for example, if your standard auto insurance covers $250,000 in liability and you're responsible for $450,000 in damages to another party in an accident, umbrella insurance would cover the $200,000 gap.

This insurance also provides similar liability coverage for claims against your homeowners insurance and may provide other coverages not included in your regular auto and homeowners policies, such as protection against lawsuits filed against you for libel or slander, or liability coverage when you are traveling outside the U.S. Umbrella coverage usually extends to all members of your immediate family, but does not cover liability for any businesses you may own.

Most insurance carriers require you to have standard auto and homeowners policies with their company to qualify for umbrella coverage. They also generally require a minimum level of regular liability coverage.

Umbrella coverage begins at $1 million and increases in million-dollar increments. As you can see, this insurance is not for minor fender-benders or any other incident that your regular insurance can handle. It's only activated when your liability is so extensive that your standard insurance is exhausted or if a claim isn't covered by your regular insurance. Maybe you are responsible for a major accident involving multiple vehicles, or perhaps another party has filed a $1 million lawsuit against you. These types of incidents are statistically rare, but when they happen, their impact can be severe.

Coverage may differ from one insurance carrier to the next, but here is a quick overview of what a typical umbrella policy does and does not cover:

Umbrella Insurance Coverage
CoveredNot Covered
Personal injury to another partyPersonal injury to you
Property damage to another partyDamage to your property
Your legal defense/court costs in a related lawsuitBusiness liability
Criminal or intentional acts
Contract liability

How Do You Know if You Need Umbrella Auto Insurance?

Umbrella insurance is entirely optional, but it may be worth considering. A major accident can happen at any time, and the additional coverage you'll get from an umbrella policy could be critically important to your future financial well-being.

One simple guideline is to match your current liability coverage against your assets:

  • Estimate your assets. Add up the equity you have in your home, your savings, investments and retirement funds.
  • Check your coverage. Look for the liability limits on your auto and home policies.

The liability coverage on your home and auto policies should individually match or exceed your assets. If not, an umbrella policy can provide additional protection at a relatively low cost.

You may also want to consider this coverage if you carry a little extra risk. For example, if you have teenagers in the house, they pose a higher risk for accidents. Does your home have a pool? Do you own rental property? These—along with a multitude of other minor risk factors—could be indicators that an umbrella policy could be to your benefit.

Example of an Umbrella Auto Insurance Policy in Action

Here's a scenario to help illustrate how an umbrella policy might work in the event of a car accident:

You hit a pothole and spill your hot coffee onto yourself. You inadvertently veer into the opposite lane, causing damage to multiple cars and significant injury to a driver and her passengers.

  • One car is totaled and two others sustain damage. The combined damages of $58,000 are covered under your regular insurance policy.
  • The driver and her two passengers are hospitalized and require $250,000 in medical treatment for their injuries. They file lawsuits totaling more than $750,000 to compensate for ongoing medical treatment, recovery and lost wages, as their injuries don't allow them to return to work for six months after the accident.
  • You hire an attorney. Your legal defense costs more than $125,000.

Your regular insurance has personal injury coverage of $250,000 and pays for the initial medical treatment. But the $750,000 plus $125,000 in legal costs fall under your $1 million umbrella policy. Without that coverage, you would be held responsible for these additional costs. You could lose your assets and—if unable to pay—see your future earnings garnished. A single event could easily become a long-term drag on your personal finances and a major source of stress.

How Much Does an Umbrella Auto Insurance Policy Cost?

According to the Insurance Information Institute, the cost for $1 million in umbrella coverage averages between $150 and $300 annually. Expect to pay about $75 for an additional $1 million in coverage and about $50 for each additional $1 million after that. Of course, the cost of your policy will vary depending on your insurance carrier and the amount and type of coverage you choose.

Because umbrella insurance is an add-on to your existing policy, the best place to start is with your current auto insurance company. They will be able to provide a quote, along with details on what's covered, what isn't and any restrictions that may apply. Be sure to inquire about the following if they are important to you:

  • Breed exclusions for dogs: If your pup is on the list of banned breeds, you may not be eligible for coverage.
  • Restrictions on your covered activities: Are you an expert ax-thrower? Make sure that your favorite pastime isn't excluded from coverage.
  • Coverage for your boat or other recreational vehicle: This could be a major benefit—or a significant oversight if you aren't covered.

Once you have a proposal in hand, you can do some comparison shopping. Many insurance companies will require you to carry both auto and homeowners insurance before you can add umbrella coverage, so be prepared to shop for the whole package if you decide to get additional quotes.

Adding umbrella coverage may qualify you for discounts with your insurance company, so be sure to ask. You might also think about raising the deductibles on your regular auto and homeowners policies to help defray the cost of the additional insurance.

A Relatively Small Cost for a Lot of Reassurance

Although umbrella coverage isn't as essential as a regular auto insurance policy is, it can provide a high level of additional coverage for a relatively low cost. Although it is unlikely that you'll have to deal with an incident of this magnitude, it's not impossible. Lawsuits aren't uncommon, and damages can add up quickly even in minor traffic accidents. Umbrella coverage relieves at least some of the financial anxiety that comes with life's everyday risks.

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