Who Needs Umbrella Insurance?
If you have more assets than liability coverage, umbrella insurance can give you the protection you need.
One of the reasons we need an educational insurance resource like the one you're browsing now is that not every insurance term is clear and straightforward. Umbrella insurance is one of those terms. Just hearing the name doesn't go a long way to explaining what it is and what it covers (hint: it's not coverage for your collection of fancy umbrellas).
This article will clear things up by giving you an overview of umbrella insurance: what it is, who needs it, and who will be just fine without it.
Umbrella Insurance: The Basics
You can think of umbrella insurance as an umbrella that sits on top of all your existing personal liability insurance policies (you might not realize you have any, but they are included in your auto and home insurance policies). Umbrella insurance gives you additional coverage in excess of the amounts on your liability policies.
Like a regular personal liability policy, umbrella insurance covers you for personal liability arising from things like causing bodily injury, property damage, or other kinds of legal damage (such as slander and libel). It will also foot the bill for some of the legal fees that arise when you defend yourself against the lawsuit if these liability issues make it to a court of law (for related reading, see Insurance and Lawsuits: What Happens When You Are Sued?). What makes it different, however, is that it provides more comprehensive coverage than a standard liability policy. Not only will it allow you to collect a larger insurance payout if one is warranted, but it will also cover some perils that are excluded in your liability insurance.
Umbrella insurance first caught on in the 1960s and it goes on strong to this day, primarily due to large settlements being awarded by courts. Horror stories about seemingly minor incidents that leave someone on the hook when outsized damages are awarded to the plaintiff is enough to make people extra prudent when deciding what kind of insurance they need. This type of coverage might even grow in popularity in the social media age, when one wayward tweet could land you on the wrong end of a defamation lawsuit.
Who Should Buy Umbrella Insurance?
Whether you should buy umbrella insurance largely depends on where you live, what you do for a living, and, most importantly, your appetite for risk.
Some lifestyle factors also increase your vulnerability to a liability lawsuit. Being a frequent traveler, having a swimming pool, owning multiple residences, riding ATVs as a hobby, and owning pets can all add to your risk profile and should be factored in when deciding whether umbrella insurance is a good fit for you. If you participate in activities that might accidentally cause harm to others, such as hunting or owning accessible vacant land, your risks are also larger (see A Look at Uninsurable Risk to learn about risks that insurers won't cover).
According to data from Jury Verdict Research, 13% of personal injury liability settlements were for amounts exceeding $1 million. That being said, I don't think most people should purchase umbrella insurance. Most insurance agents believe that the target customer for this coverage is someone who owns over a million dollars in assets or earns more than $100,000 per year. And that's a good place to start. The saying "You can't get blood from a stone" holds true here; the more you have to lose, the more closely you have to protect it.
But even if you fall into this category, you should consider the area you live in. Some jurisdictions are known for being more trigger happy with lawsuits or for awarding high damages. If you live in such a place, an umbrella policy might be an important part of protecting your net worth in case you ever find yourself in someone's cross-hairs.
Then you have to consider your comfort level when it comes to risk. Risk tolerance varies from person to person and it will likely change as you move through the different stages of your life. For example, those nearing retirement often have a lower risk tolerance and will likely need umbrella insurance to protect their net worth as they head into their golden years.
How Much Insurance Do You Need?
If you decide to buy an umbrella policy, you have to decide how much coverage you will buy. The typical recommendation is to get a coverage limit that equals your net worth, plus the value of your employment income stream (if any).
The wealthier you are, the bigger a target you become to the lawyers representing those seeking compensation from you. You want to have enough insurance so that you wouldn't have to liquidate any of your investments in order to pay off a claim.
Umbrella Insurance Is Not for Everyone
Anyone who doesn't fit into the categories mentioned above probably shouldn't bother getting umbrella insurance. But first things first: to be eligible for umbrella insurance, you first need to have primary insurance in place. That means there's no sense in looking into an umbrella policy unless you have some kind of liability coverage to begin with (again, it doesn't have to be a stand-alone policy but can be bundled in your auto or home insurance coverage).
Another group who can get away with not having umbrella insurance are those with high limits of insurance and broad coverage on their primary policies. Basically, these are the people whose primary coverage already gives them sufficient protection. In some areas, for instance, you can buy auto insurance with up to $5 million in liability coverage. If you're already covered for such a high amount, do you really need an umbrella on top of that?
In general, if you have more liability coverage than assets being covered, you should probably do without an umbrella policy.
How Much Have You Got to Lose?
There is a lot of information to digest here and personal calculations you have to make. But don't let it overwhelm you. It mainly boils down to how much you have to lose, how likely you are to lose it, and how much you are willing to risk.
Written by Jacques Wong
Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won Insurance Council of BC awards in 2015 and 2020 for academic excellence in the insurance licensing courses. He educates insurance professionals through PNC Learning and as a Thought Leader at ReFrame Insurance.
In his day job as an insurance broker, he helps businesses with creative risk management solutions and strategic advice when it comes to insurance.