For homeowners and drivers, umbrella coverage kicks in when limits are exceeded on normal insurance.
You cause an accident on the freeway and a dozen other drivers or passengers are injured in the pile-up.
Your teenager hosts a party at your house, and a guest gets drunk and gets hurts.
These situations have one thing in common: You can be sued for amounts beyond the coverage limits of your car or home insurance, or for actions like slander that aren’t typically covered by ordinary insurance.
The solution is an umbrella policy, a relatively cheap policy that kicks in when your normal coverage is inadequate. Umbrella policies don’t cost a lot because they don’t pay out unless coverage limits are exceeded for your regular insurance. It costs around $150 to $300 a year for a $1 million umbrella policy. You can buy additional coverage on top of that in million-dollar increments at even cheaper rates.
One thing to remember: Insurers generally won’t sell you an umbrella policy unless you already have sufficient liability coverage on your primary insurance, usually $250,000 on your automobile policy and $300,000 on your homeowner’s policy. If you don’t carry that much insurance currently, buying it will be an additional cost on top of the umbrella policy itself.
One way to offset the added expense: Raise the deductibles on your home and auto insurance. This makes sense. The purpose of insurance is to protect you from events that will crush you, not to save you a few hundred dollars through a lower deductible if you get in a fender bender.
In the right situation, an umbrella policy can save you from financial ruin. Here are nine situations where one protects you.
∙ You have substantial assets. If you lose a lawsuit, creditors can go after a variety of assets, from your home to your business to your retirement savings. Yes, 401(k)s are protected from all creditors. And IRAs are protected in bankruptcies but not from other creditors. And some states provide additional legal shields for retirement savings accounts.
∙ You own a house. Suppose a guest is injured at your house in a trampoline accident. Someone slips and falls on your walkway. Your tree falls on a neighbor. In every case, you’re responsible.
∙ You have a teenager driver. If your child makes a mistake, you’re on the hook.
∙ You have a swimming pool or a boat. Water accidents tend to be bad ones that spur costly lawsuits.
∙ You are a landlord. You can be sued by your tenants, their guests or even people walking down the street who are injured on your property. The umbrella policy covers you if the claim exceeds the limits on your normal homeowners policy.
∙ You volunteer. Someone you serve through a charity or religious organization can come after you personally for negligence or inappropriate behavior. The Federal Volunteer Protection Act doesn’t apply in many circumstances.
∙ You are in a commuter carpool or shuttle other people’s children. If you transport other people and something happens, you’re responsible.
∙ You have any sort of dangerous pet. That goes for exotic animals as well as dogs.
∙ You are sued for pain and suffering. If you’re deemed at fault in a variety of circumstances, you could face awards for pain and suffering, one of the costliest liability expenses. Awards can run into the hundreds of thousands of dollars.