UPDATED: Mar 13, 2020
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Umbrella insurance is a kind of liability insurance policy that covers both the assets of the insured party and the future income of parties on the primary policies. It is not the same as excess insurance, which typically only applies when all the policies that it covers have been exhausted, umbrella insurance “drops down” to fill in gaps in coverage as needed against any underlying policy or policies.
Sometimes the umbrella policy is considered to be the primary policy “on the risks” for certain situations. Obviously, the word “umbrella” is referring to the way that the umbrella policy protects the insured parties’ assets in a more broad way than the primary insurance policies beneath it.
How Do Umbrella Policies Work?
So for example; an umbrella policy is only for liability coverage that runs over and above the initial coverage afforded by other policies. Umbrella policies are typically sold in $1 million coverage increments. So if there were to be a $1 million umbrella policy covering both an auto insurance policy and a home owner’s policy it would be added to the liability coverage limits of each policy. So in effect – if the auto insurance policy has a liability insurance limit of $250,000 then the total coverage is $1.25 million (for liability only) and if the home insurance policy has a limit of $500,000 then the total coverage is $1.5 million in that respect too.
Umbrella policies enable policyholders to extend their specific liability coverage over and above that provided by existing policies. They are designed to offer a cost-effective mechanism for increasing liability coverage without simultaneously paying for additional coverage under other types of insured risk on a more broad-based policy.
An umbrella policy can be extended across any range of policies that insure at least in part against the liability of the individual (so, for example, an umbrella policy is not going to add benefits to a health insurance package because individual liability coverage isn’t included in health insurance) such as boats, RV’s, caravans, and other insurance policies.
It’s also worth noting that an umbrella policy may be able to extend coverage in the event of liabilities that are not covered by existing policies too – in this case, the total liability insurance in these events is limited to the value of the umbrella policy and does not include any other policy’s limit. These events may include; libel, slander, invasion of privacy and false arrest.
(To read more about personal umbrella insurance outside of our glossary, please read our more detailed article on the subject.)