Umbrella Insurance - What Is It, And Do You Need It?

One of the best things about living in America is the right to a fair trial if you’re accused of wrongdoing—and the right to bring someone else to trial if they wrong you. It can also be one of the worst.

The right to due process is crucial to any free society, but the culture of civil litigiousness has a more ambiguous reputation. For every small claims case that allows a victimized citizen to seek retribution, there’s a case where someone is just trying to make a dishonest buck. If you’ve ever been hit with a bogus lawsuit, you know that being on the side of justice doesn’t guarantee anything.

The fact is, almost everyone is open to some sort of civil suit—even if they don’t do anything to deserve it. If you own a business, that liability is increased tenfold. In order to truly protect yourself against losing assets in a legal battle, you might need umbrella insurance.

Here’s how it works, how to get it, and how to decide if you really need it.

What is umbrella insurance?

Umbrella insurance protects people when they’re sued after an event that transpired at their home, in their car, or because of something they did. For example, if you’re skiing and accidentally hurt a fellow skier on the slopes, they could sue you for medical expenses.

Or let’s say you’re hosting a party at your home and someone trips down the stairs. They could sue you for any injuries as well as emotional pain and suffering. While some insurance policies cover this type of personal liability, there are limits to what they can pay.

Once those limits have been met, your umbrella insurance policy will kick in. Think of umbrella insurance as a secondary policy, with your homeowners, renters or auto as your primary policy.

An umbrella policy will pay for your legal expenses and protect you if you lose the case. If you win, an umbrella policy would cover your lawyer’s fees.

If you’re sued and lose, the judge could award the plaintiff an amount that exceeds what you currently have. In this situation, the judge will usually allow the plaintiff to go after your future earnings until they receive what they’re owed.  If you have an umbrella policy, the insurance company will pay so your salary isn’t garnished for years to come. In other words, an umbrella policy covers your future earnings as well as your current assets.

When is it worth it?

It’s easy to be held liable for something that happened on your property—that’s why umbrella insurance is so popular. If you don’t own a home, have little to no net worth and don’t keep any dangerous equipment on your property, you can probably do without umbrella insurance.

However, most people should consider buying a policy. Dan Green, founder of Growella, said umbrella insurance is necessary if you fit one or more of these categories:

• People who own (or rent) boats, cars or other vehicles

• Coaches of youth sports

• People with dogs or dangerous pets

• Parents

• People who host guests in their home or on their property

• Anyone who own rental properties

• People who talk about other people or businesses

• People who volunteer their time and services

Many of these activities increase your chance of being involved in a lawsuit, even if they might seem harmless. Why buy more insurance just because you have a dog? You won’t ask that after your sweet Golden Retriever runs out of the house and bites someone, leading to a lawsuit.

“Umbrella insurance is a must,” Green said. “It provides protection against claims and lawsuits from accidents you’ve caused and shields your future income from garnishment.

Green says a $1 million policy is sufficient for most people and only costs $200 a year (about $16/month). It’s one of the most affordable insurance policies you can buy—less than the price of a few lattes.

Financial planner Clint Haynes CFP® of NextGen Wealth said he recommends umbrella insurance to almost all of his clients, especially those with higher salaries. He says most people should start with a $1 million policy and only buy more if their net worth increases.

Other ways to protect yourself

Umbrella insurance is designed to ensure your assets won’t be seized in the case of a lawsuit—but that’s not the only way to protect yourself.

Another way is to set up your business as an if you’re currently operating as a sole proprietor. That way, if someone suffers harm because of your business, they can only go after property held by the business instead of your personal holdings.

You can also increase the liability coverage on your renters, homeowners and auto policies to avoid buying umbrella insurance. However, it’s usually cheaper to buy a new umbrella policy than to increase the liability payouts on your other forms of insurance.

Research your state’s homestead laws, which can protect your property from being named in a judgment. These usually only apply to your primary residence and not a vacation home. You also must live in a state for a minimum length of time to qualify as a resident.

A more unorthodox method is to self-insure with a large stockpile of assets, usually several million dollars. But this route is only attainable for a small subset of the population.

Summary

Umbrella insurance protects you when you’re sued after an event that occurred at your home, in your car, or because of something you did. So you really can’t go wrong with umbrella insurance, especially on our current climate that loves lawsuits.