An umbrella policy provides an extra layer of liability coverage that kicks in after your underlying homeowners, auto, or renters liability limits are exhausted. For a modest premium — typically $150-400 per year for $1 million in coverage — an umbrella policy protects your assets and future earnings against catastrophic liability claims.
An umbrella policy is excess liability coverage. When a covered liability claim exceeds your underlying policy limits, the umbrella pays the remainder up to the umbrella limit. Example: judgment against you is $800,000. Your auto policy pays its $300,000 limit. Your $1 million umbrella pays the remaining $500,000. Without the umbrella, that $500,000 comes from your personal assets.
Umbrella policies typically also cover certain liability claims that underlying policies exclude, including: libel and slander; false arrest; invasion of privacy; liability from serving on a nonprofit board; and worldwide coverage for personal liability. Specific coverages vary by insurer and policy — read carefully.
Anyone with assets or future earnings worth protecting should consider an umbrella policy. Situations that increase the need: owning a pool, trampoline, or dog; teenage drivers in the household; rental properties; frequent social entertaining; high-profile careers; and significant net worth or future earning potential.
Umbrella insurers typically require minimum underlying limits before issuing umbrella coverage. Common requirements are $300,000 in auto liability and $300,000 in homeowners liability. If your underlying limits are at the state minimum, you may need to increase them. This is actually beneficial — you want the underlying policies to absorb as much as possible before the umbrella activates.
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Regulatory resource: California Department of Insurance — https://www.insurance.ca.gov. The Insurance Professor provides education only — not legal or insurance advice.