Legal Definitions - umbrella policy

An umbrella policy is a type of personal liability insurance that provides additional coverage beyond the limits of your existing primary insurance policies, such as auto, homeowners, or boat insurance. It acts as an extra layer of protection, "kicking in" when the liability limits of your underlying policies are exhausted. This type of policy is designed to protect your assets from large claims or lawsuits that could otherwise exceed the coverage provided by your standard insurance, offering broad coverage for a wide range of potential liabilities.

• Example 1: Severe Auto Accident
  Imagine David is involved in a severe car accident where he is found at fault. The other driver and passengers sustain serious injuries, leading to medical bills and lost wages totaling $1.2 million. David's standard auto insurance policy has a liability limit of $500,000.

  How it illustrates the term: In this scenario, David's auto insurance would pay out its maximum of $500,000. His umbrella policy would then activate to cover the remaining $700,000 in damages, protecting his personal assets from being used to pay the difference.

• Example 2: Homeowner Liability for an Injury
  Consider the case of the Millers, who host a large backyard barbecue. A guest accidentally slips on a wet patio and falls, sustaining a severe head injury that results in a lawsuit for $1.5 million. The Millers' homeowners insurance policy has a personal liability limit of $500,000.

  How it illustrates the term: After the homeowners insurance pays its $500,000 maximum, the Millers' umbrella policy would provide the additional $1 million needed to cover the lawsuit, preventing them from having to pay out of pocket and potentially losing their savings or other assets.

• Example 3: Liability from a Rental Property
  Sarah owns a small rental property in addition to her primary residence. A tenant's visitor trips on a loose step on the property's exterior staircase, suffering a serious leg injury. The visitor sues Sarah for negligence, seeking $800,000 in damages. Sarah's landlord insurance policy for the rental property has a liability limit of $300,000.

  How it illustrates the term: Sarah's landlord insurance would cover up to its $300,000 limit. Her personal umbrella policy would then step in to cover the remaining $500,000, protecting her from a substantial personal financial loss stemming from her ownership of the rental property.