What is umbrella insurance?

America. Land of football, guns … and lawsuits. We spend about 2% of our national GDP on lawsuits annually, the highest of any country. That’s roughly $1,000 for every man, woman, and child. About half of that goes to attorneys and fees, providing ample incentive for attorneys to sue.

And you—yes you—an upwardly mobile professional, are a target for lawsuits. But what if there was a way to quickly and easily reduce your risk—for $150 to $300 a year or less. 

There is. It’s called umbrella insurance. No, despite the name it doesn’t cover your umbrella (sorry, Rihanna).

Don’t think you’d ever need that? Let’s look at a few examples. 

When you might need umbrella insurance

You accidentally spill coffee on someone’s kid at Starbucks

You’re getting your morning Starbucks and the place is packed. The barista hands you your coffee. You back into someone’s kid, stumble, and spill your coffee all over them. The innocent kid, sadly, suffers $700,000 in burn damages.

While an accident, the parent could still seek an attorney and sue you for that. And that is generally not covered by homeowners insurance. Cue umbrella insurance. If you have an umbrella policy with $1,000,000 in coverage limits, usually the minimum standard, it will cover that $700,000 payout. However, it will be subject to a “retained limit,” i.e, a deductible, typically of about $1,000. The insurance company’s lawyers will also defend you in court against the allegations. And since they have $700,000 on the line, they’re incentivized to use good lawyers to defend you. 

Skeptics will say the mom is more likely to sue Starbucks than you because the typical American doesn’t have that kind of money laying around, Starbucks does, and attorneys like juicy targets. But if this were to happen in, say, New York, and you’re well dressed for, say, a job in finance, the parents and their lawyer might reasonably conclude you have assets or (ironically) umbrella insurance and go after you as well.

Which reminds me: the first rule of umbrella insurance is don’t tell anyone you have umbrella insurance. If they know there is a pot of gold that will pay out in a lawsuit, they’re more likely to sue in the first place. It’s similar to the fear people have that an insurance beneficiary might murder them for life insurance, but a lot more likely, especially compared to life insurance in your twenties.

You back out of a parking space in a hurry and hit a pedestrian

You’re late to work so you back out of the driveway in a hurry. And bam, you hit a pedestrian. You’re sued for $1.1 million in medical damages. 

You might think your auto insurance would pay for this … and you’d be right … up to a point. Most states require liability coverage far less than $1.1 million. The minimum in New York is $50,000. So the auto insurer would pay for the first $50,000, and you’d be on the hook for $1.05 million.

But let’s say you had a $300,000 auto insurance policy and a $1 million umbrella policy. As we’ll get to in a minute, you typically need at least $250,000 to $300,000 in auto coverage to qualify for umbrella coverage. Then you’d only owe your auto insurance’s deductible—typically $500 or $1,000—instead of $1.1 million. In fact, you could be sued for up to $1.3 million and still only owe the deductible. 

Frequently asked questions about umbrella insurance

If I’ve convinced you it’s worth looking into, you may have a few questions:

What’s the catch? 

Typically you have to buy it from your auto insurer, and they’ll likely require your auto policy and renters/homeowners insurance policy to have around $300,000 in personal liability limits. 

If you don’t meet those policy limits already, you’ll have to upgrade those policies first. Which means realistically the umbrella policy only has to pay if you’re sued for more than $300,000, or (depending on policy details) sued for something your homeowners or auto doesn’t cover at all. That means the odds of your ever making an umbrella claim are very low. The insurance company knows that, and thus they price $1 million policies pretty cheaply (about $150 a year).

Umbrella policies generally exclude claims related to commercial activity, i.e., your workplace or business. While plans are usually fairly generous, they may also exclude certain liabilities, so be sure to read your policy.

It’s one of those things you’ll probably never need, but if you do it could save you from catastrophe. It’s similar to a high deductible plan associated with an HSA in that way. 

What if I don’t have a car? 

If you’re, say, a New Yorker and don’t own a car, you can usually buy a “non-owners” car insurance policy—they’re usually fairly cheap—and still be eligible for umbrella insurance.

What if I live somewhere owned by my parents or a friend?

Believe it or not, you can often still buy renters insurance and be eligible for umbrella coverage. Talk to your insurance company, but you’d probably appoint the landlord as policy owner.

If I buy umbrella insurance, does that mean I can finally axe murder Paul Allen with impunity?

Asking for a friend.

No. For one, you’re still going to jail. Umbrella insurance applies to civil, not criminal, liability. And two, umbrella insurance covers accidents, not intentional acts. Though that didn’t stop O.J. Simpson and Bill Clinton from trying (and partially succeeding) during their civil trials.

Is umbrella insurance worth the extra cost?

If you’re making six digits and/or have assets worth protecting, I think the answer is yes, given the minimal cost. We’re talking about something that costs around $150 a year—that’s $12.50 a month—and could save you from a million dollars of liability. To me that makes it one of the best deals in insurance, certainly better than whole life insurance. 

But if you have questions relating to your specific situation, you’re best off consulting your financial advisor and/or attorney, and not some guy off the internet, even if he is handsome.

Learning about insurance is key to “adulting”

Congrats for reading about umbrella insurance! Learning about insurance is never too fun … but neither is a lawsuit.