What Is an umbrella policy — and who really needs one?

You insure your home. You insure your car. You may even have coverage for your boat or recreational vehicle. But what happens if an accident results in a lawsuit that exceeds the limits of those policies?

That is where umbrella insurance can make a difference.

An umbrella policy provides an additional layer of liability protection when the coverage limits on certain underlying insurance policies have been exhausted. It can help protect your savings, property and future earnings from the financial consequences of a serious accident or lawsuit.

And contrary to what many people believe, umbrella insurance isn’t just for the wealthy.

How does umbrella insurance work?

Imagine you are involved in an automobile accident and are found responsible for injuries to another driver. Medical expenses, lost wages and other damages total $750,000.

Your automobile insurance provides $300,000 in liability coverage.

Without additional protection, you could be personally responsible for the remaining $450,000.

If you have a $1 million umbrella policy that covers the incident, it could pay that additional $450,000, subject to the policy’s terms and conditions.

Umbrella insurance generally begins where your underlying liability coverage ends, although certain claims may be covered differently.

Who should consider umbrella insurance?

You don’t have to own a mansion or have millions in the bank to benefit from additional liability protection.

Consider these everyday situations:

Homeowners: Someone slips on your steps, falls near your swimming pool or suffers a serious injury on your property. A lawsuit could exceed your homeowners liability limits.

Parents of teenage drivers: Young drivers have less experience behind the wheel, and a serious automobile accident could create substantial financial liability for the family.

Families with dogs: Even a friendly family pet can unexpectedly injure someone. Depending on the circumstances and your insurance coverage, a dog-related injury could lead to an expensive claim.

People who entertain frequently: Hosting parties, family gatherings or neighborhood events can increase the possibility of someone being injured on your property.

Owners of boats or recreational vehicles: Certain recreational activities create additional liability exposure. Coverage depends on the specific vehicles, activities and insurance policies involved.

People with savings or retirement assets: A significant lawsuit can threaten the financial security you have spent years building. While some assets may have legal protections, others could be vulnerable.

What does an umbrella policy cover?

Depending on the policy, umbrella insurance may provide additional protection for:

• Bodily injuries for which you are legally responsible
• Property damage caused to others
• Certain personal injury claims, such as libel, slander or defamation
• Legal defense costs associated with covered claims

It is equally important to understand what umbrella insurance generally does not cover.

It typically does not pay for damage to your own home or vehicle, your personal injuries, business-related liabilities unless specifically covered, or intentional acts. Exclusions and coverage details vary by insurer.

Is umbrella insurance expensive?

One of the biggest surprises for many consumers is that umbrella coverage can be relatively affordable compared with the amount of protection it provides.

Policies commonly begin with $1 million in coverage, with higher limits available.

The premium depends on factors such as the number of vehicles and drivers in your household, your properties, recreational exposures and the amount of coverage selected.

Insurance companies also generally require certain minimum liability limits on your automobile and homeowners policies before issuing umbrella coverage. Increasing those underlying limits may add to your total insurance cost.

How much coverage is enough?

There is no single answer for every household.

A good starting point is to consider your savings, investments, property, income and potential exposure to liability claims.

Someone with substantial assets may need higher limits, but a younger family still building its financial future could also benefit from additional protection.

An insurance professional can help review your existing policies and determine whether your liability limits are appropriate.

A little extra protection can mean a lot

Most people don’t expect to be involved in a serious accident or lawsuit. Unfortunately, one unexpected event can have financial consequences lasting for years.

Umbrella insurance cannot prevent an accident, but it may help prevent a covered liability claim from becoming a financial crisis.

The bottom line: If you own a home, drive a car, have a teenage driver or have assets you want to protect, umbrella insurance deserves a conversation with your insurance agent.

Harrington Insurance Agency encourages individuals and families to review their liability coverage periodically, especially following major life changes. Understanding what your existing policies cover — and where gaps may exist — is an important part of protecting your financial future.