Personal liability insurance provides coverage when others claim you have injured them or damaged property. Some liability coverage comes as part of a homeowner's or auto insurance policy. Personal liability, also called an umbrella policy, provides additional protection that goes beyond your other insurance.
What Personal Liability Covers
As a Supplement to Other Policies
When a claim exceeds the liability limits of other insurance, a personal liability policy covers the additional amount. Your other insurance pays first.
For example, you may be sued for $200,000 because of an auto accident that you caused. If you have $100,000 liability on your auto insurance, it pays a maximum of $100,000. If you have a $1 million umbrella policy, it pays the additional $100,000.
Insurance companies may require you to have a certain minimum amount of liability coverage on your car, boat or homeowner's policy before they'll sell you an umbrella policy, according to Traveler's.
Personal liability covers some circumstances when your auto or homeowner's insurance doesn't apply, such as when you rent a boat or have an auto accident abroad, according to Bankrate. A personal liability policy covers you wherever you go, unlike a homeowner's policy or auto policy.
Its coverage includes a wide range of property and personal damage for which you, your family members or pets are responsible. Umbrella coverage typically includes:
- an injury your child inflicts on another during team sports
- someone slipping on ice in your yard and breaking a hip
- invasion of privacy
- causing mental distress
- slander and libel
- shooting someone by accident
An umbrella policy also pays the cost of your defense when someone sues you.
What's Not Covered
An umbrella policy doesn't cover you for business liability even for a home-based business, according to Certified Financial Planner Neal Frankel. If you buy a basic umbrella policy, you may be able to add coverage for you home business.
Other exclusions depend on the particular policy, but damage or injuries done intentionally aren't normally covered.
Amounts and Cost
Personal liability insurance comes in large amounts, typically $1 million or higher, according to Bankrate's Jack Hungelmann. Policies are commonly available up to $5 million.
The chances of someone suing you for $1 million may appear infinitesimal, but the low risk makes these policies very inexpensive. An umbrella policy typically costs between $150 and $200 per year for the first $1 million of coverage as of publication, according to Hungelmann. Each additional million costs approximately $100 annually.
Who Needs It and How Much You Need
A 2013 Consumer Reports study showed that most homeowners -- about 90 percent -- don't have personal liability coverage, according to the Chicago Tribune. Yet this coverage isn't just for the extremely wealthy, because almost anyone can get sued.
Consumer Reports recommends that people with assets of six figures to $1million and up should consider buying an umbrella policy.
Typical suggestions include getting umbrella insurance to cover at least the value of your assets in case of a lawsuit -- for example, $1 million if you're homeowner with significant equity or have a six-figure income. People who own rental property may need between $3 and $5 million in personal liability insurance, according to Kiplinger.
Your risk tolerance is part of the equation for deciding whether to buy personal liability insurance. The chances of collecting are small, but you're also purchasing peace of mind.
- The New York Times: Umbrella Policies Fill in Some Gaps
- Kiplinger: Why You Need an Umbrella Policy
- Wealth Pilgrim: What Is Personal Libaility Insurance?
- Bankrate: What is Umbrella Insurance?
- Liberty Mutual Insurance: Umbrella Insurance
- NOLO: What Is Criminal Negligence?
- Traveler's: Umbrella Coverage Basics
- Chicago Tribune: Should You Seek Out Umbrella Insurance?
- Consumer Reports: 4 Big Insurance Mistake to Avoid