What is an Umbrella Insurance Policy?

An umbrella insurance policy is an insurance policy that covers claims beyond what traditional property and/or liability insurance covers.

How Does an Umbrella Insurance Policy Work?

Businesses also obtain umbrella policies to mitigate any lawsuits or judgments.

For example, let' say that John Doe has liability insurance for his business. The policy covers up to $10,000 of personal injuries if one of John's customers is harmed by, say, falling down the steps in his business.

One day, John has a sale and lots of customers come in. Sure enough, Jane Smith falls down John's stairs and breaks both legs and an arm. The medical bills are well over $200,000.

Because John's policy only covers $10,000 of medical bills, he would be on the hook for the other $190,000. If John has an umbrella policy, however, the $190,000 would likely be covered.

Why Does an Umbrella Insurance Policy Matter?

Most of us realize that auto and proerpty insurance are important, but few people realize how limited that coverage can sometimes be, particularly when someone sues them for damages in a business. In many instances, companies, even small ones, can be sued for tens of millions of dollars.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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