Umbrella insurance covers lawsuits, settlements, and legal defense costs that you’re involved in, as long as the reason for the lawsuit is covered in the policy. The lawsuit must be a civil lawsuit, known as a tort, and not a criminal one.
Simply put, if you’re involved in a lawsuit that one of your primary insurance policies is paying for, such as an at-fault auto insurance claim, then your umbrella policy would act as an extra source of liability money.
For example, many people buy a $1 million umbrella policy. Let’s say your underlying auto insurance limits are $100,000 per person and $300,000 per accident. If you’re involved in an accident with four people and all four of them have serious injuries totaling $250,000 for each person, then you’d owe a total of $1 million in injury claims.
Your auto policy would pay out $100,000 to three people for a total of $300,000 paid from your auto policy. But it won’t pay more than that, since your limit is $300,000 per accident.
Without an umbrella, you would be on the hook for the other $700,000. But since you have a $1 million umbrella policy, then it will pay for the remaining $700,000 from your accident.
Note: It’s possible that your umbrella policy would pay for a claim that your homeowners or auto insurance doesn’t, though these type of umbrella policies aren’t as common today.