It’s a separate product protecting you from liability over (and above) that provided by your other personal insurance policies. Holding this extra layer of protection requires that your underlying (base) policies (auto and home insurance) carry (at least) minimum liability limits.
Umbrella policy protection is not limited to auto and home, and that is really the core of our concern: it could also extend over condo, classic/antique vehicles, 1-4 family homes, watercraft, and almost anything you have or do!
What activities could create financial risk? Damage or injury (to others) resulting from or by: a child’s accident, hosting guests, a swimming pool, a vacation property, home remodeling, a pet’s “enthusiasm”, volunteer activities, libel/slander, and so much more…
So, what if there is a gap in coverage between your base policies and an Umbrella policy? You’d be self-insured (aka out-of-your-pocket) for the difference if an incident occurred and resulted in financial loss to you.
A Financial Planning rule-of-thumb: you should carry Umbrella coverage equal to, or greater than, your net worth. The cost is low.
We believe all of this has no correlation to the risk profile of your life style; bad things can happen to anyone, at any time.
Here is an example:
A couple hosted a party for their teenage children. They did not provide any alcohol, but it was brought by some of the guests and was available. After leaving the party, one of the guests was severely injured in an auto accident, and the injury was attributed to his alcohol consumption. This case went to the Wisconsin Supreme Court which decided that anyone who sells or furnishes alcohol to a minor is responsible for the minor’s injuries as well as any injuries caused by the minor. The opinion of the court was that the homeowners should have prevented the consumption of alcohol by minors on their premises. Both the homeowners and personal umbrella policies paid on this claim.