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Umbrella insurance coverage is not a substitute for traditional home or auto insurance. It is a secondary liability insurance policy providing extra coverage beyond your traditional insurance limits.
For example, your home insurance probably provides both property and liability insurance coverage. Let's say that your home liability coverage has a limit of $200k, but a guest becomes injured while visiting your home and sues you for $1.5 million in medical fees and lost wages. If you have umbrella insurance coverage, you would pay the deductible for the home liability insurance, and the home insurance policy would cover up to $200k. Then the umbrella insurance policy would go into effect and pay for the rest.
Umbrella insurance coverage also applies to auto insurance. Let's say that you rear-end a BMW and after the investigation you are held responsible for the other driver's totaled car, extensive medical injuries, and lost wages. The settlement amount exceeds your auto insurance policy limits. Without umbrella insurance, you would need to pay the remainder out of pocket. Umbrella insurance coverage pays the remainder of the settlement, and you pay nothing but the auto insurance deductible.
Because umbrella insurance is a type of liability coverage, it does not protect from financial losses due to fire, theft, or other property damage. These types of situations are covered under traditional property insurance up to the value of the property.
