Do You Really Need a Liability Policy?

MARCH 4, 2025

Even with thorough asset protection planning, unexpected events can occur, putting your assets and future earnings at risk. An umbrella or excess liability policy plays a crucial role in a comprehensive risk management strategy. Here’s an overview of the differences in liability policies and whether you need additional coverage — and, if so, how much might be sufficient.

Umbrella vs. Excess Liability

Umbrella insurance provides additional liability coverage beyond the limits of your current policy. This can prevent financial damage from significant events for which you’re liable, affording you protection for claims not covered by your existing underlying liability policies.

To access the coverage provided by an umbrella insurance policy, the policyholder pays a self-insured retention, which is similar to a deductible. The insurance policy will not pay for a loss until the self-insured retention is paid by the policyholder.

Once the policyholder reaches the self-insured retention limit, the umbrella policy may cover the remaining damages, including defense and indemnity costs. For example, if a homeowner is found liable for $500,000, and the homeowners policy denies coverage, the umbrella policy may provide coverage, once the policyholder pays the self-retention amount. An umbrella policy does not follow the form of an underlying policy.

Conversely, an excess liability policy is a type of coverage that provides additional protection for claims exceeding the limits of the underlying insurance. The excess policy does not expand your current policy coverage; instead, it offers a higher limit to protect you from damages where the claim exceeds the amount of the underlying policy. 

For example, if a homeowner is found liable for a $500,000 claim, and the homeowners insurance pays the liability limits of $300,000, the excess liability policy will pay the additional $200,000. Another example: if a homeowner is found liable for a $500,000 claim, and the homeowners policy denies coverage, the excess liability policy would pay nothing. An excess liability policy follows the form of the underlying policy.

How to Know If You Need a Liability Policy                        

People are often unaware that simple activities may place assets at risk. Consider the following questions:

• Do you host gatherings at your home?
• Are there teenagers living in your home?
• Do you organize events at external venues?
• Do you employ staff such as gardeners, handymen, housekeepers, or a nanny?
• Do you or your family frequently travel for business or leisure?
• Do you have a trampoline, hot tub, or swimming pool?
• Do you own a second home?
• Are any of your homes or properties held in a trust or an LLC?
• Do you serve on the board of a nonprofit or charitable organization?
• Do you own or operate recreational vehicles, jet skis, jet boats, or other watercraft?

If you answered “yes” to any of these questions, you may need a liability policy.

What Do You Have to Lose?

Deciding whether you need liability insurance depends on several factors, including your assets, the risks you face, and what you stand to lose. As your assets grow, so does your potential loss.

If your assets exceed the liability limits of your homeowners or automobile insurance policies, it’s prudent to consider additional liability coverage. Think about the coverage you would need if you were to lose a lawsuit. You want to protect your net worth and future earnings.