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. Following is an overview of the liability policy differences and whether you need extra liability coverage — and, if so, how much coverage is 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.¹

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.² 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.³

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.²   

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.[4]

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.

What Does Liability Insurance Cover? 

Liability insurance typically provides coverage for you and your household members. It applies to claims such as:

• Bodily injury to others
• Property damage to others
• Legal defense costs in related lawsuits
• Lawsuits for defamation, libel, slander, and invasion of privacy
• Incidents occurring outside the U.S.

Liability insurance may offer coverage beyond underlying policies, such as:

• False arrest, imprisonment or detention
• Malicious prosecution
• Wrongful eviction or entry
• Invasion of privacy
• Uninsured/underinsured motorist
• Employment practices liability

Each policy is different; therefore, it’s important to engage an insurance professional before purchasing a policy.

What Liability Insurance Won’t Cover

Liability insurance doesn’t cover your injuries or damage to your property. Other claims typically not covered include:

• Business losses
• Criminal acts committed by you
• Written or oral contracts
• Intentional acts or injury committed by you
• Damage due to nuclear radiation, war or terrorism
• Communicable disease

Intentional acts and business activities are typically excluded from personal liability policies.