Umbrella Insurance derives its name from the broad coverage it provides. Other types of insurance policies, such as homeowners insurance, boat insurance, and auto insurance, have very specific types of claims that they cover. What they do cover is also capped by the policy limits. This leaves someone without umbrella coverage with a serious gap in coverage. It's like being out in a rainstorm and trying to keep dry by holding a newspaper over your head. It just isn't enough. If you want to fully protect your assets, then an umbrella policy is an important component of your insurance coverage.
Umbrella policies are liability policies. A liability policy covers you in the event that there are claims against you arising from the injury of another party. These injuries are usually things that you are legally responsible for. For example, an auto accident. If you caused the accident, then you are legally liable. But doesn't your auto policy cover that? Yes. But only up to your policy limits. Let's say you caused an auto accident with damages to another party equaling $500,000, and your policy limits were only $300,000. Who would cover the $200,000 gap? You, potentially, from whatever assets you have, including your house, savings, and future wages, which could be garnished, nnless you have an umbrella policy. An umbrella policy would pay the amount of your liability that is in excess of your policy limits. Coverage for claims above your policy limits would also apply to any liability claims paid out by your homeowners insurance or boat owners insurance policies, for example. Umbrella policies can be purchased for very large limits. Typically between $1 and $10 million. Since claims this high in value are rare, premiums tend to be low compared to other types of insurance.
Umbrella policies also cover liability claims not included in your other policies. These include claims for things like false arrest, libel, slander, and invasion of privacy.
Who should have an umbrella policy? Anyone with assets to protect. There is no way of knowing if you will be one of the unfortunate few involved in an accident with massive damages, and an umbrella insurance policy will insure that you weather that storm.