An umbrella policy provides an additional layer of liability coverage to an existing policy. Any claims are first paid out from the underlying policy, and the umbrella policy is accessed if any additional liability remains thereafter. It is intended to provide protection from unusually large losses, and so is made available in large tranches, usually of $1 million or more.
As an example of how an umbrella policy works, a company employee gets into an automobile accident in which he is at fault, and the other party is awarded a $1,000,000 claim for personal injury. The company’s main liability policy covers $400,000, and the residual $600,000 is covered by the umbrella policy.