When most people consider their insurance needs، only a few types of coverage usually come to mind. Health insurance and life “or sometimes disability” insurance protect you and your loved ones، auto and homeowner’s or renter’s insurance protects your major tangible assets.
Personal liability insurance، often called an “umbrella” policy، rarely makes this list. But when a rainy day shows up or an expensive lawsuit، sometimes nothing but an umbrella will do.
As the name suggests، personal liability coverage exists primarily to protect against liability claims. In most cases، this means finding yourself and your assets the target of a civil lawsuit.
A personal liability policy may seem like overkill for individuals who already have three or four insurance policies. It is true that not everyone needs such protection. But an umbrella policy effectively protects your assets and future income against damage claims that can arise from a variety of scenarios. Like flood insurance for waterfront properties, liability insurance is a product you hope you never need to use، but can provide significant peace of mind in the meantime.
Who needs liability insurance?
Some level of personal liability coverage is built into home owner’s “or renter’s” insurance and auto insurance. For many people، this may be enough. In part، this is because certain types of assets are protected by state and federal law. For example، a court cannot force you to use qualified retirement accounts، such as 401″k”s، to pay a legal judgment، and most states have laws protecting traditional IRAs.
Some states also protect Roth IRAs and other retirement accounts. Many states also protect your primary residence، although the exact rules vary; Florida, for example, offers very strong protections in this area، while other states can only protect a certain level of home equity.
You can also protect certain assets from lawsuits through estate planning tools، such as properly structured and funded irrevocable trusts. However, be wary of creating such beliefs directly after an incident that you fear could trigger a lawsuit. If it looks like you’re just trying to avoid future creditors، courts may determine that the transfer of assets is fraudulent, making those assets available to pay a judgment.
If you don’t have many assets outside of your retirement savings and your primary residence, then your existing liability coverage may be sufficient. But second homes and non-retirement investment accounts are vulnerable. High earners and their spouses may also want to consider their coverage options, as courts are known to garnish wages to satisfy judgments.
While amounts vary by geography and insurance policy, homeowner’s insurance typically includes up to $301.000 in personal liability coverage. Auto insurance typically covers up to $251.000 per person and $501.000 per accident involving bodily injury, and less for incidents involving only property damage. However, serious accident lawsuits can sometimes result in multi-million dollar judgments or settlements. This is where umbrella policies come in.
Most people think of car accidents as the leading cause of such lawsuits, and with good reason, as car accidents are relatively common and can cause a lot of damage. But there are a number of situations in which you may find yourself liable for an accident. You may host a party at your home where one of the guests is seriously injured. Your dog may bite a stranger or an acquaintance. If you employ domestic staff, such as nannies or home health aides, the employee may sue not only for physical injury, but also for wrongful termination or harassment.
There are other liability risks that may not come to mind as easily. For example, the hyper-connected world of social media creates many more opportunities to slander or defame someone, even without intentionally setting out to do so. Your teenage or pre-teen children may also develop such problems; in a worst-case scenario, they may end up involved with a cyberbullying or harassment incident that takes a tragic turn. Teenagers also increase your responsibility when getting behind the wheel. Even grown children can trigger “vicarious liability” statutes that can leave you personally liable in certain circumstances, such as if they borrow your car and then get into an accident.
Another area that some people overlook is the risk of sitting on a board for a non-profit organization. Many nonprofits are too small to offer much، if any، protection for board members’ personal assets in cases where the organization and its board of directors are sued. Board members may wish to consider directors and officers insurance specifically، as well as or instead of an umbrella policy. People whose charitable work or professional activity put them in the public eye may also want to consider increased liability coverage because of the potential reputational damage a lawsuit could do. themselves as well as their financial health.
When considering the need for personal liability insurance, the common law concept of joint and several liability is also worth considering. In many jurisdictions، a plaintiff can recover all damages from any of multiple defendants, regardless of fault. In other words, if the four defendants are all equally liable, the plaintiff can recover 100 percent of the damages from one of them and nothing from the other three. Thus, many attorneys focus on the highest net worth defendant in such cases, on the theory that this method is more likely to secure the largest payout for their client.
How Much Liability Insurance Should You Have?
As you can see، individuals with a high net worth, high income potential, or both have reason to be concerned about their liability exposure. Once you’ve decided to buy an umbrella policy، the next logical question is how much insurance to buy.
Unfortunately, there is no specific formula to determine the exact amount of coverage. A good rule of thumb is to have at least enough insurance to cover your net worth and the present value of your future income stream. A Certified Financial Planner or insurance agent can help you with such calculations, and there are also a variety of online tools designed to help you calculate a figure. Keep in mind that tools and advice from insurance companies will tend to want to sell you more insurance than you may need، but it can still be helpful to see what factors will affect your coverage. Some of these are intuitive, such as your current net worth and the assets you own. Others are more concerned about the possibility of accidents; for example, you may want more insurance if you own a trampoline or a swimming pool، and you can also expect slightly higher premiums.
As with any insurance decision, shopping around is a good idea. But there are real benefits to buying most or all of your insurance products with one provider. Consolidating your coverage will not only ease the administrative burden, but also make it easier to spot potential gaps. For example, if your homeowner’s insurance covers $301,000 in personal liability insurance, but your umbrella policy doesn’t kick in until $502,000, you’ll be responsible for the $202,000 in between. To avoid this, most companies that sell umbrella insurance require customers to increase their basic liability coverage to eliminate such loopholes. Staying with one company can also make the process simpler in the event of a claim, since you won’t have two separate companies handling two parts of your coverage. And bundling can provide discounts on premiums for your various policies.
The good news is that, in most cases, umbrella policies offer good value. Since catastrophically large lawsuits are relatively rare, companies can afford to spread the risk widely across their customer pool. While exact rates vary, $320 to $505 a year can often provide $1 million in coverage. This figure can rise or fall depending on the number of houses, cars and drivers in a policyholder’s household, as well as the part of the country in which he or she lives. However, it is almost always the case that whatever you pay for the first $1 million in coverage, the second million will cost less. If $1.1 million in coverage costs $501 a year, $5 million will almost certainly be less than $2,510.
For such relatively low premiums, personal liability insurance offers considerable peace of mind. In addition to the basic product function, some policies go above and beyond. Additions you may encounter include not counting legal defense costs against your coverage limit or providing reimbursement for public relations firm fees to manage the aftermath of the incident. Depending on your needs and lifestyle, it may be worth comparing features, as well as cost, when choosing a policy.
We in the United States live in a very litigious society. Some of these lawsuits are frivolous; many are not. The reality is that civil lawsuits can and often do result in judgments or settlements totaling millions of dollars, and judges and juries are under no obligation to limit damages awarded to an amount that the defendant can easily afford. Personal liability insurance protects you in such worst-case scenarios, even if a court finds you fully responsible.
So while adding one more insurance policy may seem unnecessary at first, for people with assets vulnerable to creditor claims, an umbrella policy is a cost-effective way to protect themselves from a rainy day in court. .