When most people consider their insurance needs, only certain types of coverage usually come to mind. Health insurance and life (or sometimes disability) insurance protect you and your loved ones; Car and home owner or renter’s insurance protects your principal tangible asset.
Personal liability insurance, often called an “umbrella” policy, rarely makes this list. But when a rainy day – or a costly lawsuit – changes, sometimes there will be nothing but an umbrella.
As the name suggests, personal liability coverage exists primarily to protect against liability claims. In most cases, this means the goal of yourself, and your property, a civil lawsuit. A personal liability policy can seem like overkill for individuals who already have three or four insurance policies. It is true that not everyone needs this kind of protection. But an umbrella policy effectively protects your property and future income against claims of damages that may arise from a wide variety of scenarios. Much like flood insurance for beach property, liability insurance is a product you hope you never need to use, but one that can create substantial peace of mind in the meantime.
Who needs liability insurance?
Some level of personal liability coverage is built into homeowner’s (or renter’s) insurance and auto insurance. For many people, this may be enough. In part, this is because certain types of property are protected by state and federal law. For example, a court may not compel you to use qualified retirement accounts such as 401 (k) s to pay legal retirement, 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 exact rules vary; For example, Florida provides very strong protection in the region, while other states can only afford a certain level of domestic equity.
You can also protect certain assets from lawsuits through estate planning tools, such as properly structured and funded irrevocable trusts. However, beware of setting up such trusts directly after an event you fear may trigger a lawsuit. If it appears that you are trying to dodge future creditors, the courts may determine that the asset transfer is fraudulent, which is available to pay these assets a judgment.
If you do not have your retirement savings and multiple assets outside of your primary residence, then your existing liability coverage may be sufficient. But second home and noninvestment investment accounts are unsecured. High income earners and their spouses may also want to consider their coverage options, as courts have been known to wage to satisfy a decision.
While the amount of geography and insurance policies vary, homeowner’s insurance typically includes personal liability coverage of up to $ 300,000. Auto insurance typically covers $ 250,000 for each person and $ 500,000 per accident from the accident, and is lower only for those incidents that involve only damage damage. Yet serious accident lawsuits can sometimes result in multi-million dollar judgments or settlements. This is where umbrella policies kick in
Most people think of car accidents as the main trigger for such lawsuits, and with good reason, since car accidents are relatively common and can cause a lot of damage. But there are many situations in which you can find yourself liable for an accident. You can host a party at your home where one of the guests is seriously injured. Your dog may bite a stranger or acquaintance. If you employ domestic workers as a nanny or a home health aide, the employee can sue not only for causing bodily harm, but also for wrongful termination or harassment.
Other obligations are risks that do not come to mind so easily. For example, the hyperconnected world of social media creates many opportunities to discredit or discredit someone, without even intentionally doing so. Your teenager or preterm children can also cause such problems; In a bad situation, they may be involved with a cyber incident or harassment that takes a tragic turn. Teens also increase your responsibility when they get behind the wheel. Even adult children can trigger “bizarre liability” methods that can make you personally liable under certain circumstances, such as when they borrow your car and are then involved in an accident.
Another area some people overlook is the risk of sitting on a board for a non-profit organization. Many nonprofit companies are too small to offer much, if any, protection to the personal property of board members in cases where the organization and its board of directors are sued. Board members may want to consider the insurance of directors and officers in particular, as well as an umbrella policy. People whose charitable work – or whose business activities – place them in the public eye, may want to consider potential liability coverage because the potential harm a lawsuit could do to their reputation as well as their financial health.
When the need for personal liability insurance is considered, it is also worth considering the common law concept of “joint and several” liabilities. In many jurisdictions, a plaintiff can recover all damages of any kind from multiple defendants, regardless of the blame. In other words, if the four defendants are all found equally liable, the plaintiff can recover 100 percent of the damages from one of them and nothing from the other three. Many attorneys thus focus on defendants with the highest net worth in such cases, under the theory that this method is the most likely to secure the largest payment for their client.
How much should you bear?
As you can see, a person with a high net worth, high income potential, or both, has reason to worry about their liability risk. Once you have decided to buy an umbrella policy, the next logical question is how much insurance should you buy.
Unfortunately, there is no specific formula to determine the correct amount of coverage. A good rule of thumb is to insure at least enough to cover the present value of your net worth and your future income flow. A Certified Financial Planner ™ or an insurance agent can help you with these kinds of calculations, and there are also a variety of tools online with which you can calculate a figure. Keep in mind that equipment and advice from insurance companies may make you want to sell more insurance than you need, but it can still be useful to see what factors will affect your coverage. Some of these are simple, such as your current net worth and the assets you have. Others are potentially more concerned with accidents; For example, if you own a trampoline or a pool, you want more insurance, and you can also expect a slightly higher premium.
As with any insurance decision, it is a good idea to shop around. But the majority or the entirety of your insurance products has real benefits of buying with a provider. Consolidating your coverage will not only reduce the administrative burden, but it will also make it easier to see potential gaps. For example, if your homeowner’s insurance includes $ 300,000 in personal liability insurance, but your umbrella policy doesn’t kick up to $ 500,000, you’ll be responsible for $ 200,000 in between. To avoid this, most companies selling umbrella insurance require customers to increase their base liability coverage to eliminate such holes. Sticking to one company can also simplify the process in the case of a lawsuit, as you will not have two separate companies that handle two parts of your coverage. And bundling can secure discounts on premiums for your various policies.
The good news is that, in most cases, umbrella policies provide a good value. Because frighteningly large lawsuits are relatively rare, companies can afford to spread the risk widely in their customer pool. While exact rates vary, $ 300 to $ 500 per year can often secure $ 1 million in coverage. This figure can rise or fall depending on the number of homes, cars and drivers in the policyholder’s home, 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 coverage of $ 1 million, the second million will cost less. If the cost of $ 1 million in coverage is $ 500 per year, then $ 5 million would almost certainly be less than $ 2,500.
For such relatively low premiums, personal liability insurance provides substantial peace of mind. Apart from the basic function of the product, some policies go above and beyond. Extras you face may include not counting legal defense costs against the extent of coverage or offering to reimburse a public relations firm’s fees to manage the outcome of the event. Depending on your needs and your lifestyle, it may be worth comparing the features, as well as the cost, when choosing a policy.
We live in a highly litigation society in the United States. Some of these lawsuits are trivial; There are not many. The reality is that civil suits can result in decisions or settlements running into millions of dollars, and judges and judges are under no obligation to limit the damages provided by a party to a lawsuit at rest. Personal liability insurance protects you in such worst cases, even if the court considers you fully liable.
While adding another insurance policy may seem unnecessary at first, with property that is vulnerable to creditors’ claims, an umbrella policy is a financially prudent way to protect a rainy day in court.