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; Car and home insurance or earner insurance protect your major tangible assets.
The list of personal liability insurance, often called an “umbrella” policy. But when it comes to a rainy day – or an expensive process – sometimes nothing but an umbrella do.
As the name suggests, the coverage of personal liability mainly exists to protect against claims of liability. In most cases, this means finding yourself and your assets the goal of a civil lawsuit. A policy of personal liability may seem like overkill for people who already have three or four insurance policies. It is true that not everyone needs such protection. But an umbrella policy effectively defends your assets and future income against damage claims that can come from a wide variety of scenarios. In addition to flat insurance for beachfront property, liability insurance is a product that you hope you will never need to use, but one that can make considerable peace of mind in the meantime.
Who needs liability insurance?
Some level of personal liability coverage is integrated into the homeowner’s insurance (or lease) and auto insurance. For many people, this may be enough. In part, this is because some types of assets are shielded by state and federal law. For example, a court may not force you to use qualified retirement accounts, such as 401 (k) s, to pay a legal judgment, and most states have laws that protect traditional IRAs. Some states protect Roth IRAs and other retirement accounts. Many states also protect your primary residence, although the exact rules are different. Florida, for example, offers very strong protection in this area, while other states may only protect a certain level of home equity.
You can also protect certain assets from lawsuits through tools for estate planning, such as properly structured and funded irrevocable trusts. However, be careful to set up such trusts immediately after an incident that you fear could cause a lawsuit. If it looks as if you are just trying to evade future creditors, the courts may decide that the transfer of assets is fraudulent, so that the assets are eligible to pay a judgment.
If you do not have many assets outside your retirement savings and your primary residence, your coverage liability may be sufficient. The second homes and investment accounts are not vulnerable. High-income earners, and their spouses, may also want to consider their coverage options because courts have been known to garner wages to satisfy judges.
While the amounts vary by geography and insurance policy, the homeowner’s insurance usually includes up to $ 300,000 personal liability coverage. Auto insurance typically covers up to $ 250,000 for each person and $ 500,000 per accident involving body harm, and less for incidents involving only property damage. But lawsuits for serious accidents can sometimes result in judgments or settlements for millions of dollars. This is where umbrella policies kick in.
Most people think of car accidents as the main trigger for such lawsuits, and with good reason, because car accidents are relatively common and can cause a lot of damage. There are however a wide variety of situations in which you can be liable for an accident. You could host a party at your home, where one of the guests is seriously injured. Your dog may bite a stranger or acquaintance. If you use a household staff, such as a nurse or a health-care home, the employee may sue not only because of physical injury, but also for incorrect termination or harassment.
There are other responsibilities that may not fall so easily. For example, the hyperconnected world of social media creates many more opportunities to slander or defame someone, even without deliberately set to do so. Your teenage or preteen children may also create such problems; In a worst case scenario, they could end up with a cyber bullying incident or harassment that takes a tragic turn. Teenagers also increase your liability when they get behind the wheel. Even adult children can trigger statutes for “vicarious liability” that could leave you personally responsible in certain circumstances, such as if they borrowed your car and were involved in an accident.
Another area that some people overlook is the risk of sitting on a board for an unprofitable organization. Many nonprofits are too small to offer much, if any, protection for the personal assets of board members in cases where the organization and its board of directors are unsuccessful. Board members may want to consider directors and officers insurance specifically, as or in place of an umbrella policy. People whose charitable work – or whose professional activities – put them before the public eye may also want to consider a higher liability coverage due to the potential damage a lawsuit could do to their reputations and their financial health.
When considering the need for an insurance of personal liability, it is also worth considering the common law concept of liability. In many jurisdictions, a plaintiff can recover all the damages from any of multiple defendants, regardless of guilt. In other words, if four defendants are all equally responsible, the plaintiff can recover 100 percent of damages from one of them and nothing from the other three. So many attorneys concentrate in such cases on the defendant with the highest net worth, according to the theory that this method is the most likely to secure the greatest payout for their client.
How much liability insurance should you carry?
As you know, people with a high net worth, high income potential or both have reason to worry about their liability exposure. Once you decide to buy an umbrella policy, the next logical question is how much insurance you should buy.
Unfortunately, there is no specific formula to determine the correct coverage. A good rule of thumb is to carry at least enough insurance to cover your net worth and the current value of your future income stream. A certified financial planner, or an insurance agent can help you with such calculations, and there are also a variety of tools online designed to help you calculate a figure. Remember that tools and advice from insurance companies will tend to sell you more insurance than you may need, but it may still be helpful to see what factors will affect your coverage. Some of them are intuitive, such as your current network and assets you possess. Others are more equally concerned about the potential for accidents; For example, you want more insurance if you own a trampoline or a pool, and you can also expect slightly higher premiums.
As with any insurance decision, shopping is a good idea. However, there are real benefits to buying the majority or the whole of your insurance products with one provider. Consolidating your coverage will not only ease the administrative burden, but it will also make it easier to recognize potential gaps. For example, if your homeowner insurance covers $ 300,000 in personal liability insurance, but your umbrella policy will not cover up to $ 500,000, you will be responsible for the $ 200,000 in between. To avoid this, most companies that sell umbrella insurance require customers to increase their coverage of base liability to eliminate such holes. Sticking to one company can also make the process simpler in case of a lawsuit because you will not have two separate companies dealing with two parts of your coverage. With bundling you can get discount 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 among their customer pool. While the exact rates are different, $ 300 to $ 500 annually can be coverage of $ 1 million. This figure may rise or fall depending on the number of homes, 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 what you pay for the first $ 1 million coverage, the second million will cost less. If $ 1 million coverage costs $ 500 per year, $ 5 million will almost certainly be less than $ 2500.
For such relatively low premiums, the insurance of personal liability offers considerable peace of mind. In addition to the basic function of the product, some policies are higher and further. The extras that you may incur are not counting legal defense costs against the coverage limit or offering reimbursement for public relations company costs to handle the case of the incident. Depending on your needs and your lifestyle, it may be worthwhile to compare features and costs when choosing a policy.
We in the United States live in a highly litigious society. Some of the lawsuits are frivolous; Many are not. The fact is that civil suits can, and often do, result in judgments or settlements that run into millions of dollars, and judges and juries have no obligation to limit the awarded damages to an amount that the party is successful can comfortably afford. Personal liability insurance protects you in such worst-case scenarios, even if the court finds you absolutely responsible.
Although after adding a longer insurance policy may seem unnecessary at first, for people with assets vulnerable to creditors’ claims, an umbrella policy is an economically sensible way to protect against a rainy day in court.