When most people consider their insurance needs, only certain types of coverage typically come to mind. Health insurance and life insurance (or sometimes disability) protect you and your loved ones; your car and landlord’s or tenant’s insurance protects your major property assets.
Personal liability insurance, often called an “umbrella” policy, rarely makes this list. But when a rainy day – or an expensive one – comes along, sometimes nothing but an umbrella will do.
As the name suggests, personal liability coverage exists primarily to protect you from liability claims. In most cases, this means finding yourself, and your assets, the purpose of a civil lawsuit. A personal liability policy may seem excessive to individuals who already hold 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 from damage claims that can arise from a wide variety of scenarios. In the same way as flood insurance for beachfront properties, liability insurance is a product you hope you will never need to use, but one that can create substantial peace of mind in the meantime.
What is Civil Liability Insurance?
Some levels of personal liability coverage are integrated into landlord (or tenant) 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 cannot force you to use qualified pension accounts, such as 401 (k) s, to pay a court order, and most states have laws that protect traditional IRAs. Some states also protect Roth IRAs and other retirement accounts. Many states also protect your primary residence, even if precise rules change; Florida, for example, offers very strong protections in this area, while other states may only offer a certain level of wealth at home.
You can also protect certain assets from lawsuits through estate planning tools, such as properly structured and funded irrevocable trusts. However, attention to creating such trust directly after a feared incident can trigger a cause. If it appears as if you are simply trying to evade future creditors, the courts may determine that the transfer of business is fraudulent, making these assets available to pay a lawsuit.
If you don’t have a lot of assets outside of your pension savings and your primary residence, then your existing liability coverage may be sufficient. But second homes and pension-free investment accounts are vulnerable. High-income earners, and their spouses, may also want to consider their coverage options, since the courts are known to garner wages to satisfy decisions.
While amounts vary by geography and insurance policy, homeowners insurance usually includes up to $ 300,000 in personal liability coverage. Car insurance typically covers up to $ 250,000 per person and $ 500,000 for accidents involving damage to the body, and less for accidents involving only damage to property. However, lawsuits for serious accidents can sometimes result in lawsuits or settlements worth millions of dollars. This is where umbrella policies start.
Most people think of car accidents as the main trigger for such causes, and with good reason, since car accidents are relatively common and can cause a lot of damage. But there are a wide variety of situations in which you may find yourself responsible for an accident. You can organize a party in your home where one of the guests is seriously injured. Your dog may bite a stranger or a friend. If you employ family personnel, such as a babysitter or home health care worker, the employee could sue not only because of physical harm, but also because of unfair termination or harassment.
There are other liability risks that may not come to mind so easily. For example, the hyperconnected world of social media creates far more opportunities to slander or defame someone, even without deliberately putting them on hold. Your teen or preadolescent children may also create such problems; in the worst case scenario, they could end up involved with a cyberbullying or harassment incident that takes a tragic turn. Teenagers also increase your responsibility when they get behind the wheel. Even adult children may come up with “vicarious liability” statutes that can leave you personally liable in certain circumstances, such as if they borrow your car and then are involved in an accident.
Another area that some people overlook is the risk of sitting on a board for a non-profit organization. Many non-profit organizations 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 cited in the case. Board members may wish to consider the insurance of directors and officers specifically, as well as whether or not to pursue an umbrella policy. People whose charitable work – or whose professional activities – put them in the public eye may also want to consider increased liability coverage because of the potential damage a lawsuit could do to their reputation and to their financial health.
When considering the need for personal liability insurance, it is also worth considering the common law concept of “joint and several liability”. In many jurisdictions, a plaintiff can recover all damages from any of several defendants, regardless of guilt. In other words, if four defendants are all found equally liable, the plaintiff can recover 100 percent of the damages from one of them and none from the other three. Many lawyers thus focus on the defendant with the highest net worth in these cases, under the theory that this method is most likely to secure the largest payment for their client.
How Much Liability Insurance Should You Take?
As you can see, people with a high net worth, a high income potential or both have reason to worry about their exposure to liability. Once you have decided to purchase an umbrella policy, the next logical question is how much insurance should you buy.
Unfortunately, there is no specific formula for determining the correct amount of coverage. A good general rule is to bring at least enough insurance to cover your net worth and the present value of your future income stream. A Certified Financial Planner ™ or an insurance agent can help with such calculations, and there are also a variety of online tools designed to help you calculate a figure. Keep in mind that the benefits and advice from insurance companies will tend to make you want to sell more insurance than you might need, but it can still be helpful to see what factors will influence your coverage. Some of these are intuitive, such as your current net worth and the assets you own. Others are more immediately concerned about the potential for accidents; for example, you may 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 around is a good idea. But there are real advantages to purchasing most or all of your insurance products from 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 homeowners insurance covers $ 300,000 in personal liability insurance, but your umbrella policy does not go up to $ 500,000, you will be liable for the $ 200,000 in between. To avoid this, most companies that sell umbrella insurance require customers to increase their base liability coverage to eliminate such forums. Attacking a company can also simplify the process in case of a lawsuit, since you won’t have two separate companies managing two portions of your coverage. And bundling can ensure discounts on premiums for your various policies.
The good news is that, in most cases, umbrella policies offer good value. Since catastrophically large processes are relatively rare, companies can afford to spread the risk widely among their customers. While exact rates vary, $ 300 to $ 500 a year can often secure $ 1 million in coverage. This figure can increase or decrease depending on the number of homes, cars and drivers in an insurer’s home, as well as the part of the country in which they live. However, it is almost always the case that whatever you pay for the first $ 1 million coverage, the second million will cost less. If $ 1 million in coverage costs $ 500 a year, $ 5 million will almost certainly be less than $ 2,500.
For such relatively low premiums, personal liability insurance offers substantial peace of mind. In addition to the basic function of the product, some policies go above and beyond. Supplements you may encounter include not counting the costs of legal defense against the coverage limit or offering a refund for the public relations firm’s rights to manage the fall of the incident. Depending on your needs and your lifestyle, it may be worth comparing features, as well as costs, when choosing a policy.
We in the United States live in a highly litigious society. Some of these processes are frivolous; many are not. The reality is that civil lawsuits can, and often do, result in lawsuits or settlements ranging in the millions of dollars, and judges and jurors have no obligation to limit the damages attributed to an amount that the party in question you can pay comfortably. Personal liability insurance protects you in these worst cases, even if the court holds you fully liable.
Therefore, adding another 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 yourself from a rainy day in court.