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January 24, 2013

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I have 1 million, but I'm thinking about bumping it up to 2 million. I think that is plenty of insurance.

"In a lawsuit, lawyers will aim for your available assets but probably settle for a comparable insurance amount."

This is extremely helpful. I have $1M in umbrella b/c it was the basic starting amount. But I admit I never understood why people based their umbrella insurance amount on their total assets, because everything else we insure is sensibly based on potential loss (homeowners insurance), not what we have (e.g. If I'm worth $1M and I get a $1m policy and i lose a $2m lawsuit, I just lost everything, right?) Now I get there's a logical reason for this advice.

An extra $60 per month? Year?

greg - that'd be per year. umbrella insurance is REALLY cheap b/c the odds of it ever paying out is miniscule (they require certain coverage amounts on your auto and home policies, so the vast majority of all claims will be fully paid by these). Then the odds of the second million in a policy being required is even incredibly smaller than that.

Umbrella insurance is the lottery ticket of the insurance industry (thus the need for the "peace of mind" argument, which works on me...)

We currently have a $1M umbrella plan. After looking over our assets in our end of the year net worth review (I take care of the finances and try to make sure hubby knows where we stand a couple of times a year), we decided to increase to $2M when we renew this year.

I don't have it but I think it is something I will need to look into over the next few years... at least I hope I get to the point where I need to look into it!

I think it depends on your risk factor. If you're a landlord or have a blog with big audience, your chance of getting sue is much bigger right? If you're a regular working stiff, I don't see the need to get a huge umbrella plan.

"Base your umbrella policy on the value of your assets. In a lawsuit, lawyers will aim for your available assets but probably settle for a comparable insurance amount."

I am not sure this is entirely correct.

For instance, if you are a doctor or an executive, they know you have a lucrative source of income. They are going to aim for your assets and your income. If they win more than your assets they can put a judgement on you and get your wages garnished.

In addition I believe your insurance coverage is discoverable during the discovery phase of litigation. So if you have 1 million in assets and 1 million in insurance coverage they can certainly sue you for 2 million and try to take your insurance and your assets.

Now of course they still have to justify in court the amount they sue for so they cannot just sue for any number based on what you have. But I do not feel that the advice to simply insure what you have is entirely sound.

I think it is more sound to insure for reasonable maximum exposure. If you have 1 million in assets but it is reasonable for a lawsuit to reach to 3 million in some cases, then you should carry 3 million in coverage. Carrying coverage that just covers your assets does not mean they cannot still get your assets or even future income streams.


qualified retirement accounts are not typically "available assets' in a lawsuit BTW, (though potential future earnings SHOULD be considered)..I include my retirement accounts in my liquid net worth and have corresponding $2.5M of Umbrella coverage. That tripled with homeowners and auto inurance runs me TOTAL COMBINED cost of less than $900.00~ a YEAR!..great peace of mind on all 3 fronts!

Though not anywhere close to a million in assets I have $2 million because the difference between 1 and 2 was minimal and I had and will continue to have multiple teenage drivers on my insurance for many years. I suspect once my children are off my insurance I will either eliminate the umbrella insurance or reduce it back to $1M and rely on homeowners and auto individually once again. My rationale is most of my assets are in retirement accounts and my personal residence, both of which are hard to get to for lawsuits, and by the time my kids are off my insurance I'll be pushing retirement so it will be hard to go after future earnings. That said, I will likely compare any desired increase in the insurance amounts on the home and auto policies as compared to just maintaining the umbrella policy when the time comes.

I'm wondering where you get your umbrella insurance. I was only able to get it through the same company I have car insurance with. They outsource this to another company. I called about 10 insurance companies that claimed to offer it but they would not write a policy if I did not have car insurance with them. This limits my choices. Any web based ideas? Please do not suggest a local agent. I have called every agent in my county at some point only one ever followed up even after having all my information and they are not interested in helping me with umbrella. Other agents would not return my calls! Even AAA would not return calls to provide a quote! I'm in FL and have to use Citizens for condo insurance so nobody is interested in serving me.

I have a $1M umbrella policy with State Farm. I believe it has to be held by the insurer that covers you for all of your other liabilities. The premium is around $250/year. I took it out many years ago when I was selling my financial software and was concerned that if my software was found to be in error in some way I might be sued. It never happened and although my software is no longer on the market and will finally stop working this July I will keep the insurance in case I were to be found responsible in a serious auto accident. We now only drive about 3,000 miles/year in close proximity to our home and stay off freeways so I'm probably overinsured. However I would rather be overinsured than underinsured.

I've never understood the notion that your insurance should match your assets. Lawyers are not dumb - they know that for anyone who isn't completely judgment-proof, insurance is likely going to play a factor. So why would they limit their demands to just your provable assets? I would think they'd go for as big a judgment as possible. They can always garnish your wages for life, after all.

I used to have an umbrella policy when I had a vending business, but not anymore. I do have one rental house, so you've got me thinking I should look into it again.

The changes of losing a >$1M lawsuit are roughly 1 in a million. Strick is right, this is similar odds to buying a lottery ticket. Actually this is a worse deal than buying lottery tickets given the cost/ payout ratios. So this is not a great 'buy' financially given the odds involved.

Most people do not 'need' any umbrella. But if you have a lot of assets to protect I don't think it a bad idea as long as the cost is trivial to you. Its not a bad price for peace of mind. But then I also like buying an occasional lottery ticket too.

I am not a lawyer (thank goodness) but would emphasize/add:
1. Totally concur with the focus on protecting future earnings..a major lawsuit can take your present AND your future finances.
2. Don't forget even if you win, I think the liability policy will still cover the mega cost of your lawyers (or the insurance company's lawyers) defending you. I suspect that without umbrella insurance, at some point the cost of the people "on your side" will even start billing you unless you have umbrella funds.
3 While there is regional variation, keep in mind just the "room alone", or the "rent"of most ICU beds is approximately $1200-$1500 per night, excluding any medicine, services, procedures, imaging etc. If your teenager paralyzes someone in an auto wreck, you will pay the hospital and all the future therapy/nursing home bills (see the past discussions of long term care costs and imagine now it starts in childhood and you are "on the hook" for 60 years or so!). Hence the morbid "joke" of many lawyer friends that from purely a Machiavellian cost standpoint, it is "better" to kill someone than permanently injure him/her.
Again, not a lawyer,but food for thought in the discussion of umbrella insurance and the need to prevent the "black swan" financial disaster.Admittedly the "black swan" is rare as Jim points out, but peace of mind for less than a thousand bucks a year should be considered.

@jim,

What do you base those odds on?

With 300 million people in the US that would mean if those odds are annually that there would be 300 such successful cases per year. If you wanted to apply it to everyone.

However people who have no assets and a low income won't get sued because no lawyer wants that case. That eliminates a huge percent of the US population right there. So if you only look at the people who actually have assets worth going after that will change the odds quite a bit. Then if you look more carefully at people who have activities that are more likely to put them in situations that could involve a lawsuit (businesses, real estate, etc.) that will once again change the odds quite a bit.

If you look at people who have assets/income that makes such a lawsuit worth pursuing and are also involved in activities that increase the odds of being sued I would find the odds at 1 in a million to be orders of magnitude too low. But if you can back up the number I would be curious to know where you got it from.

@Apex

Jim is spot on. Here's a post with the details:
http://www.freeby50.com/2010/10/how-likely-are-you-to-lose-1m-lawsuit.html

Figures come from the doj, summarized here:
http://bjs.ojp.usdoj.gov/content/pub/pdf/cbjtsc05.pdf

@Apex

Should have read your comment more carefully before responding. You make some good points about people with money being more likely targets, as well as certain professions (doctors especially). So adjust accordingly if you think you're at particular risk.

But Jim is right that the overall chance for individuals who aren't specifically doctors is roughly 1 in a million.

What percentage of your paycheck can be garnished if a lawsuit is lost? Is the number completely up to the judge or is there a ceiling?

Great discussion! I have $2M umbrella insurance, which more than covers my assets. I hadn't realized that the odds of losing a $1M lawsuit are 1M to 1 -- so even at $150/year, I'm only getting $1 value.

I initially got it to cover my rental properties. When I asked a lawyer whether I should create an LLC for my rental houses, he advised that I get umbrella insurance instead (an LLC is $800/year minimum tax in California).

This is a great discussion. Does anyone know whether the insurance company's lawyers would get involved if I had a lawsuit (saving me a major stress to have them on my side), or if they just step in to pay after?

@Jim, Sean,

So Jim's numbers are based on the assumption I laid out in the second paragraph of my comment. The rest of my post lays out why I think that overstates the odds.

But after reviewing the data that Jim's post on his blog is based on I think the data itself does not lead to a conclusive decision because the data is such a small subset of cases filed.

Based on the documents from the DOJ that Jim used, there were nearly 27,000 civil cases that went to trial in 2005 but there were 7.4 million that were filed. So for 7.37 million of those cases we do not know what happened. Many may have been thrown out, many were settled. What were they settled for? We don't know. Were many of them small? Likely they were. But were some of them over a million? Likely they were. If there is a chance that you could lose 10 million in court are you happy to settle for 1.5 million out of court. You may very well be. Court is a crap shoot as anyone who has been there will tell you. In fact the risk of a much higher loss could make it such that the odds of a large payment might be much higher in a settlement than in a judgement because the defendant simply cannot afford to take the risk of a rainmaker judgement. Now for individuals who have no umbrella insurance they likely can't settle for 1.5 million. So perhaps that logic applies more to larger businesses, but it could also apply to individuals who are well insured and after consultation with their insurance company all agree that settlement is the safer option. We just don't know because nearly all out of court settlements are confidential.

So I don't believe these stats from the DOJ are enough to conclude what your odds are. They represent 3/10ths of 1% of the number of civil cases that were filed. In the other 99.7% of cases we have no idea what happened.

7.4 million civil cases filed in one year is huge.

A second thing that is interesting as it relates to real estate investing is that of the cases that went to trial the 4th highest median payout was for premises liability and the median payout was almost $100,000. That means half of them were higher than that. There were almost 2000 of these premise liability cases that went to trial. If the ratio of cases filed to cases that went to court in the average was true also for premises cases that would mean there were over 500,000 premises liability cases filed. That may be too high because we don't know what percent of premises cases went to trial versus the percent of all civil cases that went to trial but even if that is too high it indicates that the number is very large.

666 of the premises cases were won by the plantiff which means the percent of successes was about 1 in 3 whereas the average of all cases was closer to 60%. I doubt this is a coincidence. Property owners are more likely to carry insurance and more likely to have access to good legal council to help in their cases. If you have unmbrella coverage your insurer is going to vigorously defend you in court if the liability is large enough because that is cheaper than paying a large judgement. If you don't have insurance you have to pay to defend yourself.

This can further be seen by looking at other types of cases. Winners in medical malpractice was only 24% (584 of 2449). Doctors have huge malpractice insurance which is going to bring an army of lawyers to defend them. Motor vehicle cases were won by 63% of plantiffs (5964 of 9431). Most of these cases have an individual as the defendant who does not have an umbrella policy and has only between 25-100K of liability coverage on their auto policy. The insurance company isn't going to spend 10-20K in legal costs to try to avoid losing a suit for 25K so you are mostly on your own, and you lose.

I agree with Jim that liability suits are a lower probability event than many people think. This is why people go through so many hoops with multiple nested LLC companies to try to protect themselves. I argue that most people doing this are doing it in a way that will allow a plantiff to pierce the corporate veil and show that the company is not a separate and distinct unit from the individual and thus provide no protection.

However, I think the odds for those who have assets and are participating in activities that carry greater risk is much higher than the 1 in a million stated based on the DOJ numbers. I don't know what they really are but they are certainly high enough that if you have the assets and the participate in activities that increase your risk and don't carry umbrella insurance I think you are taking an excessive risk that is not worth taking.

It's worth noting that the number of malpractice cases that went to court was about the same as the number or property premise cases and the number of winners was less than property premise cases. The median award was 400K so the payout was 4 time higher but there is no sane doctor who doesn't have malpractice insurance.

If you are in a higher risk activity, you need umbrella insurance.

@SteveD,

Yes the insurance company lawyers are going to come to your defense if the amount being sued for is high enough.

I do not believe as a landlord your odds are only 1 in a million and you can read why I believe that above.

Further more your insurance does not only cover you for 1 million dollar suits. It covers you for 10K suits, and 100K suits and 500K suits as well. Just like your car insurance doesn't cover you only if you total your 30K car, it also pays for the 3K fender bender which is much more common than the 30K accident that totals your car.

So it is not correct math to calculate your value based only on paying out the maximum. The majority of the value actually comes from paying much less than the maximum as that is a much higher likelihood.

Jim is absolutely correct that million dollar payments for liability are rare. I just don't think 1 in a million is the accurate way to asses that for individuals with assets who are in a higher risk activity.

As I stated in my post above million dollar malpractice suits are also rare. Notice those suits are also included in the numbers Jim is using and they are no more common than property premise suits. Yet there is not a sane doctor out there that doesn't carry some form of malpractice insurance.

@Apex you make a good point noting that the data only represents cases that went to trial. Of the remainder, there are really only a few possibilities:

1) The case was thrown out
2) The case is still ongoing
3) The case settled

The third option is really the only one that affects your overall risk.

I can only speculate here, but logic suggests that the overwhelming majority of cases that settle do not end up ruining the defendant financially, simply by the fact that the defendant must agree to the settlement. Most any rational defendant would choose to take their chances at trial rather than agree to a settlement that bankrupts them. So I think it's not unreasonable to focus on trial outcomes when assessing risk of a truly catastrophic loss.

All those settlements ARE a great argument for having ADEQUATE insurance, but I don't think they lend much weight to the idea of insuring beyond $1 million.


@Sean,

I think I addressed that in my post. I agreed there that we can assume individuals without insurance who are not excessively wealthy would not agree to a settlement that ruins them. However we do not know how many people have large assets with large insurance policies and choose to settle for an amount that is large rather than risk a much larger amount in court.

As to not insuring for more than 1 million that is certainly a defensible choice. 1 million in insurance is very good coverage.

However when you are running a multi-6 figure business or real estate investment business with a multi-7 figure net worth do you really cut corners by saving $67 bucks on an extra million or 2 of liability insurance? Perhaps you do. I don't.

And if that law suit comes and they sue you for 3 million and your lawyers tell you they think the amount they are asking for is excessive so hopefully the 1 million dollar coverage will be enough, do you wish you spent the $67. I do.

@Apex by the way, I'm not arguing against umbrella insurance, I'm just suggesting that more than $1 million worth is probably excessive for most people.

You are 100% correct that engaging in lawsuit-attracting activities changes the calculus entirely, though, and landlording certainly qualifies.

I think we're pretty much in agreement, overall.

@Sean,

Yes, I think you, Jim and I are all in close agreement.

I know none of you are saying don't get umbrella insurance. The question is 1 million or 2 or 3. While the risk is low all insurance is is a risk spreading mechanism. Even though the risk is low the ramifications of it happening are so disastrous that for the extra 67 bucks I would sooner take out extra insurance even if it is even more unlikely.

Clearly it is more unlikely, that is why the second million is so much cheaper than the first million.

I just figure that in the grand scheme of things when I have costs for my rental business that approach 100K in a given year and as I expand will continue to grow into the multiple hundreds of thousands, $67 bucks for an extra million in coverage isn't even half the cost of getting a furnace repairman out to the property once. It's just too cheap to take the risk for me, no matter how small that risk is.

"The changes of losing a >$1M lawsuit are roughly 1 in a million. Strick is right, this is similar odds to buying a lottery ticket. Actually this is a worse deal than buying lottery tickets given the cost/ payout ratios. So this is not a great 'buy' financially given the odds involved."

Jim, I'll trust that those numbers are accurate for the sake of discussion, but I would absolutely not compare this to a lottery. In a lottery, you have a very small chance of winning a large payout. In lawsuits, you have a very small chance of LOSING everything. I don't play the lottery, but when my assets get a little bigger you can bet your you-know-what that I'll spend the couple hundred bucks or whatever it is a year to insure against the small possibility of losing everything.

Apex, thats a good point, the numbers I looked at don't represent the cases that don't go to trial.

I wrote that one a while ago so I don't recall the details. I'll have to revisit it and try and find about the other 7+ million cases. THe DOJ report I cited does say that trials only account for 3% of dispositions. So that means only about 899k cases are disposed. Not sure what happened to the other >6M cases filed but not disposed.

Also found this data :
http://www.courtstatistics.org/Civil/20124Civil.aspx

For the 17 states they looked at only 6% of civil cases are tort. I assume 17 states a good sample so that 6% figure is close enough to national rate.

61% of the civil cases are contract disputes. Plus theres a 11% probate and 11% small claims. So 83% of civil cases are in those 3 categories.

So the vast majority of civil cases wouldn't apply to something like getting sued for personal liability.

Jim

I think umbrella insurance is probably one of the most under-used and under-appreciated types of insurance available to consumers. I mean, the fact that you can cover almost everything that can happen with umbrella insurance really does offer the peace of mind more people need. Not to mention the fact that it is CHEAP. Like you said, an extra million for $60 is not bad at all. It would be interesting if insurance companies began cross-selling umbrella insurance more often.

Several people are quoting a price of around $60 for a $1M umbrella policy.

I have checked online and the $60 is for one quarter and not for one year and this is close to what I have been paying at State Farm for many years.

Limey, I think FMF said that the $60 was for an "extra" $1M. He said he increased his coverage to $4M. So it may just be +60 to go from 3 to 4M.

I've seen prices around $100-200 for $1M. I expect it depends on the situation and the location. Insurance costs vary a lot.
Also it depends on how the insurer handles the auto/home liability. They usually stack your umbrella liability on top of your home/auto liability. So if the home/auto liability maximums differ then the cost of umbrella liability may differ.

I finally had time to read all the comments. I generally agree with what Apex has said. Liability insurance makes sense if you have high risks. I think the changes of a large lawsuit are small and 'most' people do not need high $1m level liability coverage. Of course people in high risk groups have more cause to worry.

Unfortunately I can't find good data covering ALL civil cases so my original analysis may be flawed. The report I used only looked at trial cases. So its hard to find any good info on what the real number of >$1m cases there are filed in courts versus settled outside courts.

Apex said: "if you only look at the people who actually have assets worth going after that will change the odds quite a bit."

Thats a good point too which I had not considered. Lets say roughly 5% of the households are millionaires or about 5M millionaires in the nation. One would expect that mostly only millionaires would stand to lose $1M or more. That puts the odds at 300 in 5M or 1 in 16,667. However I'm sure that there are $1M judgements against people who do not have $1M assets. You sue someone and garnish their wages, etc. But its still a good point and I would assume that most of the people losing >$1M lawsuits have $1M to lose.

Jonathan said : "In a lottery, you have a very small chance of winning a large payout. In lawsuits, you have a very small chance of LOSING everything"

In one respect I think that the impact of +1M is equivalent to -1M so I think its comparable. However psychologically I would agree that the negative impact of 'losing everything' would outweigh the positive impact of a potential 1M windfall.

Jim

Jim - the impact of +1M vs. -1M is not at all comparable if your net worth is 1M.

What if your net worth is $0 or less?

Vastly more Americans in that situation.

As I said psychologically the prospect of 'losing everything' has more impact than the prospect of gaining $1M.

But numerically -1 is equivalent in magnitude to +1.

@Jim,

Thanks for reading through my comments and analyzing them. Your new analysis on hypothetical numbers (5 Million millionaires is actually really close to the real number but I suspect you knew that) of 1 in 16,667 if you have assets worth going after is starting to get closer to where I suspect the real risks probably are. Once you add in those participating in activities of higher risk and consider potential out of court settlements you probably get down to the 1 in a few thousand range. This is still very low odds. But for people who might face those kinds of odds the insurance is actually pretty cheap.

@Old Limey,

As Jim stated the $60+ number is for the "extra" millions in coverage. The first million is by far the most expensive. And this goes to Jim's point about judgements over a million being rare. They know this and so it is much cheaper to get an extra million or two of coverage.

The first million is usually around 150-200 and it usually requires certain minimums on your other policies which might raise those costs as well if you were carry low liability on your homeowners and auto policies.

It's also worth nothing that when you operate a business or real estate investments once you reach a certain size you need a separate commercial umbrella in addition to your personal umbrella. I am in that situation. My personal umbrella would cover me for up to 5 property locations. Since I have more than that I need a separate commercial umbrella for my real estate properties and this is a little more expensive than a personal umbrella but still very affordable.

One other way to look at this is simply assuming the insurance companies got the risks / costs right and reverse engineer the risks from the prices. So if they charge $100 for $1m coverage then the risk there is 1 in 10,000 of a pay out. That assumes $0 profit for the insurer. If we assume up to 50% profit / overhead costs for the insurer then that doubles to 1 in 20,000.

Hard to know what their actual payout rates are though. I'd expect for a high pay out risk item like this with low probability of pay out theyd want a higher profit rate in general. I mean you don't make $1M risks with 2% profit margins paying $2 at a time... I mean thats like buying lottery tickets. ;)


Jim

However the $1M umbrella coverage is on top of the liability for your home /auto. So they're not looking at paying $1M. They're looking at paying the amount up to $1M above the liability limit you have to have for auto/home. So for example an auto policy might have a $300k max liability so the umbrella would cover the amount between $300k and $1M. So they're looking at extra premium of $150-200 for maybe paying out $700k versus not having the umbrella. That would probably lower the expected risk probability even more.


Jim

@Jim,

I think that's exactly right.

For all the people that the insurance company has insured they need to cover their risks + profit/overhead. That is what they pay the actuaries to figure out and get right.

They insure people across a large risk spectrum but the rates are generally the same unless you are in an entirely different category like malpractice insurance. So if the average risk is in the 1 in 20,000 range some people's risks are much lower than that and some are much higher. If you have a large asset base and participate in the higher risk activities you odds are probably greater than 1 in 10,000.

Everytime I change my behavior I ask myself if it changed my risk profile. If it did, I examine my insurance coverage to see if I feel it is still adequate.

The key is that not everyone's risk is the same and its important to try to gauge if your risks require better protection than you currently have.

Now on the other hand we shouldn't simply assume that the insurance has a reasonable profit margin or overhead level. For all we know this product has 99% profit.

I mean look at flight insurance. One vendor on the web wants $59 for $1M coverage for a single flight. That doesn't mean that the chances of a plane crashing are 59/1M or 1 in 16949. In fact the actual odds of dying in a plane crash are more like 1 in 10,000,000.

Jim

Note I meant that odds of dying in a plane crash for a single flight are 1 in 10,000,000 ballpark.

Jim

@Jim,

I don't know much about flight insurance, but my guess would be it's an oddball product that hardly anyone takes without much competition in the marketplace making its pricing subjective to non competitive offerings.

Umbrellas on the other hand are a ubiquitous commodity product very much like Term Life Insurance. There is almost no profit in a term life insurance policy which you can see by how the agents push whole life so strongly.

I don't know what the profit margin on liability coverage is but I suspect that the ubiquity of the product and the marketplace competition makes it such that the profits are squeezed to a reasonable level.

@Jim,

BTW, You are like an odds machine. Hmmm, Should I take the over or the under on the Super Bowl next Sunday? :)

Bought my first PULP a few days ago, State Farm 2M for $20/month. They only offered me 1M or 2M and it would have been $13/month for the 1M. I had to buy renters insurance as well, and that adds $10/month for 500K. If only health insurance could be this affordable (and I'd be fine with a 10K/yr deductible) ...

I have a million-dollar umbrella policy. Decided to get it after a jogger ran out in front of my car in an unmarked crosswalk...missed him by about six inches. I was speeding; he was in a legal crossing, according to our state's law. If he'd been hurt or killed he or his relatives would have cleaned my clock.

Umbrella insurance is something I've been meaning to do. I need to consolidate my auto and homeowners policies under the same carrier and add the umbrella policy too.

FMF..Are you putting your property remtals ino seperate LLC's (in addition to Umbrella insurance?), I think that would be VERY prudent having each property into it's own LLC...

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