Umbrella Insurance Is Always the Right Answer

The following is a guest post from Marotta Wealth Management.

If you have a personal umbrella insurance policy, congratulations. If you don't, you must not have a lot to lose. This important insurance can extend your liability coverage beyond your home and auto insurance by millions of dollars.

We live in a litigious society. Anyone can sue you for any reason. Those with money are targets simply because suing someone without assets is pointless.

Car and home insurance are required, but even $300,000 liability coverage won't protect you in the event of a catastrophe. Your teenage driver is at fault and young people in both cars are seriously injured. Your dog bites a child. You chaperon a class trip and are judged negligent when one of the students tragically dies. You cause an accident on the freeway and a truck filled with expensive cargo is involved. A neighbor slips on your steps and sues you. You write something reckless and unwarranted on the Internet about a certain financial columnist, and he sues you for slander and libel.

The good news is that these events are relatively unlikely. The bad news is that any one of them could result in a judgment well in excess of your liability limits. Your insurance company will just pay their $300,000 share and leave you to defend yourself in court for the remainder. If the judgment doesn't ruin your finances, the legal fees will.

If you receive a judgment for more than your net worth, you could lose everything. Your taxable investments and savings may be subject to the claim. The equity in your house may be at risk. A large judgment can also garnish 2.5% of your wages for the next 10 years and/or any current or future inheritance you receive. Any inheritance left in a generation-skipping trust offers protection against creditors and failed marriages, but many families leave an inheritance outright instead.

You don't want a single accident to wipe out your life savings. Umbrella insurance helps protect you against that possibility.

Personal umbrella insurance sits on top of your auto and homeowners insurance. To get umbrella coverage you must first increase your home and auto insurance liability coverage to where the umbrella policy begins, usually $300,000. Only then can you get additional coverage of $1 million or more. If you get sued for $1.3 million, you would first pay your $1,000 deductible. Your home or auto insurance would pay $299,000 to reach the $300,000 liability on the policy. The umbrella insurance would pay the final $1 million. You would pay nothing more than the initial $1,000.

Being sued for more than $300,000 is not a remote possibility. For example, with today's more effective air bags, surviving an auto accident even with serious injuries is much more likely. As a result, the cost of life insurance policies is decreasing while medical expenses continue to accelerate. We've made cars safer and more people survive the accident. They survive, and then they sue for damages.

Anyone with assets they don't want to lose will benefit from umbrella insurance. Many accidents are the fault of someone with no assets to lose. Unfortunately they can simply not pay or at worst declare bankruptcy and lose nothing. If you are saving and investing, you have something to lose. It isn't clear at what level of assets you should get protective umbrella coverage, but financial pundit Dave Ramsey recommends it for families who have more than $200,000. It certainly isn't just for the ultra rich.

Consider buying more than $1 million in coverage. Getting the same amount of coverage as you have assets won't protect the assets you have. For example, if you have $1 million in assets and you purchase $1 million of coverage, you will lose all of your savings in a $2 million judgment. Thus you need to have enough coverage to satisfy the worst judgment you might receive. Coverage of $2 to $4 million will suffice for most of today's lawsuits.

I am usually not an advocate of insurance products. Umbrella insurance is the exception. It is designed to cover very unlikely but very costly events, exactly what insurance is supposed to do, at a reasonable price. In review courses for the certified financial planner (CFP) exam, prospective advisors are told, "Umbrella insurance is always the right answer."

About 12% of homeowners purchase umbrella insurance. For the wealthy, that number grows to about 50%. The tragedy is that half of wealthy homeowners are betting their entire net worth against the odds of a freak accident, which unfortunately do happen.

Insurance companies will only write an umbrella policy if they also provide your home and auto insurance. They want to know if the underlying coverage gets cancelled for any reason, and they don't trust another insurance company to defend their interests.

Another excellent feature of an umbrella policy is that the insurance company is obligated to provide your legal defense, and the legal costs are paid in addition to your coverage.

The first million dollars of coverage usually costs the most. A typical annual premium might be $150. Subsequent costs are about 65% of the first million for each subsequent million. So $2 million of coverage would cost about $248, and $4 million would cost $443.

Premium costs vary and are subject to a host of issues. When you apply for an umbrella policy, your answers to a number of questions may raise your rates or even disqualify you. Own a Rottweiler or a have been recently convicted of reckless driving and you may not be able to get umbrella coverage. If you serve on a board, you may not be able to get coverage for more than the board's coverage. And if you have a driver younger than age 25 or have a very poor driving record, coverage may cost a $100 more per million. Even if you don't plan on getting umbrella insurance, you might want to apply just so you know what behaviors may limit your likelihood of being sued.

Remember, personal umbrella liability insurance covers only nonbusiness activities. Umbrella policies are also available for businesses and well worth the money. Any umbrella insurance won't cover intentional acts or punitive damages.

For the cost of a splurge on a not particularly memorable restaurant meal, you can enjoy the protection of a $1 million umbrella policy. Insurance agents don't make much commission on an umbrella policy. So you have to call them. Just do it.

Comments

[Unlock Your Dollar]

I have had umbrella insurance for well over a decade, just in case. I have some really large, older trees in my yard, plus I live on a large corner lot, which all leads to more opportunities for problems.

[JeffinwesternWA]

Spot on! Had a biz partner who's 18 y.o son was "partially at fault" in a SERIOUS auto accident, Dad's $500K auto liability "paid out and left", with over $1M+ lawsuits pending against him as owner of the car. 1) Get kids once they are "adults" their OWN POLICY, even if it costs a lot more. Got money, income? GET umbrella coverage for MORE than your net worth and future income. $1.5, $2, 2.5M of coverage isn't expensive! One of my first recommentaions as a Financial planner for over 16~ years...

[KaseyD]

Very timely post; I just renewed my $3 million personal umbrella liability insurance. It's part of my "retirement plan". That is, I don't want to retire penniless because of just one unexpected accident.

My premium, in urban California, is $543/year (I have no risky behaviors). I got a second quote earlier this month of $601/year. Well worth the price; and a fraction of my homeowners' policy.

I do, however, use an insurance company other than my primary homeowner insurance. I got it through affiliation with a professional membership. I'm not sure, but I think that gives me two attorneys on my side, rather than just one. Although either might not necessarily have my best interests at heart. When working in large corporations, I remember we always purchased insurance from multiple firms; so I don't know why it's generally not done for homeowners as the article suggests. Does anyone have thoughts on separate vs. the same insurance company?

[jimmy]

The only downside of umbrella insurance is that once the plantiff who is suing you finds out that you have umbrella insurance, they sue you for even more money. As a lawyer, I've seen this happen many times.

[Apex]

Also agree strongly with this post.

@Jimmy,

As a lawyer is there a way to keep the plantiff from knowing about this (probably hard as the insurance company is paying the legal fees but can that fact be kept secret from the plantiff)? Are you required by law to disclose your available assets and insurance policies and what their values are?

If you are that is unfortunate law in my opinion. The suit should be based on the claim not your ability to pay. If you have no ability to pay then I guess they won't get paid but if you have greater ability to pay that should not change what their claim is worth.

So what rights do you have as a defendent to not disclose or keep private the information about your umbrella? Any?

Thanks.

[balor123]

You may have underestimated the cost a bit. In the state of MA, the cost of auto with the discount insurers like Geico and Progressive run about $500/driver/year. Due to the recent deregulation, the full service insurers (Liberty Mutual, Amica, etc) haven't lowered their prices (they make more money by charging lazy existing customers more) and insurance with them runs about 50% more for the same coverage. To get Umbrella coverage, then you first have to pay another ~$500 for your existing coverage so the actual cost, at least in MA, is on the order of $500 - $1k per year.

[jim]

I think that umbrella insurance is a good idea IF and only IF you have assets to protect. There are a lot of people out there with assets to protect that should have such insurance. But theres also a lot of people who have no assets who would be pretty much wasting their money on umbrella. Chances of losing a very large lawsuit judgment are really not all that high. Its something to worry about because it would be financially catastrophic but it is not something that everyone absolutely must have.

[Old Limey]

I have had an umbrella policy for about twenty years. This does require that you give one insurance company all of your business, I use State Farm. One other thing my wife and I are both particular about is that we only allow family members to be passengers in our cars. Even good friends might not hesitate to sue you in the case of a very serious accident or death, especially if they know you have deep pockets. I like to hike with a senior group but I would not join a carpool where I would be obligated to take a turn as the driver in my own vehicle. Currently our group rents a 45 passenger bus from the top company in our area, it works out at $30/person for an 8 hour day but it's worth it not having to drive, especially on the way home after a very strenuous and long hike in the mountains.

[Adam]

@jimmy and Apex

it works both ways. A friend of mine had a son in a car accident. He got a call from his insurance company and said that they had paid out the max on his policy and he was still being sued for more. They recommended that he get a lawyer.

My friend's response was "I have a million dollar umbrella policy with you."

The insurance company had their lawyer fight off the lawsuit.

Even if the plaintiff tries to sue you for more than the umbrella policy, the insurer has a strong motive to fight off the lawsuit if possible. Paying their lawyers is always going to be cheaper than paying the claim.

[Josh Stein]

If my umbrella breaks, wouldn't it be cheaper to buy a new one rather than insure it?

Yes, that was a very dumb joke.

[janetJ]

Adam,

While this may be true, I know that lawyers specifically target lawsuits against those with umbrella policies. So you may have a better legal team due to your policy, you would have had a lower risk of being sued if u didn't have the policy in the 1st place.

[Apex]

@Adam,

I am having a hard time putting the pieces together here. You said the insurance company said the following:

"they had paid out the max on his policy and he was still being sued for more. "

Your friend bitches that he had a 1 million dollar policy with them. Yes and the point is what exactly? They said they already paid the max. It would appear they are done.

Then you say that the insurance company paid their lawyers to fight off the additional suit for which they had no further responsibility because they had already paid the max. Why would they do that?

You close by saying it's always cheaper for the insurance company to pay their lawyers than to pay the claim. But in this case if they already paid the max that is not true.

This story doesn't make any sense to me. Are you really saying the insurance company had already lost and paid out the max and then continued to pay their own lawyers to fight exclusively on behalf of your friend for which they had no further financial responsibility?

Unless the umbrella policy that he had with them, obligated them to do this, I don't believe for one second they would do that.

Please clarify.

[Apex]

@JanetJ,

Your comment is the type of thing I am specifically trying to get an understanding for. So how do lawyers know if you have an umbrella. Is there a legal means by which they can force a defendant to report all of their assets and insurance policies?

If so, that is very disappointing.

If someone with legal experience in this area of liability law could post on the topic of whether or not you can keep the amount of your coverage private I would really appreciate it. As an owner of an umbrella policy I would like to know if I am required to tell a potential plantiff how much they could squeeze out of me.

[jim]

I also don't buy the idea that lawyers go after people with umbrella insurance. I can't see how the lawyer would know unless you went out and told em. I don't see any reason why anyones liability coverage limit would be public knowledge.

[tlm]

Note that if you are a private pilot, forget it. There is no umbrella policy that will cover recreational flight activities. Too bad.

[janetJ]

Apex,

It used to not be the case. These policies used to be private. Now, the insurance companies use a scoring system. Now you can simply order a scoring report, and right in the report, it lists your liability coverage.

[Crystal@BFS]

For everybody who is pro umbrella policies, what level of assets do you think a person should have before bothering?

Specifically, we owe about $69,000 on our $130,000 home, own 2 cars outright worth about $20,000 total, own $18,000 in high dividend stocks, have $16,000 in the banks, and have about $50,000 in a 401(k), Roth IRA, and pension fund. Would you suggest an umbrella policy to us already?

[sammysosarules]

Crystal,

I'd first start off by not listing all your financial assets on a financial website - if you worried about getting sued anyways.

[Crystal@BFS]

@sammy, you must not read my blog and haven't seen me around here for the last year or so, lol. I post my net worth monthly and love working with real numbers. I think it makes for a better discussion. Other than the snarkiness, do you think there is a level that needs to be reached before an umbrella policy should be considered?

PS To actually answer you, I don't think that having my numbers posted opens up my liability any farther than if I didn't. If I ever get sued, I'm sure their lawyers can figure out what I'm worth pretty darn quickly anyway - that's what they are paid for...

[Apex]

@Crystal,

You appear to have a net worth approaching 200K and there is your future earnings potential to consider. If your current or expected future earnings are fairly high I would start looking into it. If they are not that high then it might not be as critical yet but I would start thinking about it.

[Crystal @ BFS]

@Apex, thanks! We'll be making around $80,000 combined for the next few years at least and who knows after that with me, so I'll reevaluate it when our nw is closer to 1/2 a million or more. Thanks again!

[Mike Hunt]

Great post, and it makes me realize that I am unprepared.

Although we don't live in the US right now we do have substantial assets. When we move back we will need to remember to get an umbrella policy.

I recently heard a story of my colleague who lives in SE Asia, but has a college age son in the USA. The son lent his car out to a neighbor who totaled the car within 15 minutes. She took no responsibility on the matter and my colleague found out the auto insurance policy was actually in his name, not his son's! They have the same first and last name but different middle name so it was a typo by the insurance company.

He was glad to have caught that for fear of getting sued.

I like living in SE Asia better with regard to expensive lawsuits, if you accidentally injure or God forbid, kill someone here, the liability is only a few thousand US dollars.

-Mike

[Scotty]

Great post! Reminds me I need to up my umbrella insurance to $2million. I’ve been carrying it with the same company that does my home and car insurance so everything is in one kitty.

[Lyle]

Note on the issue of the amount needed consider a case where bankruptcy is a result of the law suit and what is protected and what is not protected. I.E. 401ks and IRAs are protected in Bankruptcy. Home equity is protect by different amounts per state so you would need to check it.