A reader asked me this question today:
What are your thoughts on personal liability “umbrella” insurance and who should have it?
There are two ways to answer this question. How much personal liability do you have in your life? Do you have a lot of assets to protect?
How does an umbrella policy work?
An umbrella policy acts as excess personal liability coverage to supplement auto liability and homeowner’s liability. Let’s say that you have $250,000 auto liability coverage per accident, but there were five people in the car all with serious injuries and you caused the accident. If you were sued for one million dollars, your auto policy would only pay up to $250k, and you would be stuck with the rest of the bill. But, if you bought a million dollar umbrella policy, it would pay the remaining $750k, after your auto insurance paid the first $250k. Umbrella policies will also pay for bodily injury, property damage, and personal injury. Personal injury is not broken bones. Personal injury in the insurance world is slander, libel, defamation, eviction, false imprisonment, or invasion of privacy. So, if you have a profession that exposes you to these types of personal injuries towards others, an umbrella policy will definitely come in handy, because most auto and homeowner’s policies do not include this coverage without an endorsement. Generally, insurance companies won’t let you buy an umbrella policy unless you buy your auto and homeowner’s policy from them as well. They will probably also want you to max out your liability limits on the auto and homeowner’s policies first, because they’ll receive more premium for it. Umbrella policies are very cheap, because they are only used for very large civil liability lawsuits. You can probably buy a million dollars worth of coverage for $200 to $300 a year.
Who needs an umbrella policy?
First, evaluate how much exposure or risk you have in your life. Do you have a trampoline or pool in your house? Do you own an ATV or other recreational vehicles? Do you have multiple young, inexperienced drivers in the house? Do you have company over at your house often that use the pool, trampoline, or recreational vehicles? If you answered “yes” to more than one of these questions, then you might want to consider purchasing an umbrella policy. If you own your own business or you are a professional such as a doctor or lawyer, don’t expect an umbrella policy to help you out. You’ll still need a business owner’s liability policy and/or malpractice insurance. Generally, I would always advise someone with a great deal of wealth who is well-known in the community to buy an umbrella policy. It’s cheap, and you want to do whatever you can to protect your assets. A judge or jury will consider throwing you a huge judgment if they know you have the assets or cash to back it up, so an umbrella policy would be worth it to have.
My Thoughts . . .
If you’re worried about the exposures in your life such as having children at your house all the time jumping in the pool or playing on the swing, I would first consider raising your liability limits on your homeowner’s policy to the maximum amount before buying an umbrella policy. If you still want more coverage and an extra $250 bucks a year won’t bust your budget, it can’t hurt to have the extra coverage. If you think that your profession, status in the community, or anything else in your life might make you a big target for a liability suit if something were to happen, I would suggest buying the policy only because it is relatively cheap in terms of the coverage you receive. You’ll probably never use it, but if you do, you’ll be SO glad that you bought it.