Liability Protection: Is Your Umbrella Big Enough?

People make mistakes, no one is perfect, and bad things happen to good people. These plain and simple truisms relate to many of the liability risks involved in everyday life. If something unthinkable occurs, and a person is injured on your property, or you or a family member cause a serious car accident, you could be held legally responsible.

Of course, the wealthier you are, the more you stand to lose. If you own a pool or trampoline, have teenagers who drive, coach youth sports, employ household workers, entertain often, or are a public figure, your chances of becoming the target of a lawsuit are even higher.

Standard homeowners and auto insurance policies generally cover personal liability, but you may not have enough coverage to protect your income and assets in the event of a high-dollar judgment. That’s where an umbrella policy comes into the picture, providing an extra layer of financial protection.

What’s Covered, What’s Not

It’s not unusual to hear of court judgments in the multimillions, and if your insurance coverage falls short, the financial consequences could be severe. Responsible parties could be ordered to liquidate a home or other personal property and turn over their assets — including future earnings — to satisfy a judgment.

To purchase an umbrella policy, you must first have a certain amount of liability coverage in place on your homeowners/renters and auto insurance (typically $300,000 and $250,000, respectively), which serve as a deductible for the umbrella policy. This means the umbrella kicks in after the coverage on those policies has been exhausted.

An umbrella policy provides additional protection against lawsuits claiming that you or a member of your household are liable for bodily injury or damage to the property of others, up to policy limits. On top of the excess liability coverage, an umbrella policy may help pay legal expenses and compensation for time off from work to defend yourself in court. It might also cover some nonbusiness-related personal injury claims that are typically excluded from standard homeowners policies, such as libel, slander, invasion of privacy, and defamation of character.

A personal umbrella policy won’t cover your own injuries, damage to your property, or liability associated with your business — for that, you may need a commercial umbrella policy. You generally won’t be covered if you hurt someone on purpose, commit a crime, or breach a contract. Read your policy carefully for other possible exclusions, such as injury claims involving some breeds of dogs.

How Much Do You Need?

One general guideline is to have liability coverage in place that, at a minimum, matches your net worth. This total includes assets such as savings and investment accounts, cars, valuable art and collectibles, plus the equity in your home and/or any other real estate that you own. You may want to add the value of your projected stream of future income. (Qualified retirement plan assets may have some protection from civil liability under federal and/or state law, depending on the plan and jurisdiction.)

A typical umbrella policy will provide liability coverage worth $1 million to $10 million. Umbrella policies usually cost between $150 and $300 per year for the first million dollars of coverage, and the cost per million tends to decrease as the amount of coverage increases.1

Terrible accidents don’t happen very often, but when they do the impact can be devastating. It may be well worth the effort to reconsider whether you have the appropriate amount of liability coverage based on your family’s financial situation, lifestyle, and the related risks.