Umbrella Liability Insurance- How Much is Enough?

It was a blue-sky Colorado day as my clients were driving to the airport after a week of snow skiing when they hit a patch of ice causing their car to veer into the oncoming lane.  Fortunately my clients and their children had buckled their seatbelts…unfortunately the two ladies in the oncoming car had not.  Both went through the windshield and suffered significant facial lacerations that required plastic surgery.  They sued my client and won a high six-figure judgment.  Six months earlier, as part of our annual financial review we had insisted that our client purchase a $1 million personal umbrella liability policy.  As a result, the legal claim was paid by their insurance company.  Had that not been the case, our clients would have lost everything. 

So when I’m asked, “Should I purchase an umbrella liability policy?” I almost always respond with a definite “Yes!”  The answer to that question is almost always followed by the next question, “How much coverage do I need?” 

Recently, a long-time friend was trying to decide whether to increase his umbrella liability coverage and his thought process went something like this:  “I have a $3 million net worth with $1 million in an IRA and the balance in personal investments and my home.  Since the IRA is protected under federal law, I thought I’d increase my umbrella policy from $1 million to $2 million to cover my exposed net worth.”

Here’s the flaw in his thinking.  First, IRAs are protected from the claims of creditors under most circumstances.  But let’s assume my friend got a judgment against him for $4 million.  The insurance company would cover $2 million of the claim and he’d be personally responsible for the remaining $2 million.  The correct answer is not as simple as matching the policy limits to your net worth.

How much is enough?

In deciding how much coverage you should purchase, consider these factors:

  • In most of these types of cases, the attorney’s settle the case rather than trying the case before a judge or jury.  In personal lawsuits, most plaintiff attorneys strongly prefer to settle for insurance proceeds rather than bankrupting families and putting them out of their homes.  So owning a decent amount of insurance is a significant incentive to arriving at a settlement without going to court where anything might happen in front of a jury.
  • When considering personal umbrella liability coverage, think about your personal situation.  Are you a natural ‘target’ for lawsuits?  For example, doctors, dentist and business owners sometimes feel like they are walking around with a bulls-eye on their back.  Everyone thinks they have lots of money and are therefore quick to sue them.  If your wealth is conspicuous such as expensive homes and cars, you’ll be a bigger target. 
  • Consider your lifestyle.  If you’re one of those who still thinks you have the skillset to text and drive; if you think you can have a couple of cocktails at a party and still drive home, you’ll be more likely to be in a case that includes a big judgment.  People with swimming pools or other recreational property are also more at risk. 
  • If you have young drivers in your household, you are at greater risk.  Studies suggest that two-thirds of drivers between ages nineteen and twenty-nine text and drive while over eighty percent use their cell phone while driving.

How much does it cost?

The good news is that a personal umbrella liability policy may be one of the best insurance bargains.  A $1 million policy typically costs between $100 and $300 per year.  A $5 million policy will typically costs between $500 and $1,000 per year.  The bad news is you may be required to raise the basic liability limits on your homeowners and auto insurance policy.  The umbrella policy typically has a $300,000 or $500,000 deductible, meaning that you must raise your basic coverage in order to ‘match-up’ the two policies so that there is no gap in coverage.

The bottom line?

If you have accumulated assets, you’ll need to purchase an umbrella liability policy.  Your best bet is to meet with your property and casualty agent and get his or her recommendation for the appropriate coverage based on your individual facts.