September 7, 2017

A Good Umbrella Protects You When It Rains Bad Luck

Anybody can be sued, but some people may be more likely to be sued than others — like people who own homes, have savings, drive nice cars, and possess toys like boats and RVs. Having the good things in life can make you an attractive target for lawsuits. Even just having the ability to acquire nice things can make you worth suing.

That’s where an umbrella insurance policy comes in. It provides an extra layer of protection beyond what your regular insurance policies for homeowners, auto, business, specialty — like boat and RV — provides so that you won’t have to pay out of pocket or, even worse, owe from your future income.

For example, I’m a 65-year-old widow with a condo in Florida, a house in New Orleans, two cars, a boat, and an RV. I have the usual property and casualty insurance on all these things, but if I were sued because a guest slipped and fell in my condo, or I struck a motorcyclist with my RV, I could very likely face a big lawsuit.

Since I don’t want to see my retirement nest egg vanish because my insurance didn’t cover the entire cost of an expensive lawsuit, I own an umbrella insurance policy. It’s only $187 a year, and well worth the peace of mind. My umbrella policy provides a multi-million dollar shelter from legal storms to help prevent financial disaster if I am unfortunate enough to be the target of a costly lawsuit.

Not familiar with the umbrella insurance concept? Read on.

When It Rains, It Pours

Umbrella policies start at $1 million in coverage and can go as high as $10 million or more. They take over when regular insurance policy protections are exhausted, so most insurers will insist that you buy regular policies with high limits — for example, an umbrella policy might require that you first have at least $250,000 in liability on your auto policy and $300,000 in liability on your homeowners policy.

Overall, an umbrella policy can be a real insurance bargain. The nonprofit Insurance Information Institute estimates that the first $1 million in umbrella coverage will cost $150 to $300 and the next million will cost about $75, with the cost dropping to $50 for every million in coverage after that.

After you’ve determined that you need an umbrella policy, and before you buy, the next step is to figure out how big an umbrella you need. The National Association of Personal Financial Advisors (NAPFA) says that anyone with more than $300,000 in savings should consider an umbrella policy. It may also be wise to consider an umbrella, even if you have less in savings, if your money is tied up in real estate — or something else that is tangible. NAPFA recommends having at least $2 million in coverage for these reasons:

  • An estimated 13% of personal injury and liability awards and settlements are for at least $1 million.
  • If you have $1 million in assets and $1 million in coverage, a $2 million judgment will take everything you have.
  • A judgment for more than your net worth could wipe you out: Taxable investments and savings and the equity in your house also will likely be at risk. The court can also garnish 2.5% of your wages for the next 10 years. And, the court can take any current or future inheritance you may receive.

How big is too big an umbrella? Financial advisors say a personal judgment of greater than $5 million is unlikely for most people.

And, remember, personal umbrellas don’t cover businesses — even small, part-time ones — so consider acquiring business insurance if you have that risk.

How to Buy an Umbrella Policy

The best way to purchase an umbrella policy is to buy all the underlying policies from the same, comprehensive insurance company. Not only are you more likely to get a better price, but also the insurer will work with you to make sure that all of your assets are covered under the umbrella.

This kind of cooperation can be important. For instance, I have a condo in Florida in a high-risk area. Some large insurers who offer condo coverage — including one I have done business with for years — won’t cover my condo because of weather risk. But because my large insurer covers my cars, my toys, and my house elsewhere, the knowledgeable agent was willing to work with me to find an alternative insurer whose policy for my condo would be covered by the umbrella his company provided. I’m a good customer and, in return, I get a good deal. I also get very valuable expert help and, overall, because my insurance is mostly with the same company, I pay a very pocketbook-friendly price for the whole package.

My umbrella policy also offers peace of mind when I volunteer in the community. I am a member of my condo board. While the board is covered by directors and officers liability insurance, and a law in Florida (and some other states) shields board members from lawsuits over issues that don’t involve fraud or self-serving deals, my personal umbrella protects me personally. For instance, if I inadvertently said something to a resident that he thought slandered him, my umbrella would offer protection if the suit got really ugly — and expensive. Different umbrella policies offer different coverage for volunteering, though. It pays to ask very specific questions if this is a concern for you.

Other lifestyle choices that make an umbrella policy particularly attractive include:

  • Frequent travel outside the U.S., and your regular insurance policy offers limited international liability coverage.
  • Owning a swimming pool, a trampoline, or a a dog that could bite someone. (Make sure the breed isn’t excluded from coverage.)
  • If I’m an occasional landlord — I rent my condo for a week or two — my personal umbrella provides some valuable protection if my tenant is injured or experiences a financial loss. More active landlords should consider a business policy.
  • Coaching kids’ sports. If someone gets hurt, you could be sued personally.
  • Participation in active sports that sometimes result in injury to others, such as hunting, surfing, motor sports, and skiing.
  • Hobbies that involve reviewing products or businesses. (If you’re getting paid, that makes it a professional activity and your personal umbrella probably won’t provide coverage.)

Finally, don’t expect your umbrella policy to do everything. Here are some things that umbrella policies don’t cover:

  • Your own injuries
  • Damage to your own belongings
  • Injuries or property for which your business is liable
  • Criminal acts

While umbrella policies aren’t perfect, they certainly can provide vital shelter when legal challenges and misfortune reign.

READ MORE: How Your Relationship Status Can Affect Your Insurance

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