When a lot of people consider their insurance needs, only certain types of coverage typically come to mind. Health insurance and life (or sometimes disability) insurance protect you as well as your loved ones; car and homeowner's or renter's insurance protect your major tangible assets.
Personal liability insurance, frequently named an "umbrella" policy, seldom makes this list. However when a rainy day - or an expensive lawsuit - turns up, sometimes nothing but an umbrella can do.
Because the name suggests, personal liability coverage mainly exists to protect against claims of liability. Normally, which means finding yourself, and your assets, the target of a civil lawsuit. An individual liability policy may seem like overkill for those who already hold 3 or 4 insurance policies. It is true that not everyone needs such protection. But an umbrella policy effectively defends your assets and future income against damage claims that can arise from a wide variety of scenarios. Much like flood insurance for beachfront property, liability insurance is really a product you hope you won't ever have to use, but one which can create substantial peace of mind in the meantime.
Who Needs Liability Insurance?
Some degree of personal liability coverage is made into homeowner's (or renter's) insurance and automobile insurance. For many people, this may be sufficient. In part, it is because some forms of assets are shielded by state and federal law. For example, a court cannot force one to use qualified retirement accounts, such as 401(k)s, to pay a legal judgment, & most states have laws protecting traditional IRAs. Some states protect Roth IRAs along with other retirement accounts, too. Many states also protect most of your residence, though the precise rules vary; Florida, for instance, offers quite strong protections in this area, while other states may only shield a particular degree of home equity.
You can even protect certain assets from lawsuits through estate planning tools, such as properly structured and funded irrevocable trusts. However, be skeptical of establishing such trusts directly after an incident you fear may trigger case. If it looks as if you are simply attempting to dodge future creditors, the courts could determine that the asset transfer is fraudulent, rendering these assets open to pay a judgment.
If you don't have many assets outside your retirement savings and your primary residence, in that case your existing liability coverage may be sufficient. But second homes and nonretirement investment accounts are vulnerable. High income earners, and their spouses, may also want to consider their coverage options, since courts have already been known to garnish wages to satisfy judgments.
While the amounts vary by geography and insurance coverage, homeowner's insurance usually includes up to $300,000 of personal liability coverage. Automobile insurance typically hides to $250,000 for each person and $500,000 per accident involving bodily harm, and less for incidents that involve property damage only. Yet lawsuits for serious accidents can sometimes result in judgments or settlements for millions of dollars. This is where umbrella policies activate.
Most people think about car accidents as the main trigger for such lawsuits, sufficient reason for good reason, since car accidents are relatively common and may cause a lot of damage. But there are a wide selection of situations in which you can find yourself liable for an accident. You may host a party your own house where one of the guests is seriously injured. Your dog may bite a stranger or acquaintance. If you employ household staff, such as a nanny or home health aide, the employee could sue not merely due to physical harm, also for wrongful termination or harassment.
You can find other liability risks that may not spring to mind so easily. For example, the hyperconnected world of social media creates a lot more opportunities to libel or defame someone, even without deliberately setting out to do so. Your teenage or preteen children may possibly also create such problems; in a worst case scenario, they could end up associated with a cyberbullying incident or harassment that takes a tragic turn. Teenagers also increase your liability if they get behind the wheel. Even adult children can trigger "vicarious liability" statutes which could leave you personally liable in certain circumstances, such as should they borrow your car and so are then involved in an accident.
Another area some individuals overlook is the threat of sitting on a board for a nonprofit organization. Many nonprofits are too small to provide much, if any, protection for board members' personal assets in cases where the organization and its board of directors are sued. Board members may decide to consider directors and officers insurance specifically, and also or instead of an umbrella policy. People whose charitable work - or whose professional activities - put them in the general public eye may also desire to consider increased liability coverage due to the potential damage a lawsuit could do with their reputations and also their financial health.
When considering the necessity for personal liability insurance, additionally it is worth considering the common law concept of "joint and many" liability. In many jurisdictions, a plaintiff can recover all of the damages from some of multiple defendants, regardless of fault. Quite simply, if four defendants are all found equally liable, the plaintiff can recover completely of damages from one of them and nothing from the other three. Many lawyers thus concentrate on the defendant with the best net worth in such cases, under the theory that this method is the most likely to secure the biggest payout for his or her client.
How Much Liability Insurance Should You Carry?
As you can see, individuals with a higher net worth, high income potential or both have reason to be worried about their liability exposure. After you have made a decision to purchase an umbrella policy, the next logical question is how much insurance you should buy.
Unfortunately, there is no specific formula to look for the correct amount of coverage. A good rule of thumb is to carry at the very least enough insurance to cover your net worth and the present value of one's future income stream. AN AVOWED Financial Planner? or an insurance agent will help you with such calculations, and there are also a variety of tools online designed to help you calculate a figure. Bear in mind that tools and advice from insurance companies will tend to desire to sell you more insurance than you may need, nonetheless it can still be useful to see what factors will affect your coverage. Many of these are intuitive, such as your current net worth and assets you own. Others are more immediately concerned with the prospect of accidents; for instance, you may want more insurance if you own a trampoline or a pool, and you will expect slightly higher premiums as well.
As with any insurance decision, shopping around is a good idea. But you can find real advantages to purchasing almost all or the entirety of your insurance products with one provider. Consolidating your coverage can not only ease the administrative burden, but it will also ensure it is easier to spot potential gaps. For instance, if your homeowner's insurance covers $300,000 in personal liability insurance but your umbrella policy does not activate until $500,000, you can be responsible for the $200,000 in between. In order to avoid this, most companies that sell umbrella insurance require customers to increase their base liability coverage to remove such holes. Sticking to one company may also make the procedure simpler regarding a lawsuit, because you will not have two separate companies handling two portions of your coverage. And bundling can secure discounts on premiums for your various policies.
The good news is that, in many instances, umbrella policies offer a good value. Since catastrophically large lawsuits are relatively rare, companies can afford to spread the risk widely amongst their customer pool. While the exact rates vary, $300 to $500 annually can often secure $1 million in coverage. This figure may rise or fall according to the number of homes, cars and drivers in a policyholder's household, and also the the main country in which they lives. However, it is almost always the case that whatever you pay for the first $1 million of coverage, the second million will cost less. If $1 million in coverage costs $500 each year, $5 million will almost certainly be significantly less than $2,500.
For such relatively low premiums, personal liability insurance offers substantial reassurance. In addition to the product's basic function, some policies go above and beyond. Extras you may encounter include not counting legal defense costs against the coverage limit or offering reimbursement for public relations firm fees to control the incident's fallout. Based on your needs as well as your lifestyle, it might be worth comparing features, together with cost, when choosing a policy.
We in the usa live in an extremely litigious society. A few of these lawsuits are frivolous; many are not. The reality is that civil suits can, and frequently do, bring about judgments or settlements that run into the millions of dollars, and judges and juries haven't any obligation to limit awarded damages to an amount the party being sued can comfortably afford. https://insurancebrokernorfolk.uk/best-liability-insurance-brokers-norfolk/ protects you such worst-case scenarios, even if the court finds you entirely liable.
So while adding one more insurance policy may seem unnecessary at first, for those who have assets vulnerable to creditors' claims, an umbrella policy is an economically sensible way to protect against a rainy day in court.