Do you have enough liability insurance?  If there were a vehicle accident for which you were at fault, and a child were permanently disabled, would your auto liability policy offer enough coverage to pay for the skilled care the child would need for years to come?  If a young parent were killed in a freak fall on your property, would your insurance cover the support he would have provided his children as they grow up?  We’d all like to believe that such catastrophic losses would happen only to other people.  But there is nothing we can do to totally eliminate the risk of this type of event in our own lives.

Consider what would happen if there were a settlement (or judgment, if it goes to court) of $800,000 as a result of an auto accident for which you were liable.  Let’s say you have insurance with a limit of $300,000 per accident.  What would happen?  The auto insurer would pay its $300,000.  Then virtually everything you own would be fair game for seizure to pay off the additional $500,000, except for assets that may be protected in some states, such as your home.  Furthermore, your earnings could be garnished for years to come.   With stakes this high, and considering the relatively modest cost of additional liability coverage, it just makes sense for many people to purchase the added protection of an umbrella policy.

An umbrella policy is insurance that provides additional coverage once the liability limits on your homeowner’s or auto insurance policy are exhausted.  Umbrella policies are typically sold with limits of $1 million to $10 million.  In the example above, if you had a $1 million umbrella policy, once you satisfied the deductible, the auto insurer would pay the auto policy limit of $300,000, and your umbrella insurance would pay the other $500,000 of the $800,000 settlement or verdict.  Your assets would not be at risk.

One myth about an umbrella policy is that it’s only needed by the wealthy.  These days the cumulative value of homes, vacation homes, rental property, cars, boats, savings, investments, and so on, owned by many people, who don’t consider themselves wealthy, make them vulnerable to liability beyond their auto or homeowner’s insurance limits.  A good question to ask yourself is whether you have assets that you don’t want to put at risk in the event of a catastrophic liability.

Lifestyle also plays a role in determining liability risk.  Do you have a swimming pool, trampoline, swing set, or other recreational equipment that can lead to accidents?  Are there frequent guests on your property?  Do you engage in sports that could injure others?  Do you live in a wealthy town where you might be more of a target for a liability lawsuit?

How Much Do You Need?

People often reason that the amount of umbrella coverage they need should be the value of their assets, but this might not be adequate.  If, for example, you have assets of $1 million and buy $1 million of coverage, what happens if you’re found liable for a $2 million judgment?  Insurance would pay the first $1 million, plus the limit of the underlying homeowner’s or auto policy, but you could lose a significant amount of your assets for the second million.  If you were found liable for $3 million, you could lose not only a significant portion of your assets, but you’d still owe $1 million.  Both your future income and any inheritance you might receive would be jeopardized.   Just how much coverage you need depends on all your risk factors, your own financial planning, and your tolerance for risk.

There is usually a substantial premium discount if you buy your auto, homeowner’s, and umbrella policy all from the same company.  Additionally, if you have a claim, you eliminate the potential problems of dealing with different insurance companies where each might be trying to shift payment responsibility to the other, leaving you caught in the middle.

The cost of an umbrella policy depends on such criteria as the amount of coverage, the insurance company issuing the policy, and your own ‘personal risk factors’ (such as the number of traffic tickets you’ve gotten in the past few years, and possibly your credit report).  A million dollar policy often costs less than a dollar a day.

For some people another attractive feature of an umbrella policy is that it provides coverages not found in their homeowner’s or auto policies.   You are covered if you cause bodily injury, property damage, or personal injury.  Generally, the types of personal injury covered include false arrest, false imprisonment, malicious prosecution, defamation, invasion of privacy, wrongful entry, or eviction.  Some umbrella policies also provide coverage if you face liability arising from your service on the board of a civic, charitable, or religious organization.

Your insurance agent can help you decide whether an umbrella policy makes sense for your life style and financial needs.