Small Cost, Big Protection with Umbrella Policies
Guide to Personal Liability Insurance & Rates
Most people don't think much about personal liability insurance — until someone slips on their sidewalk and threatens to sue. Whether you know it or not, you likely already have some type of insurance that protects you in case you're liable for an accident or an injury. This sort of coverage is often bundled with car, homeowner's or renter's insurance. Still, you may want to add additional liability coverage through an umbrella policy. Not only are umbrella policies relatively cheap, they even cover accidents outside the home — such as a weekend softball game when your errant throw hits someone in the face. This guide explains how personal liability insurance works and how you can use it to protect yourself and your finances.
When Accidents Happen: 9 Scenarios in Which You Might Be Liable
Here are some real-life crises in which you might need umbrella coverage.
A drunken guest causes an accident
At a New Year's Eve party at your home with dancing and alcohol, one of your guests drinks too much and crashes into a car on the way home. His airbags protect him from serious injury, but one of the passengers in the other car is badly hurt and requires a series of surgeries. Her family sues you for one million dollars under the state's "social host" law, contending that you knew your guest was inebriated but didn't prevent him from driving.
Your child's playmate gets hurt
Your child has friends over to play. One falls out of your child's tree house and breaks his arm, knocks out two teeth and spends a day in the hospital with a concussion. His uninsured parents come to you with the bills and not-so vague hints about lawyers.
Your cleaning lady takes a bad fall
Your cleaning lady slips in your tiled kitchen while mopping, shattering her kneecap. She has no medical insurance or workers compensation, and she'll be out of work for several months. You are liable for the medical bills for her surgery and rehab as well as her lost wages.
Your neighbor is injured in your pool
Your neighbor dives into the shallow end of your swimming pool and fractures her neck. She may be able to walk again, but in the meantime, she has bills for hospitalization, wheelchair and ramp installation, attendants and grip bars in her bathrooms and showers. She has no medical insurance, and her attorney advises her to sue you for those costs.
Your teen has a collision
Driving at night, your teenager makes a turn and collides with another car at an intersection. The driver of the other car is seriously injured and sues you for one and a half million for his medical bills and pain and suffering. You have a $500,000 liability coverage with your car insurance, and - fortunately - an umbrella policy that will cover the other million.
You're sued as a member of the board
While you're serving as a volunteer board member of a charitable organization, someone decides to sue the charity. Even though you had nothing to do with the claim, you may automatically become a defendant simply because you're on the board.
Your terrier gets too territorial
Your bored but enterprising dog tunnels under the fence and nips a contractor working next door. Your pooch had his rabies shots and it wasn't a serious bite, but the contractor sues you for the injury, medical expenses, pain and suffering and punitive damages, because that's the kind of person he is.
Your dead tree topples over
A tree on your land topples in a thunderstorm, crashing across the property line onto the neighbor's house and ripping through the balcony and roof. You knew the tree was dead and had even talked with your neighbor about how you planned to remove it. Now you're looking at the wrong end of a lawsuit.
You cause an accident on the fairway
You dislike golf, but a close friend invites you for a game. During a pleasant afternoon on the golf course, you drive a golf ball upside the head of a fellow club patron who wandered onto the fairway. He goes to court saying you should have been more careful.
What a Personal Liability Policy Covers
Coverage for an umbrella policy generally starts at $1 million, although insurance companies will sell you more protection at a price. You may in fact want to go higher. The policy can protect your future earnings as well as your life savings. Personal liability umbrella policies can protect you if you are sued for:
- An accident you're involved in on your property or somewhere else
- Slander and libel
- False arrest, detention and/or imprisonment
- Abuse of process
- Accidents that occur on rental property
- Malicious prosecution
- Shock and mental anguish
- Wrongful eviction and wrongful entry
What Does an Umbrella Policy Cost?
The good news: Umbrella policies are relatively inexpensive, especially when compared with the coverage that they can provide.
Some liability coverage is automatically included in all homeowners and renters insurance policies, but umbrella coverage is good if you have a high net worth," says Illinois independent insurance agent Adam Rothschild of the Rothschild Agency says. "You should buy as much liability coverage as you can afford. The court can determine how much you need to live and garnish your wages until your judgment is paid off. That could take years, maybe decades." Asked who else should consider buying umbrella insurance, Rothschild has one word: "Everybody".
Personal liability policies hover around $400 annually for $1 million of umbrella coverage. The reason for the low cost compared to other types of insurance coverage is that the policy picks up where your homeowners or renters insurance leaves off.
That is, if your homeowner's insurance pays for $500,000 worth of damages and your umbrella policy covers $1 million worth, you won't tap into the umbrella policy until your regular homeowner's insurance has kicked in $500,000. Because few people are sued for home accidents and even fewer for more than $500,000, insurance companies can afford to keep their rates low.
But big claims do happen. About 13 percent of personal injury liability settlements and court-ordered awards are $1 million or more.
If you own a small business, you might even want to check into a commercial umbrella policy, which provides extra liability coverage in addition to your company's existing policies. Adding $2 million of commercial umbrella coverage to an existing $1 million general liability policy, for example, would effectively provide up to $3 million in protection.
Most insurance companies will require you to carry about $250,000 of liability insurance on your auto policy and $300,000 of homeowners liability insurance before they will underwrite an umbrella liability policy for $1 million of additional coverage, according to the Insurance Information Institute.
Homeowners insurance protects your home against fire, storms, theft and many other unexpected disasters. It also usually offers limited liability coverage for injuries or property damage for which you, members of your family or pets might be held legally responsible. Liability is usually limited to $100,000 per occurrence, and there is no deductible. The problem is, an accident may cost more than $100,000 in medical bills — you may be sued for lost income and pain and suffering as well. This is where an umbrella policy kicks in to protect you and your assets.
What a Personal Liability Policy Does NOT Cover
Although an umbrella policy covers many costly risks, it doesn't protect you from risks related to your own business (even if you operate it from your home). This includes babysitting and child care services you provide in the home.
Here are some other scenarios a personal liability policy doesn't cover:
- High-risk use of your vehicle, such as drag racing
- Using tractor trailers or farm tractors(unless you buy rider insurance that specifically covers these vehicles)
- Fines and penalties for breaking the law(such as drinking and driving and, in many states, texting and driving)
- Intentional damage caused by you or a member of your household
- Additional health insurance
- Intentional acts such as discrimination, sexual harassment and vandalism
- Damages arising out of business or professional pursuits(unless you have a separate commercial umbrella policy)
- Liability you accept under the terms of a contract or agreement
- Damage covered by a workers' compensation policy
- Liability resulting from war or insurrection
- Liability related to the ownership, maintenance and use of aircraft, certain watercraft such as skis and air boats, and most recreational vehicles
Your policy may have other exclusions, so be sure to read it carefully. Ask your agent if you have any questions.
Is Your Umbrella Policy Big Enough?
Civil suits cost the U.S. economy $233 billion each year, according to the American Association for Justice. The average compensation payout for a civil injury suit is $60,000. The average awarded in a punitive damage lawsuit is $50,000. Most of us don't have that kind of money to spare.
A report by ACE Private Risk Services shows that wealthy families often underestimate the risk to their lifestyles by not carrying enough liability insurance. The ACE report notes that judgments in some U.S. civil cases have run into tens of millions of dollars.
The legal entanglements can get complicated. Some states, like California, require the court to compare the level of fault between all defendants in an injury lawsuit. This means the cash damages are assessed in proportion to the fault of each defendant. However, the plaintiff lawyer's strategy will be to get most of the blame laid on the wealthiest defendant, so the richest defendant could get saddled for most or all of these damages.
The ACE report cites these annual average costs for umbrella liability coverage in different amounts and scenarios:
- $383 for $1 million in coverage for a household with one home, two cars and two drivers
- $474 for $2 million in coverage
- $608 for $5 million in coverage
- $999 for $10 million in coverage
- $1,578 for $10 million in coverage if the insured also has 2 additional homes, 4 cars, a boat under 26 feet, and one driver younger than 25.
Working with an independent insurance agent can help you determine the right amount of coverage needed for your family. An agent can also help with quote comparisons and finding discounts on multiple policies.
What Affects Your Premium?
Can you be turned you down for umbrella coverage, even though you have homeowners liability and auto insurance and have been faithfully paying your premiums? Yes. Insurers may refuse to sell you umbrella coverage if you have a trampoline, a pool with a diving board or other potentially hazardous property, according to the International Risk Management Institute (IRMI).
IMRI notes that companies may also deny umbrella coverage to people with poor driving records or with homes that have fallen into disrepair.
If you're turned down, keep shopping: Another company may be willing to sell you a policy, although you may have to pay a few extra hundred dollars a year.
When you've decided to add umbrella liability coverage, consider:
Your net worth
An umbrella policy usually starts at $1 million. You want a policy at least equal to your net worth and ideally more in case you are ever hit with a financially catastrophic court judgment that could impact future income, well beyond your current net worth. Talking to a lawyer who specializes in wealth protection or a financial advisor is the first step in determining your actual net worth.
Your credit history
Expect to pay more on insurance if you have a low credit score. Insurance companies may assign you to a higher risk pool, which will increase your cost.
Driving history for all family members
Umbrella policies cover every member of the household, so each driver in the family will be evaluated for risk. Having teenage drivers will affect your rates even if they've never been in an accident.
Individual risk profile
Do you like to throw a lot of parties where alcohol is served? Do you own a boat, aircraft, ATV or snowmobiles? You may have to pay a larger premium.
Where you live can affect premiums. It's generally more expensive to buy insurance in urban areas with a high crime rate. If you've had other insurance claims, this may drive up your costs as well
Who you buy from
It may be cheaper to buy umbrella coverage from the same company that provides your homeowners or renters insurance. Shop around, making sure you're getting equal levels of coverage among different companies.
Advice from an Umbrella Coverage Expert
Adam Rothschild is an independent insurance agent and risk manager at the family-owned Rothschild Agency in Merrilville, Indiana.
Who should buy umbrella insurance?
Everybody should buy an umbrella if they can afford it. People who have a mansion with boats, planes - they probably have a lot of money and could be a target for lawsuits, so they have more that they need to protect.
Are socioeconomic factors considered in the premium calculations for umbrella insurance?
Zip code is a huge issue. [Insurers] look at crime statistics and the propensity for claims in that area. And as far as credit goes, absolutely. The government started requiring insurance companies to run credit checks years ago to try and help the people with high credit cores lower their premiums. It wasn't supposed to have any effect on people with mid to low credit scores, but that's exactly what happened.
Does it make sense to buy coverage equal to personal assets, or is there a formula for how much protection to buy?
There's no rule of thumb. If someone had a $10 million estate, I'd say they need a $10 million to $15 million umbrella. Buy a little more than the assets you have because in a lawsuit the court can value them for more than you think they're worth.
Will personal liability insurance protect me if I cause an accident while traveling outside the United States?
All policies are different depending on the company. It's not standard to cover you worldwide. There may be exclusions for countries in the Middle East, or countries where the U.S. has a trade embargo. So if you do a lot of travel, you'll want to check into that.
Why might an insurance company decline to offer a policy?
Depending on the circumstances the company may decline to underwrite the umbrella, thinking it's too risky. We run reports to see if you've had any claims made on your home or auto: moving violations, DUIs, things like that. Or a liability from a previous lawsuit. Maybe you have a pitbull.
Can you offer an estimate on the cost of annual premiums?
It really depends on what you want to cover and where you live. I'd say it will range from $250 to $500 a year for a $1 million dollar policy that covers the family, house and a couple of cars. Drivers under 25 can add to the expense.
Insurance Information Institute
Insight on buying personal liability umbrella coverage from the national organization dedicated to improving the public's understanding of the insurance business and how it works.
Find an Independent Insurance Agent
Database of independent agents searchable by zip code through the Independent Insurance Brokers and Agents of America. Always work with an insurance agent licensed to do business in your state.
Umbrella Insurance Basics
Information from the International Risk Management Institute covering a broad range of umbrella insurance scenarios.
Risks of not having umbrella coverage
A rundown of worst-case scenarios and information about umbrella policies from the American Institute of CPAs.
Consumer Alert Homeowners Insurance Checkup
Things to consider when renewing an insurance policy, including whether to expand coverage with an umbrella policy, published by the National Association of Insurance Commissioners,the US association of state insurance regulators.
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