Much has been written in the finance world about life insurance, including on this very blog. A less talked about but equally important insurance is Umbrella Insurance.
A Lawsuit waiting to Happen
Imagine for a moment, your driving down the highway and someone cuts you off. You are unable to stop and hit that person’s car at 5 mph. The person you hit sees your expensive car and makes a decision that they can sue you to get ahead. Suddenly they have an issue with their kneck or back and are sueing you. In an instant the nest egg you spent 10 years building is in danger.
It could even be worse, they could garnish your future wages if you lose badly. Even if you win you are probably looking at significant lawyer costs. This sounds far fetched, but it happens every day. In fact it happened to me, though the person ultimately lost their suit and it was covered by insurance. That being said sometimes the cause is even more trivial then a 5 mile per hour fender bender.
Waiver’s, Liable, Plagerism, Kids, and the Millions of Other Things For Which You Can Be Sued
People are sued for everything in todays day and age. Anyone who writes for a living is at risk of being sued for plagiarism, liable (stating something about someone that may not be true), or copy right infringement. Sometimes something like liable or slander can be taken to extremes, there have been cases where people have successfully been sued for a bad review of a product. Do you see a blog that posts a lot of copy written pictures? Sooner or later they could be a big lawsuit target.
How about when you use a facility and sign a waiver for risks to you? Have you ever realized that the waiver protects the owner but not you. If you accidentally harm someone else during an activity it is on you. So for example if your at a trampoline park jumping around with your kid and you accidentally collide with someone else then you have no protection from the waiver. Then again neither necessarily does the park as it is pretty well known that there is always a way around a waiver. For those with Kids in the house, did you realize you could be sued for something your kids do? Say they shot a window with a slingshot or accidentally hit someone while learning to drive, you retire potentially liable.
Even if you actively do nothing, if someone slips on your iced up walk during winter you end potentially a lawsuit target. Yes that’s right, even passively you can be sued.
What is Umbrella Insurance?
The above list was not meant to scare you. However it was meant to share with you how likely it really is to be sued and the severity of the potential impacts. So what can you do about it? Simple, purchase extra insurance to protect yourself from lawsuits. Umbrella Insurance is just such an insurance.
Low Liability Protections on Standard Policies
When you purchase car, auto, and home insurance they typically cover you for liability related to those activities up to a limit. Those limits are usually relatively low like 300K. The problem is those limits are easily exhausted just by lawyer fees in larger trials. So you need more, at least enough to pay for a decent legal team in the case of a large trial. Umbrella insurance, when purchased properly takes your liability beyond these standard coverages up to the stated amount. It also will cover liability for other areas of your life beyond home, auto and car. For example the aforementioned Liable and Slander.
How Much Umbrella Insurance should I have?
So how much Umbrella Insurance should you buy? If you have a high net worth, I recommend you insure yourself for your net worth. If you have a low net worth but a decent pay, insure yourself for at least 10x your pay to protect you from having your wages garnished. Typically experts recommend a minimum of 1 million of such insurance. According to ACE Private Risk Services 13% of injury lawsuits award more then 1 million, so you’ve covered 87% of the possibility with the insurance. Since this insurance primarily kicks in for catestrophic lawsuits only, the cost is usually much cheaper then auto or home where your paying for the possibility of a 10k payout. You can buy this coverage for somewhere between 150-300 dollars a year. Each addition million you buy will be cheaper.
However I would recommend not over insuring, potentially limiting the number to below 2 million except in extreme wealth circumstances. Extremely large umbrella insurance may make you a target in the same way as the expensive car. If a lawyer sees you have 3 million in liability insurance he might be more tempted to go after it then if you only have 1 million. That being said unless you are broke, destitute, and have a job at McDonalds flipping burgers I would recommend this insurance as a must.
Some Things to Consider when Purchasing Umbrella Insurance
The way Umbrella Insurance works it kicks in above the limits of your existing coverages. As such pay very close attention to what that defined point is and where the upper points of your other coverages lie. What you don’t want to have happen is your car insurance cover up to $300K and your Umbrella Insurance cover from $500K-$1Million. You will essentially be on the hook for that $200K gap should anything ever happen, which would not be good. I typically recommend jumping all your regular policies to $500K in coverage since 500-1M seems to be the start of standard Umbrella Insurance coverage.
If you want to do this cheaply consider upping your deductible on your existing policies, which will lower their cost. The reality is you should not use insurance unless there is a significant cost to a repair or fix. Small items can raise your rates and that raise will typically exceed the cost of the item. Therefore since insurance is for more expensive situations raising your deductible up to a still affordable rate will cover your catestrophic losses but allow you to keep your insurance costs relatively stable.
Do you have Umbrella Insurance? If so how much and why?