For high net worth individuals, having individual insurance policies on their possessions such as their homes, cars and boats may not be enough if they want to protect all of their wealth.
Insurance will replace those things if they’re damaged, but there’s a larger concern than just getting your car fixed or home rebuilt after a fire, especially if you’re at fault and someone is injured.
For people with a lot more assets to lose — such as savings accounts, high-end artwork and assets that go well beyond the value of a home or car — they could face major claims and lawsuits if they were at fault in an accident where someone was injured. And the lawsuits could go well beyond the liability limits on their insurance policies.
Umbrella insurance, technically known as personal liability insurance, can protect policyholders from a lawsuit for more than the liability limit that their home or auto insurance covers.
For as little as $150 a year for $1 million in coverage, an umbrella policy can be worthwhile to wealthy people concerned about the hint of a lawsuit, says Jim Cote, a financial wealth advisor and a presenter for the Financial Education Institute, which provides free financial educational resources to the public. For someone who may hit someone while driving or has a visitor fall down the steps to the front door of their home, that $150 would be money well spent if it protects their assets in a lawsuit.
Here are other examples of what umbrella insurance can protect against:
Bodily injury liability: These include paying medical bills and other liability claims if your dog bites someone, or if a guest falls at your home and is injured, or if a child is hurt in your yard while playing with your children.
Property damage liability: This covers damage or loss to someone’s property. For example, you could crash your car into their car, your dog could damage someone’s property, or your child damages school property.
Own rental units: If you’re a landlord, an umbrella policy could protect you from liability claims if someone trips on a sidewalk crack on your rental property and is injured, or your dog bites someone.
Umbrella coverage can also cover exclusions in other liability policies, including for false arrest, libel, slander, malicious prosecution, and mental anguish.
While lawyers “like to go after low-hanging fruit” such as wealthy people in such mishaps, having an umbrella policy won’t necessarily lead to more lawsuits, Cote says.
“Having the assets will encourage them to sue you anyway,” he says.
It goes with the territory, and that’s what an umbrella policy is there to protect you from, says Bob Passmore, assistant vice president of the personal lines policy at the Property Casualty Insurers Association of America.
“If you’re a person of some means and some assets, that makes you more of a target for lawsuits and everything else,” Passmore says.
Listen to the Hulkster
A tragedy in Hulk Hogan’s life offers a lesson on the importance of umbrella insurance. In 2007 Hogan’s son, a minor, was involved in a car accident that left his passenger in a coma. Hogan had to pay an undisclosed amount in damages to the passenger’s family.
Bodily injury damages are covered under liability limits in auto insurance policies. But once those limits are reached, the at-fault individual — or their parent in the case of a minor — must pay any damages above the policy limits. Hogan’s insurance limit was $500,000.
Hogan sued his insurance agent for failure to offer an umbrella insurance policy. A Florida court rejected his claim.
How big of an umbrella?
For people who want to save money on insurance by only getting the minimal limits required by law or their insurer, they could be putting their assets at risk.
An umbrella policy should equal their net worth, including retirement assets, says Jason Silverberg, vice president of financial planning at Financial Advantage Associates in Rockville, MD. You want to have enough personal liability insurance so that you don’t have to pay out of your own pocket to settle a lawsuit, Silverberg says.
“If you’re at fault, you want to make sure your insurance pays out — that’s why you have it,” he says.
Owning a house that you don’t want to lose in a lawsuit is reason enough to have umbrella insurance if the liability insurance in your homeowners insurance is low, he says.
Whatever umbrella insurance policy you decide to have today, it’s worth reviewing annually as circumstances change in your life, Cote recommends. You may buy a bigger home, better car or get a big bonus at work. However your assets improve, an updated umbrella policy can help cover them.
Aaron Crowe is a freelance journalist who specializes in personal finance writing. Follow him on Twitter @AaronCrowe.