There are many varieties of insurance we can purchase; auto insurance is required by law, and homeowner’s insurance is required by our lending institution if we have a mortgage. Everyone should have health insurance, and wage earners need life insurance to protect their dependents against loss of income.
There is one other category of insurance that you should consider if you have substantial assets to protect: an umbrella liability policy.
Auto and Homeowner’s Insurance
Auto insurance and homeowner’s insurance already have liability provisions — covering you against claims that may be made against you if you are at fault in an auto accident, or if someone is injured in your home because of your negligence. Automobile liability coverage is usually defined by three dollar figures, for instance $50,000/$100,000/$25,000.
The first two figures refer to the amount of coverage for bodily injury you cause to someone else because of your negligent driving: $50,000 maximum per person, $100,000 maximum altogether. The final figure is the amount of coverage for property damage that you cause. If you cause an accident involving a few vehicles that necessitates the hospitalization of several people, standard coverage will not be sufficient.
Likewise, a homeowner’s policy typically offers $100,000 of liability coverage, which can be increased to $300,000. This not only covers injuries that your guests may sustain in your home, but damage that you or your dependents may cause to another person’s property. Injury or damage caused by your pets is also covered. However, it’s easy to see how $100,000 or even $300,000 would not be sufficient in many circumstances, especially in cases involving lawyers and court appearances.
An umbrella insurance policy provides additional liability insurance, above and beyond the coverage provided by your standard automobile and homeowner’s policies. Generally it is sold in increments of $1 million, and it begins working once your standard liability coverage is used up. If, for instance, you have $250,000 in liability coverage for auto and $300,000 for homeowner’s, and you purchase a $1 million umbrella policy, your effective auto liability coverage becomes $1,250,000, and homeowner’s $1,300,000. Given the astronomical costs of medical care and legal assistance, and given the litigious nature of modern society (at least in the United States), these seven-digit coverage limits seem more adequate.
Umbrella coverage does more than bolster your existing liability coverage. It can also provide coverage for law suits filed against you for libel and slander. If you maintain a high profile in your community and engage in frequent public debates, you should consider an umbrella policy. Also, if you live in a wealthy neighborhood, if your home has a big yard with a swimming pool, you may need the additional liability coverage. The more you have, the more you stand to lose, and lawyers — particularly of the sort referred to as “ambulance chasers” — are unscrupulous.
Another Reason to Have Umbrella Insurance
A swimming pool serves as a good example. If you invite guests over for a pool party and one of them slips on a loose tile that you knew about, badly spraining an ankle, you are clearly responsible. However, if a drunken teenager from the other side of town trespasses on your property in the middle of the night by climbing over your fence, decides to take a swim, dives head-first into the shallow end of your pool, breaks his neck, and ends up in a wheelchair for life, you are just as responsible.
Legal parlance holds that your pool is an “attractive nuisance”: an attraction that, simply by the fact of its existence, can lure strangers onto your property without their appreciating the risks involved. The attractive nuisance doctrine was originally intended to protect children who perhaps don’t appreciate the risks of an abandoned car, a large pile of lumber, or a trampoline, but the doctrine has seen wider application.
If you own a swimming pool or trampoline, $1 million in umbrella coverage may not be enough. Many people purchase $5 million in coverage and more.
Most major insurance companies sell umbrella policies; they will likely require you to have at least $300,000 in liability coverage on your homeowner’s policy, and at least $250,000 in total liability coverage on your auto policy, before signing you up. So you will have to pay higher premiums on both of these existing policies. But beyond that, umbrella coverage is not expensive: $150 a year might purchase your first $1 million (per occurrence) in coverage.
You can add additional increments of $1 million to your coverage for $100 or less annually; if you purchase your policy through an existing insurer, you may get an even bigger break. So don’t skimp. However, if you have negligible assets — if you have very little in terms of assets to protect — don’t over-insure, either.
An umbrella policy is an important tool for protecting your assets and providing peace of mind. Policies are affordable and easy to purchase, and for most people at least worth some consideration.