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Personal Risk Management

Personal Umbrella Coverage Road Map

Kurt Thoennessen | November 2, 2018

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Kids' pool party

"Liability" is defined as the state of being responsible for something, especially by law. Liability is a part of our everyday lives, but it is something that most people think little about.

Every time you drive your car, host a party at your home, pick up a passenger through your Uber app, post something online, or rent a house on Airbnb, you are taking on liability. Any time you are responsible for ensuring the safety of others and their property, you are taking on liability.

Some examples of situations that can result in personal liability lawsuits include causing a car crash that results in an injury to someone else, failure to supervise children at a pool party that results in a child being injured, publishing defamatory statements online about someone else, or accidentally causing serious damage to a vacation rental property.

Lawsuits where serious injuries occur can result in significant judgments, some reaching into the millions of dollars. Obviously, we do everything we can to avoid these things from happening, but they still do.

If you are ultimately responsible for injuries to others or property damage, liability coverage will help you get through the situation with a reduced impact on your lifestyle and financial well-being. It will pay your legal fees and a judgment, so you do not have to dig into personal financial resources.

Personal liability lawsuits can be life-altering for everyone involved, and they need to be considered when designing your personal insurance coverage program. High-income earners need to pay closer attention to their liability coverage than most because they have a higher risk of experiencing a lawsuit.

Owning multiple homes, installing pools, living in luxury buildings, owning rental properties, hiring domestic staff, driving luxury cars, or owning yachts and aircraft are all examples of exposures to liability risk that successful individuals might have. High net-worth individuals should work with an insurance specialist to make sure they have the proper liability protection for their unique exposures.  

Now that you have a better understanding of what liability is and how it impacts your life, the next part of this article focuses on answering frequently asked questions about liability insurance for successful individuals and families.

Frequently Asked Questions about Personal Liability/Umbrella Insurance

The following are some of the basic questions asked about personal risk management and the umbrella liability insurance available to cover those risks.

What does a personal umbrella policy cover?

Personal umbrella insurance will cover you for personal liability lawsuits against you that stem from bodily injury or property damage that you are responsible for. If you experience this type of lawsuit, the umbrella policy will pay attorneys to defend you as well as a judgment, if one is rendered against you.

What is not covered by a personal umbrella policy?

Personal umbrella insurance provides liability insurance if you get sued for bodily injury or property damage that you cause. Typical umbrella policy exclusions include business liability and any lawsuits related to employment matters, such as harassment, wrongful termination, or age discrimination.

Are there coverage differences among umbrella policies from different insurance companies?

Umbrella policies may differ in the coverage they offer from insurance company to insurance company. Two key differences are as follows.

  • Some policies provide unlimited coverage legal fees outside of the coverage limit, while others include the cost of legal fees as part of the coverage limit.
  • Some umbrella policies can include coverages like uninsured/underinsured motorist (UI/UIM), reputational injury, nonprofit directors and officers, libel, slander, defamation of character, and coverage for kidnap and ransom expenses, while others may not offer these coverages.

How do I determine the right coverage limit for umbrella insurance?

Liability exposure is not something you can predict, such as the replacement cost of your home or the cost of a piece of jewelry. In the absence of a formula for determining the "right" limit of coverage, insurance specialists use exposure analysis and an understanding of your net worth to assist in determining an appropriate limit of personal liability/umbrella coverage.

Exposure analysis involves understanding the risks you have that could lead to a liability lawsuit. Examples of risk exposures include the territory you primarily drive in (e.g., city, rural, etc.), how often you host parties at your home, owning a vacation home, living in a high-rise building, owning recreational vehicles, and many others.

A general rule of thumb is to have enough liability coverage to cover your net worth and then consider your risk exposures and adjust the limit accordingly.

Can I purchase more than $5 million of liability coverage?

Most insurance companies will only offer up to $5 million of liability coverage. If you need more, they may offer a quote from another insurer, which can be more expensive than some other options.

The best way to purchase higher liability limits is through a specialty insurance company like AIG Private Client Group, Chubb, Cincinnati Insurance, and PURE Insurance. They can provide coverage limits up to $50 million on a single policy when it is combined with homeowners and automobile insurance.

What is uninsured/underinsured motorist (UM/UIM) coverage?

There are a significant number of people in the United States who drive without adequate automobile insurance. These people are a threat to everyone since any injuries or damage they cause will not be covered well by their insurance.

If you are injured by someone in a car accident who does not have proper insurance, your UI/UIM coverage will help protect you. In these situations, you will be able to seek compensation for your injuries, property damage, or pain and suffering through your own policy, up to the limits of coverage you have on your policy. Some insurers not only offer UI/UIM coverage on their auto policy, but they also offer higher limits, some up to $10 million, on their umbrella policy offering.

Should I add my trusts, limited liability companies (LLCs), and family limited partnerships to my umbrella?

Your estate plan may include trusts, LLCs, and family limited partnerships that are in place to limit your personal liability exposure related to the assets held by these entities. Most insurance companies will have no problem adding these entities to your umbrella policy and covering them for bodily injury and property damage lawsuits against them.

One reason why they may decide not to add these entities is if they conduct any business other than a rental arrangement. Businesses carry additional liability exposures that are not intended to be covered by a personal umbrella policy.

What liability exposures exist with domestic employees?

If you employ domestic staff—such as a nanny, chef, chauffeur, gardener, or home health aide—you have significant liability exposure. Some of those exposures include the risk of lawsuits from the employee for wrongful termination, age discrimination, and sexual harassment. In addition, if you do not have workers compensation coverage and other coverages that may be required by state law, you could be at risk of being sued for employee injuries on the job.

How will an umbrella policy help protect me for my volunteer activities on a nonprofit board?

If you decide to volunteer on the board of a nonprofit organization, you should take some time to understand your liability exposures. Most umbrella policies will provide coverage if you are sued for bodily injury or property damage because of your participation on a nonprofit board. For example, if there is a jungle gym owned by the nonprofit and a child is injured while playing on it, the board may be sued.

Your umbrella policy should be designed to cover this type of lawsuit. You also may have an exposure to being sued for libel, slander, or defamation of character as part of your activities on a board. If this is a concern, you will want to add personal injury coverage to your umbrella to cover these exposures as well.

How much does personal umbrella insurance cost?

Umbrella policy coverage limits start at $1 million and go up from there. The cost of $1 million in coverage is between $200 and $500 per a year depending on the area you live in. City locations generally carry the higher costs versus suburban or country locations. Generally, $5 million of coverage costs are between $750 and $1,000 per a year, with the higher costs being driven by the addition of a third or fourth vehicle. For $10 million of coverage costs, premiums are between $1,000 and $2,000 depending on the number of vehicles and residences you own as well as your driving record. Limits above $10 million range from $200 to $500 per a million dollars of coverage depending on the insurance company's rating structure.

The Incredible Value of the Insurance Specialist

Every insurance policy is a legal contract that includes coverages, exclusions, conditions, and legal wording that can be very confusing for those who are not familiar with how insurance works. This article only provides a small sampling of the questions that come up about liability insurance. Although the Internet is a great place to do research, it may not be able to give you the correct answer to your specific question. A specialist insurance agent will be able to answer your questions as they relate to your specific policy's coverage language.

The best way to ensure you are properly protected when it comes to your personal liability exposures is to work with a specialist insurance agent.

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