While serious accidents are rare, they do happen. If they happen to you, and you're found responsible, the consequences can be catastrophic to your wealth and lifestyle if you don't have sufficient insurance coverage.
Unfortunately, many people don't have the umbrella, or excess, liability insurance that could protect them in the event of a legal judgment against them. And when they do have it, the coverage amounts are often inadequate - particularly for those with substantial wealth.
Thankfully, the remedy is straightforward. Obtaining adequate liability coverage to protect your assets is relatively easy and surprisingly inexpensive.
What happens if you're in a car accident with serious injuries and fatalities - and it's your fault? Or a house guest slips on your staircase and suffers major trauma?
Or your child is accused of cyber-bullying, resulting in emotional harm and reputational damage to a schoolmate?
You have automobile, homeowners, or watercraft insurance, but how much financial protection do these policies offer? Many times, not as much as you may need. Since these policies have coverage limits that rarely exceed $500,000, they're not likely to make much of a dent in your financial obligation - at least not with the large legal judgments often associated with serious accidents.
Maybe you have additional insurance - umbrella (also known as personal excess) liability insurance. This form of insurance can be helpful when the financial limits on your primary automobile, homeowners, or watercraft insurance are exhausted. But is the amount of coverage in the personal umbrella liability policy enough? Chances are this is not the case, since most insurance companies cap their umbrella liability coverage at $5 million. If you have more than $5 million in assets, you could be particularly vulnerable in the event of a serious accident.
When your insurance coverage falls short of a legal judgment against you, you could be facing court-ordered liquidation of your assets, starting with your savings and investments, and then proceeding to your real estate and personal property. Garnished income is another possibility.
Such a devastating outcome is especially unfortunate because it can be so easily avoided. If you don't already have an umbrella policy, it's straightforward to acquire and remarkably affordable. If you do have one, but the financial limits are insufficient - as is so often the case for those with substantial wealth - the remedies are equally straightforward.
What is Personal Umbrella Liability Insurance?
Personal umbrella liability insurance helps protect your assets from major claims and lawsuits. Since it is additional insurance, it provides liability coverage above the limits of your primary homeowners, automobile, or watercraft policy, up to the coverage maximum you've purchased in your particular personal umbrella liability policy.
Basically, the policy sits on top of the liability insurance that is included in a homeowners, automobile, or watercraft policy, and it begins to pay when the limits are reached on those policies.
What Does a Personal Umbrella Liability Policy Cover?
Personal umbrella liability policies typically cover claims related to bodily injuries - as well as personal injury (which includes libel, slander, and defamation) - and property damage caused to a third party for which the policyholder is determined to be legally responsible.
Although they are not available with all insurance companies, some additional umbrella coverage options may be appropriate:
• Uninsured/under-insured motorist coverage. A good number of insurance companies offer this option within a personal umbrella liability policy, assuming it is already provided in the primary automobile policy. If you're in a car accident or hit as a pedestrian and the other party doesn't have any - or enough - liability insurance to pay for your compensatory damages (medical bills, long-term care, pain and suffering), your primary policy would pay these expenses. You can purchase additional uninsured/under-insured motorists coverage in a personal umbrella liability policy. Since a good number of people don't have automobile insurance or take the minimum automobile liability limit, adding uninsured/under-insured motorists coverage for yourself and any passengers in your car is well worth considering, especially since the cost is fairly reasonable. It's also worth noting that, since most health care policies don't include long-term care insurance, personal umbrella uninsured/under-insured motorist coverage could be prudent. And the same applies to pain and suffering; this coverage option is the only way to insure costs related to your pain and suffering.
• Employment practices liability insurance pays for judgments relating to the employment of domestic staff - wrongful termination, discrimination, sexual harassment, and other wrongful employment practices. When it's available (few insurance companies provide it), this is actually primary - not excess - insurance. It's generally subject to a deductible of $10,000, and coverage is typically $250,000 or $500,000 for each claim with an annual claim limit. For those with larger staffs, high staff turnover, and a history of similar problems, this coverage could be particularly valuable.
• Not-for-profit directors and officers (D&O) liability insurance provides excess coverage for not-for-profit directors and officers and trustees for errors, omissions, negligent acts or breaches of duty as well as employment practices claims. Limits of financial protection are typically $1 million.
What's Not Covered?
Personal umbrella liability policies don't cover everything. Policy exclusions typically include the following:
If you own an aircraft (or own shares of an aircraft), you won't be able to cover it with your umbrella liability policy, although you may be able to obtain some coverage in the event that you charter an aircraft with a professional crew. In general, though, you'll have to make sure you have adequate coverage on your aircraft policy.
Coverage for watercraft is not automatically included for a vessel longer than 26 feet and with more than 50 horsepower in a personal umbrella liability policy and will - if it happens to be an available option - need to be added. Even if added to your policy, it may not be the sort of coverage that you need. For example, personal umbrella liability policies don't provide Jones Act or Longshoreman's coverage, which is similar to workers' compensation insurance for the captain and crew who work on and off the vessel. This coverage is only available in a primary watercraft policy or an excess protection and indemnity policy, which is like an umbrella policy, but only for watercraft.
If you purposely injure a person or damage someone's property, your umbrella policy won't pay - and neither will any of your underlying policies for that matter. Intentional acts are non-insurable, as they would create a "moral hazard." Nevertheless, the insurer may have the duty to defend a claim until a court finds an act was indeed intentional.
Most policies exclude insurance for your business, typically defined by insurers as a trade, profession or occupation engaged in on a full-time or part-time basis for income purposes. The only types of exceptions here relate to incidental business pursuits - but the specific definition of an incidental business varies depending on the insurance company (and not all insurance companies offer this coverage). Coverage definitions are based on the amount of gross revenue earned from the business, the number of employees, how many hours they work, and whether or not they are subject to workers compensation or other similar insurance regulations. If the incidental business is farming, the coverage definition might also include the number of sales in general, and the number of animals sold in a year. If your business activities fall outside these parameters, obtaining commercial insurance may be advisable.
How Much Do You Need?
At Chessman Wealth Strategies, our general advice is to consider taking a personal umbrella liability policy with a coverage amount that is at least equal to your net worth, up to $20 million dollars.
For the purposes of determining the financial limits in a personal umbrella liability policy, include net worth assets such as properties, stocks, bonds, savings, non-qualified retirement accounts, revocable trusts, fine art, and other possessions. Assets protected from creditors such as irrevocable trusts, qualified retirement accounts, and residences guarded by homestead laws are not included.
Also include five to ten years of income from irrevocable trusts, qualified retirement accounts, and other sources of income needed to pay future expenses. While funds inside irrevocable trusts or qualified retirement plans are shielded from legal judgments, creditors can seize assets that exit these otherwise protected accounts. The umbrella liability limits need to be high enough to pay creditors; this way the distributions from protected accounts do not need to be turned off, if they can be at all.
Why $20 million? Almost all liability judgments (settlements are private) against individuals and families are under $20 million, with a few outliers that go above that amount.
How Do You Get Large Amounts of Umbrella Coverage?
Most mass-market insurance companies limit personal umbrella liability coverage to a maximum of $5 million which is great - unless you have more than $10 million in assets or a particularly elevated risk exposure.
Fortunately, there are other options. A select group of more specialized insurance companies focuses on the high-net-worth market. These insurers know that the people they insure often have assets well in excess of $5 million, and they will typically offer coverage up to $50 million, and sometimes even as high as $100 million.
What Does It Cost?
If you're wondering about the expense of umbrella insurance, you'll probably be surprised by how affordable the premiums are. Since the serious types of accidents we're talking about here are rare, the cost of insuring against them is relatively low.
The cost of coverage varies based on several factors, such as the number of homes, cars, and boats you own; how many drivers you're insuring and their driving records; your occupation (some occupations tend to result in more claims than others); where you live (urban areas tend to be more costly due to higher auto accident rates); the particular insurance company; the limits of coverage you're purchasing; and how much coverage you already have in your underlying policies, among other considerations.
How We Can Help
At Chessman Wealth, wealth Protection is a key component of our Advanced Planning process. One of the most important aspects of which is personal liability insurance – since it works to protect all of a client’s assets.
We can help you evaluate your personal liability exposure and work with best in class brokers and insurers to make sure you are protected.