Most of us hate to lose. We especially hate to lose money. And in our litigious society there seems to be a multitude of lawyers trying to make us lose — regardless of the merits.
You don’t need to do anything wrong to be sued. That’s not how it works. You may not have done anything wrong and you could still lose. You could lose the lawsuit, you could lose your assets, you could even lose money you haven’t made yet.
Many of the things you might be sued for would typically be covered under one of your existing insurance policies. Perhaps your dog nips a neighbor, or your cat gives someone a little scratch.
But not everything you could be sued for is sufficiently covered under your existing insurances, and others aren’t covered at all. That’s where an umbrella insurance policy can be essential.
Umbrella Insurance Coverage
An umbrella policy is an excess liability policy; it fits on top of existing policies to pick up where their liability stops. It’s not a replacement for any existing insurances; it’s an aid because existing coverages may be insufficient.
Your homeowner’s or renter’s, auto, and boat policies all have liability coverages to protect you against claims for damages you cause. They cover the most routine things you could be potentially liable for.
Limits on these policies is not enough for all situations. If you have a hundred grand or a couple hundred grand of liability coverage, and your actions, or lack of actions, depending on the circumstances, cause serious bodily injury, this could be horrifically insufficient.
What Umbrella Is Designed to Protect
If you are deemed liable for someone else’s injuries, your assets are at risk. And so is your future income.
Many people look at what they have and figure they are not worth suing. You also need to consider your future earnings. There are many hungry lawyers out there, and they’d be looking at your future earnings.
That’s the bottom line. If you have assets, you probably need an umbrella policy.
If you will most likely have a decent income, you probably need an umbrella policy — those are the two things it’s designed to protect.
Umbrella insurance covers you for the excess over your existing limits for injuries or property damage you cause, other damages you may be liable for, and some lawsuits. It is not covering you for damage to your property or for injuries you incur. It’s liability insurance, protecting against things you are liable for.
It won’t however, protect you for criminal acts or damages you cause intentionally. So don’t do those things.
Everyone has the risk; most of us don’t think about it. If you have a dog or other pets, entertain guests, have a car, have a boat, a pool, have kids, coach, volunteer — the list goes on. Dogs can bite. Other pets can do whatever they do. Let’s get into some of the big ones we don’t think about.
You have some friends over. One of them has a few adult beverages. Then crashes on the way home, injuring a few people. You may be sued.
You have children. They begin driving. Hopefully they’re old enough to do so and have a permit or a license. There’s a lot of risk there, and not just risk to your car or their ego. If they cause an accident, you may be sued.
Two other things we need to consider. The first is getting sued for liable or slander. That’s something an umbrella will generally provide coverage for that your other policies may not.
Just being sued can be extremely expensive. If you have a huge claim and your primary insurer decides to take the hit for their share of the liability and walk away, you may need to provide your own defense — your own very, very expensive defense. Another place your umbrella policy steps in.
Your existing coverages may also have exclusions that an umbrella might pick up.
If you have specific issues you’re concerned about, you should discuss those with a knowledgeable agent.
Umbrella insurance is generally not going to cover you for your business activities; you need separate coverage for those.
In most cases, you’ll need to meet minimum coverage requirements on your base polices. For example, your umbrella provider may require a minimum amount of liability on your homeowners and auto policies.
Umbrella insurance is typically sold in increments of a million dollars, the smallest policy being $1 million, the next $2 million, and so on. If you are young and starting out where your income is the primary thing you’re protecting, $1 million may be sufficient. If you are approaching retirement and have built a nice nest egg, $1 million may not be near enough.
Many experts recommend figuring out what you need and then going up a million. That’s not bad advice, especially if the future looks very bright.
The Bottom Line
Umbrella insurance is ridiculously inexpensive. Typically you’re looking at a few hundred dollars per year for the first million in coverage. The cost of getting sued for an amount well over your existing liability limits can be catastrophic. This is the type of things we really need to insure, those that can realistically happen, not always likely but definitely possible, where the costs of the event could be unbearable.
Many people will easily spend this much putting an additional warranty on their fridge, but then take the risk for millions.
Or they’ll spend a few times this much to extend the warranty on their car’s engine and transmission, but again do so skipping the risk of major financial loss.
The reason we need to think about these things is so that we don’t need to think about these things. If we address the problem, we can relax and live our lives, not taking undo risks, but comfortable that we won’t be the victim of a mistake we make or of someone else’s greed for our stuff.