Reasons We Have An Umbrella Liability Insurance Policy

Personal Umbrella insurance is additional liability insurance, designed to pay out on top of your existing auto and homeowner’s/renter’s insurance policies. For example, you may only have $300,000 in liability coverage on your car insurance. If you are hit with a claim of $1,000,000, you would be on the hook for $700,000 yourself unless you had an adequate umbrella insurance policy. Here is a diagram explaining this from MSN Money:

In addition, an umbrella policy can also “fill in the gaps” by providing coverage for other incidents like liability for rental properties or being sued for slander or libel. Imagine working and saving for decades, only to have all of it taken away with one incident. Here are my reasons for buying an umbrella policy:

#1. Unlikely, But Actual Scenarios
These days, there are many scenarios where one might be sued for more than $100,000 or even $1,000,000. In my mind, the most likely event is to be found at fault in a car accident. Medical costs alone can exceed $100,000 per person easily. Now imagine if there were 2, 4, or even 6 people in the car. Imagine if some of them were children. Here is one example from a NY Times article on umbrella policies:

One of Mr. Cox’s clients crashed into the rear of a car on a slick highway. A woman and a child were critically injured. After two years of litigation, his client settled the lawsuit for more than $5 million. The client had $15 million in umbrella coverage. The policy paid for the settlement and all legal costs. “Without the umbrella,” Mr. Cox said, “they would have been completely wiped out.”

More recently, I read about a parent chaperone during a field trip being hit with a $700,000 verdict for negligence:

Lauren Crossan, of Randolph, N.J., had traveled to Hawaii in 2004 with Susanne Sadler, Sadler’s daughter, and another New Jersey cheerleader to perform in the halftime show of the Hula Bowl. Within hours of her arrival at the Hyatt Regency Maui Resort, Crossan was seen drinking alcohol. Her body was found the next day on the hotel grounds.

An arbitrator determined last month that Sadler was partially responsible for Crossan’s death and ordered her to pay $690,000 to Crossan’s parents and her estate.

More:

  • A blogger writes something bad about a company and gets sued for defamation.
  • A man was asked to cut down a tree from his own yard. He refused, and later a hurricane blew the tree down and injured someone in the neighboring house.
  • Your child gets in a fight at school, and injures another student.
  • Your dog bites someone.
  • You have a pool, and a visitor hurts themselves.
  • A handyman or contractor hurts themselves on your property.

#2. Have the Insurance Company Lawyers Take Your Side
Forget even getting a large jury verdict against you. If someone simply sues you for a frivolous reason, you’ll have to pay for a $400/hour lawyer to defend yourself. With an adequate umbrella policy, the money at risk will be the insurance companies instead of your own. That means the big corporate lawyers will be on your side, and your defense costs will be covered as part of the umbrella policy.

#3. It’s Cheap, and Easy To Buy
It cost us about $250 a year for $1 million in coverage for the both of us, including 2 cars and a house. That’s basically $10 per month per person. However, we did have to raise the liability limits of our auto and homeowner’s policies slightly to $500,000 each. So if you are only carrying the bare minimum required by law (not a good idea for most people), your actual additional costs may be higher.

It was really simple to get as well; we had an umbrella policy added to our existing policies with just one phone call. No long application or additional fees. But the low cost also means you may have to look out for your own interests. I guarantee that if you mention that you want whole life insurance to your local agent, they will get really excited (big commission) and get you quotes within 24 hours. They’ll even follow up if you forget. On the other hand, selling you an umbrella policy for $200 a year results in a tiny commission. All I got was a “yeah, I suppose that might be a good idea…” They’ll still sell it to you, but it won’t be heavily promoted like other products.

#4. One Less Thing To Worry About
Some people believe that you may be a bigger target for lawsuits if someone finds out you have a $1 million umbrella policy. Here’s how I look at it. If I really wanted to premeditate a lawsuit against someone, I’d pick someone who is worth a lot more than $1M. More like $10 million and up. In a big metro area like mine, multi-millionaires are a dime a dozen. Even if I was frivolously sued, again the whole point is that I’m still covered. To me, this argument is like saying you shouldn’t earn more money because someone will sue you for it.

In the end, we have a $1 million umbrella insurance policy because this is exactly what insurance is for – to protect me from unlikely yet possibly catastrophic events. The likelihood is low, but so is the cost. We chose $1M somewhat arbitrarily because it covers our net worth and also what I feel is a reasonable amount of likely claims. As inflation (and especially medical costs) rises, I could see upping it to $2M since the additional cost is only about another $100/year.

Now, if you have a low or negative net worth, then perhaps there would be less incentive in getting such coverage. I certainly had no idea what umbrella insurance was in college. I would imagine lawyers are less likely to go after those with “nothing to lose”.

Comments

  1. Good post that clearly outlines umbrella policies. Being in college, as you said it doesn’t make sense for me to have my own umbrella policy at this point (low net worth) but I’ll definitely have to look into it in the future, and you just sparked my memory of that. :)

  2. Just curious but what company did you select for your insurance needs? Any recommendations? I’m mainly afraid of companies that would try and squirm their way out of paying… thanks!

  3. Great post! It is good to be reminded of the importance of liability insurance. I think this is especially true for automobile coverage. People often fret over the cost of collision coverage and then skimp on their liability limits when the premiums for liability are actually quite reasonable.

  4. This is an excellent and informative post. A strong and I mean very strong reason to have an umbrella liability is due to our sue happy society. If a stranger (sadly, even a friend or relative) “wanders” onto your private property and injures themselves because they roll their ankle on your lawn or a tree falls on them or even if they “accidentally” trip and fall and hit their head on your driveway; an umbrella is a must have. I highly recommend an umbrella policy for those who have never considered it EVEN IF you have a low net worth. You can have liens on you for years and wages garnished even if you don’t have a lot to give up. Don’t think it won’t happen to you because it could potentially cost you all you are worth.

  5. heather says:

    As a professional blogger, wouldn’t you need a separate business insurance policy to cover you for “slander” type issues? Would your personal liability insurance really cover you?

  6. I have a relative who was sued because someone tripped in front of their house. hundreds of thousands of course! (Medical bills).

    Anyway, they had a twist because their insurance company had dropped them and hadn’t contacted them to let them know this. So when this lady serves them with papers they call their insurance provider only to find out they were not covered.

    They ended up suing the insurer and getting it all taken care of, but wow. At least $30k in attorney fees before the insurance company gave in (they didn’t follow through with the suit – company reinstated them). The insurance company settled with the lady who tripped ($100k or something).

    They could have been easily on the hook for six figures just to settle the thing and not have to go to court and pay even more to the lawyers.

    It really doesn’t take much to turn your financial world upside down, if you aren’t covered. Just one of those horrific examples I witnessed first hand.

  7. chrisMR says:

    this is why we need to get rid of all the lawyers and reinstate a bit of personal responsibility. i understand that accidents happen, but so much of this is personal negligence/idiocracy on the part of the “victim”.
    i need to find judge who handed out a settlement of $100K for tripping on the sidewalk and I need to go walk around in front of his house for a few hours… see how he likes the lawsuit. idiots.

  8. I did check with my insurance company, Statefarm, regarding liability insurance for my blog (which has ads) It’s the same insurance company where I have my personal umbrella policy. The agent said they would cover my blog for around $1,500/year, and like the personal umbrella, if anyone sues, I could just have the insurance company lawyers handle it. I’m still deciding on the worth of such a policy. It is a lot more than my personal umbrella policy. But it could eliminate a bunch of hassles and potential loss if some jerk does sue.

    It would be interesting to see what others have been told by their insurance agents for their websites and/or blogs.

  9. Great post. An umbrella policy is one of those things I’ve often thought I needed, but I never really took the time to look into how much it costs or how exactly it would work for me. Nice job making it clear – and now I will go look into getting one for my family.

  10. Question: You mention having expensive lawyers on your side. What happens if you are sued and the plaintiff LOSES? How are your legal fees recouped? Must you counter sue?

  11. Would you mind sharing which company you went with?

  12. Great post. I have a few questions.

    1. First, I’d like to reiterate the question of which company you used, Jonathan. Is it sufficient to buy an “umbrella policy,” or does one have to go into significant depth into what different policies from different companies cover?

    2. What is sufficient coverage? You mention you have $1M in coverage, but you also mentioned the person who was sued for $5M for just a simple car accident. Will your $1M be enough?

    3. Does it matter whose fault things are? For instance, consider the aforementioned car accident. The post didn’t mention whose fault it was, but would it be different if it were your fault versus the other person’s fault? What if you have a pool? What if the other person showed an accident was your fault due to negligence?

  13. I went through State Farm. I know that in some places they have a poor reputation, but my parents have had them for 30 years or something and they’ve always been fair with claims. I also already had auto and homeowner’s insurance with them.

    Homeowner’s insurance (and thus the Umbrella on top) will usually cover libel when blogging online, but not if you run ads. That might make it a business, and you usually need separate business liability insurance for that. In some states, as long as it is not your primary job, you are covered. (The preceding is all very general, you must ask your specific carrier for details.)

  14. I agree with getting umbrella coverage. It isn’t the first thing needed (disability, health insurance…) but as you say it is cheap and easy and provides a real value (though for an unlikely scenario). Insurance is to protect you not something worthwhile only if it is likely to be useful.

  15. When I asked my Statefarm agent about whether it’s worth to have more than $1M umbrella coverage, he thought $1M is enough even if you have $2M or more in assets. The reason is that for most cases they can reach a settlement with the plaintiff in that they offer them a quick $1M rather than further delays and the possibility of getting none or much less than $1M.

  16. 1st of all great post. Like you, I have a personal umbrella policy for similar reasons.

    Unlike most people, I have personal experience with umbrella policies as both a claims guy for insurance companies and as an attorney. Let me make this clear, if someone is seriously injured near you or your property, you do not want to be underinsured. While killing someone in an accident might seem expensive, a serious injury involving significant lost wages and/or lifetime medical care can lead to astronomical damages.

    One thing was left off about choosing your umbrella policy, most (but not all) carriers will not write an umbrella over another carrier’s policy. There are three primary reasons for this requirement:
    1. Claims Control: Most personal auto/homeowners policies are “duty to defend” policies. Typically, the primary carrier will handle defense including hiring counsel. The umbrella carriers don’t trust other carriers not to “sell them out” or otherwise butcher the claim settlement process.
    2. Financial Exposure: if the underlying carrier goes under or coverage is canceled, the umbrella may be forced to “drop down.” Let’s just say umbrella carrier don’t like this outcome.
    3. Reinsurance: Even if you primary and umbrella coverage is with one carrier, much, if not all, of the exposure over $1m is likely to be reinsured with another carrier. While this doesn’t affect consumers, the reinsurance agreement often specifies the umbrella must be written over policies issued by the primary carrier.

    With respect to policy forms, there is not an enormous amount of difference for most people. If you have a professional liability exposure (teacher, home care, etc.), you need to shop for the best form.

  17. I just met with my agent last week to tweak our policies. Adding a $1M umbrella was the first order of business. I was interested to learn what assets are and are not typically at risk in a personal liability lawsuit.

    Investments and savings accounts are, IRAs and 401(k)s aren’t.
    Home equity can be.
    And the big one, for us: 2.5% of wages for 10 years

  18. good blog…love reading it

  19. Additionally, because the personal umbrella policy goes into effect after the underlying coverage is exhausted, there are certain limits that usually must be met in order to purchase this coverage. Most insurers will want you to have about $250,000 of liability insurance on your auto policy and $300,000 of liability insurance on your homeowners policy before selling you an umbrella liability policy for $1 million of additional coverage.

  20. I may be wrong but I think the umbrella policy limit is on top of the regular coverage. You don’t have a $300,000 deductible like what the picture showed. With $300,000 auto/home liability coverage and a $1 million umbrella policy, you are actually covered for up to $1.3 million. I wonder whoever wrote the article for MSN Money actually has an umbrella policy.

  21. “I may be wrong but I think the umbrella policy limit is on top of the regular coverage.”

    I think you are correct. Total coverage would be $1.3 million.

    I think they have the right idea, but the picture just shows it poorly. They are trying to say that the $300,000 must be paid out first before the umbrella pays anything. Many sources online call this a “deductible”. I guess it could say “300,000 deductible + $1.3 liability coverage” but that might even be more confusing.

  22. I also have an umbrella policy with State Farm. Mine costs me over $600 a year for 1M. The reason being that I am grandfathered in for something you cannot get anymore. That is underinsured & uninsured motorist coverage up to 1M. If some bozo without insurance puts me in the hospital or some other long term cost as a result of an accident and they are not insured or underinsured, State Farm has to make up the difference because I have uninsured and underinsured umbrella coverage. This must happen more than you think as it is costing me $400 a year over what you are paying. With the bozos on the road these days I believe it pays.

  23. I have heard alot about State Farm. What do folks think of Geico? I was a MA resident until recently which is the only state where Geico doesnt operate so I don’t know many people with experience with the company.

  24. J-

    Thanks for the timely reminder. My agent was able to get a quote for the added auto liability coverage and 1M/2M unbrella policies in less than 1/2 hour. Adds $150 / $300 for the umbrella and an additional $250 for auto but for less than $2 per day I’ll sleep a little easier.

    thanks

  25. Just something I found out while talking to All State this morning is that for you to avail of the Umbrella Policy thru them they mandate that for your auto insurance Bodily Injury Coverage is $250,000/$500,000

    I currently have auto, home & umbrella thru geico and they don’t mandate the use of $250,000/$500,000 for your auto insurance Bodily Injury Coverage

  26. Few thoughts…

    1) MSN Money’s picture is indeed misleading. the 300k would be called the umbrella attachment, and yes, you would have 1.3m of coverage. also, there is generally no deductible for injuries to other people on either your auto or homeowners.

    2) re limit, it all depends on your situation. variables might include net worth, state jury verdicts, your hobbies (e.g., racing, hunting), have a swimming pool, aggressive driver, etc.

    3) keep in mind defense is provided on top of the coverage limit. have a 1.9 mil settlement and 1 mil defense cost, 2 mil is enough limit.

    4) there are stand-alone carriers that write personal umbrella. RLI is a big one. generally, it doesn’t make financial sense to buy from a separate carrier though

    5) check out badfaithinsurance.org for reputation

    6) get multiple quotes on your whole program (auto, HO, umb). make sure your comparing apples to apples when they give you a price.

  27. I have an umbrella policy as well. I runs me under $200 a year. It is with the same company I have my auto and homeowners insurance with. I might never need it but it does give great peace of mind.

    Thanks for the great post. Keep it up.

  28. Jonathan – thanks for posting this. I just ordered my umbrella policy today.

  29. Once you have teen drivers figure on the cost doubling or tripling. I have a 2M or 3M umbrella policy. It’s the sub limit of $100k per person on a regular policy that makes the umbrella so important.

  30. Your auto or home would pay the 300,000 and then your umbrella would kick in UP TO $1,000,000 – not plus $1 million.

  31. I am interested in some sort of extended liability insurance. I am a US citizen living overseas at this time and this seems to make it complicated. I would like coverage to only include liability in the USA . I have some assets in Florida and would like the peace of mind to know I have some extra liability coverage.

  32. I just received my 2 mil renewal policy from the company I have most of my insurance with. The cost is $956. The policy lists all other insurance policies & their liability limits. I have 3 houses, 2 autos, 1 boat, and 2 jetskis. I just emailed another company for a quote.

  33. If I fell down the steps of my own property and have an umbrella policy would I be covered.

  34. Does any of the carriers or forms give you any coverage if you are sued by your employer or ex employer?

  35. This is great information for insurance buyers. Readers will be happy to know how inexpensive an umbrella policy can be. And your examples are eye-openers.

    We’ve included your article in our “Umbrella Policy” section on Newbuyer.com and recently posted it on our blog.

    Thank you for a great resource.
    Elizabeth

  36. State Farm offers 5% discount on each auto policy, so with 3 autos, state farm will offer 5% off, which can help reduce costs… in Maine, there is 500,000 min payout for wrongful death, etc, check out the details… but a person seen a car accident where people were killed, an hey were awarded $375,000 for WATCHING car accident and people died from the accident, they SEEN it in person and that was trauma… WOW… better than playing lottery… in addition, your wages can be garnished down to $7.50 per hour and the rest is out the door…

    2 houses, 3 cars, 44 and retired veteran…

    Main question: is disability veteran benefits or ssdi exempt from lawsuits, excluding personal property, more than one car or house…

  37. I have a $2,000,000 umbrealla with State Farm. I don’t have kids. It costs me $49/month which they take out of my bank acct each month. Great peace of mind. In addition to house/car it also covers defamation, rental property, and most negligent acts. I go deer hunting and if I accidentally shoot someone the umbrella also cover it.

  38. more questions !
    if you promote a wrestling event and someone gets hurt or dies competing and you do not have medical insurance at the event and they or there family sues you personal will an umbrella insurance protect your assets? (Car,house, savings, checking etc)
    If you happen to hurt someone bad say like in a bar fight will an umbrella insurance still protect your assets?
    lets say you have a underground bar and someone gets hurt at the business and they sue you will the umbrella still protect you ?

  39. I’m with State Farm Ins. here in Canada. I’m worried every winter about snow sliding off my metal roof and hitting someone or their car on the city street. This causes me alot of anxiety each year.
    I don’t know if I would be covered for that kind of liability or not. Or would I even be liable? I’ve been with State Farm for about 15-16 yrs. for house and car ins. I find insurance very confusing and this makes me feel very vulnerable.
    Can anyone please answer this question?

  40. john w sponseller says:

    State Farm is hunkering down ahead of the possible futuure social disorder. We are long time customers, and our homeowners was cancelled due to some recent claims that they paid. Now they have cancelled our umbrella, despite our current auto coverage. Complaint heading to state AG. So long, good neighbor.

  41. For the price, it just doesn’t make sense not to have an umbrella. Nowadays people are sue happy. $100,000, $300,000, or $500,000 can go pretty quickly in a personal lawsuit. For $250 or so per year, if you can have a million, it’s a no-brainer to at least consider adding an umbrella.

    Good post.

    Jared Balis

  42. Reading Randy’s above comment detailing what assets are typically at risk in a personal liability lawsuit helped me to gain clarity about whether I need it or not.

    Now I believe that a good rule of thumb is to not buy an umbrella policy until I have significant investments outside of my IRA’s and 401(k)s, which most people, including myself, might not have for a long time.

    Even owning a home might not justify a big personal liability insurance if home equity is only “maybe” considered an asset in a personal liability lawsuit. I’ll ask a lawyer about my specific situation. If my home equity would be considered an asset, I might reconsider getting an umbrella insurance once I’ve paid off most of my $300k house mortgage.

Trackbacks

  1. 300 subscribers - time to celebrate and post roundup! | Bible Money Matters says:

    [...] Reasons We Have An Umbrella Liability Insurance Policy @ mymoneyblog.com [...]

  2. Umbrella Insurance Explained « Family Money Today says:

    [...] 29, 2008 There is a really good explanation of umbrella insurance provided by the Money Blog, of which I’m a frequent reader. Check it [...]

  3. Making Money Journal » Friday Link Love says:

    [...] at MyMoneyBlog discusses Umbrella policies in Reasons We Have An Umbrella Liability Insurance Policy. This is something that we should get into, what with the rotating therapists and nurses that visit [...]

  4. Weekly Roundup - Lazy Weekend Edition says:

    [...] Jonathan from My Money Blog talks about the Reasons We Have An Umbrella Liability Insurance Policy. [...]

Speak Your Mind

*