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How much liability insurance do you need?

When most people think about their insurance needs, only certain types of coverage usually come to mind. Health insurance and life (or sometimes disability) insurance protect you and your loved ones; auto and home or tenant insurance protects your main tangible assets.

Liability insurance, often referred to as an “umbrella” policy, is rarely on this list. But when a rainy day – or an expensive lawsuit – arrives, sometimes nothing but an umbrella is enough.

As the name suggests, liability coverage primarily exists to protect against liability claims. In most cases, this means that you and your property are the target of a civil lawsuit. One liability insurance policy may seem like overkill for people who already have three or four insurance policies. It is true that not everyone needs such protection. But a master insurance policy effectively protects your assets and future earnings against damage claims that can arise from a wide variety of scenarios. Much like flood insurance for beachfront properties, liability insurance is a product you hope you’ll never need to use, but can create substantial peace of mind in the meantime.

Who needs liability insurance?

Some level of personal liability coverage is built into home (or renter’s) insurance and auto insurance. For many people, this may be enough. This is partly because certain types of assets are protected by state and federal laws. For example, a court cannot force you to use qualified retirement accounts, such as 401(k)s, to pay a legal judgment, and most states have laws protecting traditional IRAs. Some states also protect Roth IRAs and other retirement accounts. Many states also protect your primary residence, although the exact rules vary; Florida, for example, offers very strong protections in this area, while other states can only protect a certain level of home equity.

You can also protect certain assets from lawsuits with estate planning tools, such as properly structured and funded irrevocable trusts. However, beware of creating such trusts directly after an incident that you fear will trigger legal action. If it appears that you are simply trying to dodge future creditors, the courts may determine that the transfer of assets is fraudulent, making those assets available to pay a judgment.

If you don’t have a lot of assets outside of your retirement savings and primary residence, your existing liability coverage may be sufficient. But second homes and non-retirement investment accounts are vulnerable. High-income earners and their spouses may also want to consider their coverage options, as courts have been known to garnish wages to satisfy judgments.

Although amounts vary by geography and insurance policy, home insurance generally includes up to $300,000 of personal liability coverage. Auto insurance generally covers up to $250,000 per person and $500,000 per accident involving bodily injury, and less for incidents involving property damage only. Yet serious accident lawsuits can sometimes result in judgments or settlements for millions of dollars. This is where umbrella policies come into play.

Most people think that car accidents are the main trigger for such lawsuits, and with good reason, as car accidents are relatively common and can cause a lot of damage. But there are a wide variety of situations in which you can find yourself at fault for an accident. You can host a party at your house where one of the guests is seriously injured. Your dog may bite a stranger or an acquaintance. If you employ domestic staff, such as a nanny or home help, the employee could sue not only for physical injury, but also for wrongful termination or harassment.

There are other liability risks that may not come so readily to mind. For example, the hyper-connected world of social media creates many more opportunities to slander or defame someone, even without deliberate intention to do so. Your teenage or tween children could also create such problems; in the worst-case scenario, they could find themselves involved in an incident of cyberbullying or harassment that takes a tragic turn. Teenagers also increase your responsibility when driving. Even adult children can trigger “vicarious liability” laws that can make you personally liable in certain circumstances, such as if they borrow your car and are then involved in an accident.

Another area that some people overlook is the risk of serving on the board of a non-profit organization. Many nonprofits are too small to provide sufficient, if any, protection for the personal assets of board members in cases where the organization and its board are sued. Board members may wish to specifically consider directors’ and officers’ insurance, along with or in lieu of an umbrella insurance policy. People whose charitable work – or whose professional activities – put them in the public eye may also consider increased liability coverage due to the potential damage a lawsuit could do to their reputation as well as their financial health.

When considering the need for personal liability insurance, it is also worth considering the common law concept of “joint and several” liability. In many jurisdictions, a plaintiff can recover all damages from any one of multiple defendants, regardless of fault. In other words, if four defendants are all found equally liable, the plaintiff can recover 100% of the damages from one of them and nothing from the other three. Many attorneys therefore focus on the defendant with the highest net worth in such cases, on the theory that this method is most likely to secure the largest payout for their client.

How much liability insurance do you need?

As you can see, people with high net worth, high earning potential, or both have reason to be concerned about their liability exposure. Once you’ve decided to buy an umbrella policy, the next logical question is how much insurance you should buy.

Unfortunately, there is no specific formula for determining the exact amount of coverage. A good rule of thumb is to carry at least enough insurance to cover your net worth and the present value of your future income stream. A Certified Financial Planner™ or insurance agent can help you with these calculations, and there are also a variety of online tools designed to help you calculate a figure. Keep in mind that tools and advice from insurance companies will tend to want to sell you more insurance than you need, but it can always be worth seeing what factors will affect your coverage. Some of them are intuitive, like your current net worth and the assets you own. Others are more immediately concerned with the potential for accidents; for example, you may want more insurance if you own a trampoline or swimming pool, and you can also expect slightly higher premiums.

As with any insurance decision, shopping around is a good idea. But there are real benefits to buying most or all of your insurance products from one provider. Consolidating your coverage will not only ease the administrative burden, but it will also make it easier to spot potential gaps. For example, if your homeowners insurance covers $300,000 in liability insurance but your umbrella policy only kicks in at $500,000, you will be liable for the $200,000 in between. To avoid this, most companies that sell umbrella insurance require customers to increase their basic liability coverage to eliminate these gaps. Sticking to one company can also simplify the process in the event of a lawsuit, as you won’t have two separate companies handling two parts of your coverage. And bundling can secure premium discounts for your different policies.

The good news is that, in most cases, umbrella fonts offer good value for money. Since lawsuits of a catastrophic magnitude are relatively rare, companies can afford to spread the risk widely among their customer base. Although exact rates vary, $300 to $500 a year can often guarantee a million dollar coverage. This figure can go up or down depending on the number of houses, cars and drivers in an insured’s household, as well as the part of the country in which they live. However, it almost always happens that no matter how much you pay for the first million dollars of coverage, the second million will cost you less. If $1 million of coverage costs $500 a year, $5 million will almost certainly be less than $2,500.

For such low premiums, private liability insurance offers great peace of mind. In addition to the basic function of the product, some policies go beyond it. Extras you may encounter include not counting legal defense costs against the coverage limit or offering reimbursement for the costs of a public relations agency to handle the fallout from the incident. Depending on your needs and lifestyle, it can be helpful to compare features, as well as cost, when choosing a policy.

In the United States, we live in a very litigious society. Some of these lawsuits are frivolous; many are not. The reality is that civil lawsuits can, and often do, result in judgments or settlements running into the millions of dollars, and judges and juries are under no obligation to limit the damages awarded to a amount that the sued party can comfortably afford. Liability insurance protects you in these worst-case scenarios, even if the court finds you fully liable.

So while adding an additional insurance policy may seem unnecessary at first, for people whose assets are vulnerable to creditor claims, an umbrella policy is a cost-effective way to protect against a rainy day. before the courts.

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