What liability insurance does for you

Liability insurance is intended to cover costs related to injuries to other people or damage done to their property when you’re at fault. You may be involved in a car accident when a light turns red sooner than you expected, or someone could slip on an icy walkway in front of your home. In these cases, the liability policy on your auto insurance may provide compensation for the car accident; the liability policy on your homeowners insurance may provide compensation for the injury caused by the fall on ice. But it’s possible that neither will pay the total sum for which you are found legally liable.

Should you find yourself in a lawsuit, you may be responsible for payments beyond what your insurance policies will pay. There may be additional damage costs, and then there will be the court and litigation costs. These are the expenses that umbrella insurance helps protect against.

What is (and isn’t) under the umbrella

Umbrella insurance coverage is generally more extensive than other liability insurance, but every policy differs. It’s important to read the details carefully to know what situations are covered and what are not.

Damages typically covered:

• Injury to other persons, including injuries from defamation
• Damage to others’ property
• Injuries and damages caused by other members of your household, including your dog
• Personal damages from wrongful eviction or being falsely imprisoned
• Legal expenses from lawsuits related to the above

Damages typically not covered:

• Personal injuries
• Damage to personal property
• Liabilities from business or contracts, unless you have a business umbrella policy
• Liabilities resulting from criminal activities
• Transference of infectious disease

From zero to some:
How much insurance to get

The conventional wisdom is to have enough umbrella insurance to protect all of your assets should you find yourself in a lawsuit. But net worth is only one factor when considering if you should get umbrella insurance, or how much your policy should cover.

It should be noted that lawsuit awards may be in the millions of dollars. That’s why it’s important to consider the potential amount of damages due along with your likelihood of being sued, in addition to your net worth.

The odds of being sued

Anyone can be sued, and some argue that we live in a particularly litigious society. In that sense, the risk of being sued is higher than most of us would like it to be. However, there are some people who are at higher risk than others. They include:

• Landlords
• Owners of trampolines, swimming pools, firearms, and/or dogs
• Nonprofit board members
• Public figures
• Carpool drivers and/or parents of teen drivers

The list above is not exhaustive. In general, the more people you have in your home, on your property and in your car, the higher the risk of an accident and lawsuit.

Arguments for and against umbrella insurance

Some financial planners indicate that umbrella insurance is primarily a way for wealthy people to protect their assets. And that’s true. The more you have, the more you can lose. However, it’s worth noting that some types assets are protected against lawsuits and debt collection, and there are limits on how much can be collected

While asset protection laws vary state by state, their main goal is to allow individuals who have lost lawsuits to continue to be productive members of society. However, what the state feels is an acceptable loss may feel like financial ruin to you. Knowing how much you could lose in a lawsuit may help you determine if adding umbrella insurance is the right choice.

Assets typically at risk

• Bank accounts, cash
• Tangible assets, such as real estate, vehicles, jewelry and other items of value
• Future earnings, such as wages, commissions, royalties, tax refunds and other income

Assets typically protected

• Primary residence
• Exempt property as legislated by state law

Knowing the exempt property laws for your state may be the most significant factor for many when choosing to purchase umbrella insurance. Exempt property includes types of assets, such as a primary residence, as well as monetary values. For example, there may be a financial limit on how much jewelry you can keep and how much can be collected.

If your assets do not extend beyond what is protected, purchasing the additional policy may not make sense. On the other hand, if your assets go beyond the exemptions, you’ll want to determine just how much you’re willing to risk in a potential lawsuit. A financial advisor can help and advise, but the final decision is yours.