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Umbrella insurance is often unwisely overlooked
Friday, February 23, 2018, 7:03 PM

A few years back, I received an unexpected knock on the door late one Friday afternoon.

The polite stranger standing there simply said, "This is for you" as he handed me a piece of paper and then walked away. It took me a moment to realize what I was holding: a legal subpoena.

I'd been served.

This was completely unexpected and caused, I'm not ashamed to admit, a considerable degree of freaking-out on my part until I learned why it happened.

As it turned out, someone in town whom I barely knew was involved in an ugly, protracted court dispute and his legal team hoped my testimony might help his case. (Why they didn't simply call me first to assess if this was indeed true is a mystery to me...)

So a few weeks later I had the pleasure of spending an afternoon being deposed by lawyers regarding a matter I knew nothing about. I didn't realize there were so many different ways I could be prodded to say "I have no idea" and "I don't know".

And I'd say the experience was a colossal waste of my time; but right at the end, I received a pearl of advice that made the ordeal worth it.

As I was leaving the law office, one of the lawyers involved in the deposition came up to me and apologized for my having been summoned. "This case is a complete cluster", he said. "And it was all so avoidable."

"Look," he said. "You seem like a nice guy. The lesson to take from all this is to make sure you have sufficient protections in place, for your family and your business. A little foresight to line up the right kinds of insurance and legal structures can easily defend you from shitshows like my client is now going through because he didn't prepare."

I took that advice as a nudge from the universe to review my insurance and estate planning situation with my professional advisors. And I'm glad I did, as we made several changes/upgrades as a result.

I encourage everyone who hasn't done the same in the past few years to use this article as a motivation to do so soon, too.

Umbrella Insurance: A No-Brainer For Most

Now, most everyone is familiar with the basic forms of insurance: homeowners/renters, auto, life and health. But I want to highlight a specific type of liability insurance that's curiously under-owned.

Excess liability insurance -- more commonly referred to as "umbrella" insurance -- extends the liability protection of your homeowners/renters & auto insurance policies, often by a lot.

Basically, its purpose is to pay for legal and damages costs should you get sued for any incident that you or a member of your family (including your pets) are involved in.

Most home and auto insurance policies are capped in terms of how much they'll pay out in response to a liability claim. The average homeowners policy is written to cover damages of up to $300,000; and the average auto policy pays out up to $100,000 per person and $300,000 total per accident.

Adding an umbrella policy into the mix raises these potential payouts anywhere from one to $10+million.

Why own it?

Umbrella insurance is for "tail risk" events. These are the accidents/tragedies you hope never happen in life, and their probability of occurring is low. But, should they happen, their potential cost can be very high -- especially if serious injuries or fatalities are involved. In those circumstance, legal settlements can quickly mount into the millions of dollars.

Umbrella insurance is designed to kick in should one of those rare events occur where damages exceed the limits of your home or auto policy coverage. It protects you from having to forfeit your savings to make up the difference (or from having to declare personal bankruptcy).

For example, let's say your teenager hits another car while driving and injures several people severely. You are sued to cover their combined medical costs of $800,000.

Your auto insurance will (hopefully) pay out its maximum of $300,000. And if you have umbrella insurance, it will pay the remaining $500,000.

But if you don't, you'll have to come up with that half-million dollars on your own.

The following table helps clarify when umbrella insurance will pay out, as well as when it won't:

(Source)

Note that if you're deemed guilty of a criminal act, or otherwise demonstrated the intent to inflict harm, umbrella protections do not apply.

Inexpensive Coverage

Because tail-risks have such a low probability of occurrence, umbrella policies are able to offer millions of dollars worth of protection at the cost of mere hundreds of dollars per year.

Policy rates differ of course from carrier to carrier (and are influenced by such factors as your driving history, net worth, household composition, and location), but here's a schedule of typical annual umbrella insurance fees:

  • $383 for $1 million in coverage for a household with one home, two cars and two drivers
  • $474 for $2 million in coverage for the same household
  • $608 for $5 million in coverage for the same household
  • $999 for $10 million in coverage for the same household
  • $1,578 for $10 million in coverage if the household also has 2 more homes, 2 more cars, a boat under 26 feet, and a driver who is under 25

(Source)

A few things to note here. First, you'll see that a few hundred dollars buys several $millions of coverage. And that for each additional $100 in premium paid, an increasingly larger amount of coverage is received.

Second, by adding an umbrella policy on top of your existing homeowners/renters and auto policy, your carrier may elect to give you what's called a 'multi-policy discount', saving you money.

The takeaway here is that you can get a lot of protection for a relatively small annual sum. And additional coverage gets cheaper as you buy more.

The Scary Stuff

There are a lot of alarming statics that underscore the rationale for owning umbrella insurance, such as 13% of personal injury liability awards and settlements are $1 million or more.

But, it's the personal stories that hit the hardest. The following are real-world examples of actual claims where umbrella insurance coverage applied (or would have applied if it had been purchased in advance):

The insured was driving legally on a highway when she was rear ended by another driver. The collision caused the insured’s vehicle to hit a barrier and bounce into a light pole. The other driver attempted to flee the scene on foot but was apprehended. He was uninsured, did not have a driver’s license, and was cited for numerous violations. The insured sustained two broken ribs, three broken teeth, contusions to her lungs, and lacerations to the head. After the insured’s primary auto insurance company tendered its full Uninsured Motorist limit, she was still left with $260,000 in medical expenses. The insured's Excess Uninsured/Underinsured Motorist part of her umbrella policy paid the remaining expenses. [Note: this is a special case where umbrella insurance can pay for medical treatment for your own injuries.]

An insured permitted several of her children and their friends to play paintball in her large back yard. The children were advised of all safety precautions including to use face and neck protection at all times. A paintball participant removed her headgear as she was leaving the field and was struck in the eye with a paintball. The claim was settled for more than $475,000.

The insured’s tenant claims she lost her track scholarship to a four-year college when she became ill and lost part of her lung capacity due to Stachybotrys black mold found in her apartment. The tenant claimed permanent lung damage and demanded over $750,000.

A hillside on the insured’s property was covered with concrete to prevent erosion. The concrete had been installed before the insured purchased the property. Approximately 5 feet of the concrete fell into the neighboring property knocking the claimant’s home from its foundation. The resulting claim was settled for $970,000.

A 28-year old engineer dove into a friend’s above ground swimming pool struck his head on the bottom and, as a result became a quadriplegic. He sued both the homeowner and the pool manufacturer. The court found the homeowner to be 60 percent responsible and the pool manufacturer to be 40 percent responsible, and awarded $10,000,000.

An insured’s daughter hated math class as well as the teacher. The daughter made several “disparaging” and false remarks about her teacher online. The teacher sued the parents for personal injury and $750,000 was paid.

(Source1, Source2, Source3)

Each of these sounds like an "It could happen to me" tale.

But it's important to remember when reading the above that the probability of such events is very low.

You consider umbrella insurance in case such terrible events happen, not because you expect them to. Don't let over-exaggerated fear cloud your decision-making when determining how much coverage may be appropriate for you.

How Much To Get?

Ultimately, you should obtain a qualified insurance agent's advice in determining how much umbrella coverage to buy. But there are a few good guidelines to be aware of.

It's widely recommended that you purchase at least as much coverage as your net worth. But most recommend purchasing at least $1 million more than that, or the present value of your current income stream, whichever is greater.

As they say, "You don't have to be a millionaire to get sued like one." Meaning: even if you don't have a high net worth, umbrella protection makes sense. Spending a few hundred dollars each year for protection is vastly better than having your wages garnished for decades, or having to declare bankruptcy, should you be judged liable for an injury claim.

And of course, the more wealth you have to protect, the more coverage you'll need. The premiums are so inexpensive that paying <$1,000 to protect millions in assets is a complete no-brainer. Why would you not do this?

In the end, umbrella insurance is about purchasing peace of mind. It keeps you from worrying about 'losing it all' should a tragedy occur. So, the rule of thumb for how much coverage to buy is: Whatever will allow you to sleep well at night.

Taking Action: Better Safe Than Sorry

The field of behavioral economics has long warned that our human evolutionary wiring poorly suits us for dealing with Low-Probability/High-Consequence events.

This explains why so many people don't obtain sufficient coverage for these types of events -- and umbrella insurance is no exception.

A survey conducted by Consumer Reports found that only 20% of US households hold umbrella insurance policies.

Even the rich are underinsured. 1 in 5 households worth $5+ million don’t have an umbrella policy. And of those who do have a policy, nearly 25% reported having less than $5 million in coverage.

If you don't currently own any umbrella insurance, you should talk to an insurance agent asap to make sure you fully understand the risks of remaining uninsured.

This is especially important if you have kids in your household, as a high percentage of umbrella claims result from accidents caused by teen drivers. So if you've got teenagers, umbrella insurance is practically a must.

It's also particularly relevant for folks who:

  • Own property.
  • Have significant savings or other assets.
  • Are self-employed.
  • Are worried about liability claims against them when they travel outside the U.S.
  • Own things that can lead to injury lawsuits such as pools, trampolines and dogs (check with your insurer to make sure your breed is covered).
  • Engage in activities that increase your chances of being sued, such as:
    • Being a landlord.
    • Coaching kids’ sports.
    • Serving on the board of a nonprofit.
    • Volunteering.
    • Regularly posting reviews of products and businesses.
    • Participating in sports where you could easily injure others (skiing, surfing, hunting, etc.).

(Source)

The good news is acquiring umbrella insurance is relatively easy. Odds are high your existing homeowners/renters and/or auto insurance carrier can add an umbrella policy on top of your existing coverage. And, as mentioned previously, you may receive a multi-policy discount from your carrier.

Just pick up the phone and ask.

And if you're one of those already holding a sufficient amount of umbrella insurance, good for you. Pat yourself on the back for your foresight and prudence, and ask Are there other areas in my life where I could benefit from putting similar defensive measures in place today?

For example, have you already taken sufficient defensive positions in your financial portfolio to limit your losses should today's extremely-overvalued financial markets plunge further from here, as seems increasingly likely?

If not, then consider reading our primer on How To Hedge Against A Market Correction in which we explain the standard range of hedging techniques that are commonly used to offer portfolio protection and/or upside during a market downturn. These include stops, inverse and leveraged securities, shorting, options, and futures.

Just as with umbrella insurance, when it comes to protecting your financial wealth against a vicious accident in the markets, it's far better to be safe than sorry.

Click here to access our hedging primer (free executive summary; enrollment required for full access)

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11 Comments

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Excellent advice

This is very good advice Adam. I’m a lawyer. More specifically I’m a litigator. A civil litigator. That means I sue to get money on behalf of people who have been injured or for the estates of people who’ve been killed. So I know a little bit about how these things work.

In my personal opinion (not giving any legal advice!) insurance is a good deal when it insures against risk you cannot afford to bear. For example why would a multimillionaire bother to have $10,000 of coverage for an event? Insurance companies make money because they collect way more in premiums than they pay out in claims. That’s the bottom line. So (again, speaking purely in terms of personal opinion) that means every premium you pay pays not only for your risk but also for the skyscrapers, advertising, other overhead and profit of the insurance company. Why would anyone pay premiums to cover a risk they can easily afford to bear?

The reverse is also true. Other than situations where the law requires insurance, why would a poor person with no assets bother with paying premiums to protect against a financial loss when they have no assets to lose? I can think of rare exceptions.

On other hand, there are some risks even a multimillionaire cannot afford to bear. In a split second, years of accumulated wealth could be wiped out. A momentary lapse of attention while behind the wheel is all it would take. And even if you are NOT at fault, believe me when I say that the legal process is outrageously expensive, long, emotionally draining and the results highly uncertain.

So umbrella insurance makes perfect sense. ESPECIALLY if you have something to protect that you can’t easily afford to lose.

 

 

bhardey's picture
bhardey
Status: Member (Offline)
Joined: Oct 19 2010
Posts: 11
insurance example

I'm a bit confused - in the chart naming what is, and what is not, covered by umbrella insurance, it says that your own injuries are NOT covered.  Yet, in the first example of actual claims, it says that the insured's excess medical bills were covered...

Excellent article, and valuable advice, Adam - thanks.

 

Brandon's picture
Brandon
Status: Martenson Brigade Member (Offline)
Joined: Oct 6 2008
Posts: 145
Yes, why the apparent conflict?

I was just about to post the same question. I am curious as to the reason for the apparent contradiction (understanding that topics such as this always have exceptions, nuance, etc.).

Thank you for the article, Adam.

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
Joined: May 26 2009
Posts: 3150
Great catch -- special case: UM/UIM coverage
bhardey wrote:

I'm a bit confused - in the chart naming what is, and what is not, covered by umbrella insurance, it says that your own injuries are NOT covered.  Yet, in the first example of actual claims, it says that the insured's excess medical bills were covered...

Excellent article, and valuable advice, Adam - thanks.

 

Great catch, bhardy.

That example is a special case where umbrella insurance *does* cover your own medical costs. I should have highlighted it as such (and have done so now).

When you purchase umbrella insurance, you're given the option to accept or decline what's called Excess Uninsured/Underinsured Motorist (UM/UIM) coverage. If you accept it, your policy costs a little more.

Essentially, it adds additional coverage to your underlying umbrella policy, one dedicated to paying for your medical costs if you get injured in an accident caused by a driver who doesn't have any/enough auto insurance. You can read more about it here.

(Scary stat: roughly 1 in 7 drivers is uninsured)

jtwalsh's picture
jtwalsh
Status: Gold Member (Offline)
Joined: Oct 1 2008
Posts: 268
Good Post/Great Advice

 

Like Lemonyellowschwin I am an attorney. However, I  deal primarily in real estate and small business representation. I am not a particular fan of insurance companies, but if you have assets to protect, dealing with them is a necessary reality.

Adam's statistic of 13% of awards being over $1,000,000.00 reflects something I tell my clients, which is "there are very few situations that will not disappear for $1,000,000.00".  Using Adam's number, 87% of cases will "disappear" for one million dollars or less of insurance coverage.   

Another important aspect of being properly insured is the coverage of litigation costs.  Urban myths to the contrary, in many types of litigation each side pays their own legal fees, regardless of who wins.  If you are uninsured, or under insured, your attorney may do an outstanding job of defending you and get the case dismissed, but when you are left covering your own legal fees, it may not feel as if you "won". 

One more item of advice. Read your policy.  Know what is covered and what is not.  Most insurance companies dealing with consumers try to put the basic coverages in their policies in understandable language.  If you do not understand, make an appointment with your agent, or call the consumer help line for the company, and keep asking questions until you know the terms of your policy. It is not a happy occasion when an accident or  disaster happens, and you think you are insured, only to discover that you are not.

Good post Adam.

JT

Uncletommy's picture
Uncletommy
Status: Platinum Member (Offline)
Joined: May 4 2014
Posts: 608
Question?

Can anyone explain what is covered under the term "all perils" when used in an insurance policy?

ezlxq1949's picture
ezlxq1949
Status: Gold Member (Offline)
Joined: Apr 29 2009
Posts: 250
The Insurance Incubus

Interesting article, matters which I'd never thought of before. That said, I'm not sure how US-centric these concerns are. Australia where I live is set up differently to the US in some aspects, such as medical expenses which are usually covered by our Medicare and Medibank schemes. I've never heard of anybody being lumbered with a half-million dollar bill for medical treatment, however arising.

In other areas insurance has been worming its way into more and more aspects of our lives for about 20 years. For example, community groups can't always meet in public halls unless they can show $10 million public liability insurance cover. The death of fun. Someone I know lost interest in an academic research job when the nervous nellie of a boss insisted that she obtain insurance to indemnify her against something or other which might just vaguely possibly arise as a consequence of her writings. It goes on and on. Such a wonderful revenue stream!

Australia needs something like New Zealand's Accident Compensation Commission or ACC, a nationally-based, funded and administered insurance scheme to cover citizens and visitors against hurt and injury. It works, too. NZ is far more progressive and less risk-averse than Australia in many areas.

Time to life the incubus of insurance.

-Casey-'s picture
-Casey-
Status: Bronze Member (Offline)
Joined: Nov 12 2013
Posts: 78
Another civil trial lawyer here

Umbrella liability insurance is a must have and is very reasonable in cost. Don’t leave home without it.

UM coverage is another must.  Getting hit by a car whose owner has only the minimum or low (or no) coverages can ruin you with medical bills, lost wages and/or earning capacity.  Get stacked coverages.

Excellent piece, Adam.  

*Edit - another way umbrella insurance helps is by identifying any gaps in your primary coverages because umbrellas typically require underlying insurance of particular scopes and policy limits (max payouts).  

UM is uninsured/underinsured motorist coverage and inexplicably to me I more often hear about agents talking people out of it than selling it to them.  It should be part of your auto liability policy and also your umbrella.

 

pokjbv's picture
pokjbv
Status: Member (Offline)
Joined: Sep 9 2017
Posts: 3
Perhaps one of you attorneys can address this

I had a brand new BMW, a $58,000 car in June 2013, in August when it was not even 2 months old it was hit from behind and the driver cited.  He was driving his mothers' older pick up truck and they had just changed coverage to the state minimum.  Damage to my car was a bit over $16,000.

 

When I bought the BMW I had asked my State Farm agent for ENHANCED COVERAGE.  $300/500 thousand property damage/liability, and of course comprehensive with a 500 deductible, as well as towing and roadside assist, rental car and glass damage, pretty much every coverage they offered.  But, rather than simply offering me an umbrella policy which is what I really wanted but did not know how to ask for, they sold me all the above coverages at what turns out to have been a higher price in premiums than an umbrella would have been.

So here is the problem.  The guy that hit me was also State Farm and the day the claim hit the claims adjuster's desk in the regional office you can bet they had a major fit, a barely insured driver of theirs hit a brand new BMW also insured with them, they were going to be paying and no way out of it.  

Oregon has a couple laws that complicated the case, one being you cannot file two suits arising from one accident, I had suffered whiplash (still suffer from whiplash 5 years later) but because you cannot have two suits you have to either combine the injury and property damage claims into one suit, or settle one and file suit on the other.  My attorney advised me that because juries in that county were notorious for small to zero awards for "soft tissue damage" claims the property damage was the larger and more concrete of the two, I should settle the injury claim.  So I was paid $3,500 and all medical and therapy bills.  

The state also had a fairly new diminished value law on the books, and this was certainly a textbook case for that.  I had two appraisals done after I got my vehicle back from the shop, one was for $16k diminished value, and one was in excess of $20k.  I used the more conservative because they also require that in cases of 10k or less the insurer has to pay legal costs, $10,000.01 YOU are stuck with those costs.  My attorney said by claiming 10k and using arbitration I would get 10k but his fees would be more than 6k so it worked out the most I could be paid was 10k and he said he had no faith of ANY award in the county where the trial would take place if we went to trial.  

Well, it took two YEARS for State Farm to come up with an arbitrator and that was 175 miles away in Eugene, the guy had never done an arbitration before.  We presented our case, with witnesses, and evidence, State Farm had nothing but a lawyer saying they did not think they should have to pay.  

The decision came down with a ZERO award because the arbitrator said I had not sold the vehicle and therefore I could not prove any diminished value, had realized no loss.  He relied on a Oregon supreme court case regarding a motor boat from the 1950's and totally disregarded the state's diminished value law.  This left me paying almost 900 per month on a car now worth about 20k and when BMW refused to refi the car I simply gave it back, good credit is pretty important, but so is NOT getting screwed by your own insurance company and a crooked/incompetent arbitration.  It sold weeks later at dealer auction for 20k.  

The moral of the story here, well there are several and prime of those is NEVER do business with State Farm.  They do not call it Snake Farm for nothing.  The adjuster implied the company would spend ANY amount to make sure I collected no award because obviously they did not want precedent set on the new diminished value law, what they got was a precedent that probably helped them screw every driver with diminished value.  They said there is no such thing as diminished value but they would give a grand to just make it go away.  I refused, they countered with 4k and I refused again.  

Another lesson is that even when you have enhanced or umbrella coverage if the insurers do not want to pay they will ream you and there simply is nothing you can do about it unless you can pay an attorney $250 per hour for years on end.  They have HUNDREDS of BILLIONS of dollars, they tend to get what they want. 

And a last note possibly, when you decide to treat yourself to something late in life you always wanted and saved for, be aware the world will look at you as having stepped outside of your "PLACE" and they will do what they can to put you back in your place.  

So, a chapter 7 later after 5 years of this BS I get to start over.  Buying better coverage did me no good at all.  

bxy's picture
bxy
Status: Member (Offline)
Joined: Jun 13 2009
Posts: 3
The carrier matters....

There are some nuances depending on the carrier.  For example the richness of the coverage differs between a middle market carrier (state Farm, AmFam, Allstate, etc.) will differ with a high end carrier.  It you have significant assets or are a high income earner I think it is important to see if you are outgrowing your middle market carrier and compare it to a high end carrier like a Chubb to understand the differences in coverage and premiums.  I have seen Chubb very competitive in some of these areas with much much richer coverage.  Also in some cases with some carriers you can sue your own umbrella to cover your own costs if the the person who causes the issue has insufficient coverage.

MKI's picture
MKI
Status: Bronze Member (Offline)
Joined: Jan 12 2009
Posts: 77
Asset Protection

Lemon, that's an excellent comment. Thank you. I would add a few points:

1) People who own nada on paper rarely get sued; if they do, they can declare bankruptcy after the fact (except for divorce, child support, & student loans). One can use pre-planned, legit, recorded liens against properties plus keep all stocks in an IRA or LP (these are protected in my state with a charging order as the only recourse). A good reference: the book Asset Protection... In Financially Unsafe Times. I know a guy who lost everything in a lawsuit except for the stocks in his investment club LP; asset protection works. Only once a hard target do I have the guts to self-insure, and have saved enough money this way over the last 20 years to buy an entire new house...insurance is generally a scam.

2) The best insurance? Hold 10% of one's net worth in precious metals outside the system. This is real protection, even against divorce, child support, student loan debt, or criminal conviction (which no insurance can do).

3) The final step of true insurance: stay healthy and out of the medical system (e.g. eliminate processed foods and grains, eat lots of wild game and fish, offal meat, garden stuff, and finally lift weights). A good book here is Get Serious. I know couples in their 90's still walking everywhere and living active lives. It's 80% diet and 20% lifestyle.

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