What is an Excess Liability (Umbrella Liability) policy?
An Excess Liability policy, sometimes referred to as Umbrella Liability, provides additional liability protection for your assets and income in the event of a lawsuit. There are differences between an Excess policy and an Umbrella policy, but that is a subject for another article. For this article, we will call it an Excess Liability policy. These policies require you to keep a specific limit of liability on your home, auto or watercraft policy. Think of this required underlying limit as the deductible on your Excess Liability policy. If a lawsuit exceeds the required liability limit of your home, auto or watercraft policy, your Excess Liability policy will come into play. These policies are purchased in million-dollar increments. Keep in mind, if you are using different insurance agents or companies, all your policies must meet the requirements of your Excess Liability policy, so you do not have a liability gap between policies.
What increases my need for higher Excess Liability limits?
- Having a dog
- Entertaining at home
- Children of driving age
- Social Stature (known in the community)
- Being on a not-for-profit or charitable board
- Ownership of vacant land or rental properties
- Appearance of wealth (occupation, income, home, cars driven, etc.)
If you checked any or some of the above items, your possibility of being involved in a lawsuit is increased.
Are any of my assets protected from lawsuits?
In general, employer-sponsored retirement accounts (401(k), 403(b)), IRA’s (up to $1 million), your primary home (up to a limit), annuities and irrevocable trusts have some protection. With today’s litigious society, nothing is guaranteed. Eventually you will take distributions from those protected accounts or sell the home. At that point, the distributions could be attached.
How much coverage should your family have?
There is no exact formula to answer this question. We sometimes call this sleep at night insurance. I ask you to consider a simple question. Think about your net worth and your current/future income; How much of that would you like to protect from a lawsuit? That answer will give you a starting point on how much excess liability you should look at. Did you know that you can buy a million dollars of excess liability for between $150 and $300 per year and $10 million could be less than 2,000 per year? Have more assets, need higher limits? Companies like Chubb, PURE and AIG can provide limits of $100,000,000 or more. The premium will depend on the number of cars, locations (home, condo, apartment, rental property, land, etc.) and watercrafts you have.
Even if you are early in your career and do not have large assets or a big income, you should purchase an Excess Liability policy to protect your future income. This is particularly important for young doctors and lawyers who generally have a lot of debt and little to no assets. Your occupation makes you a target for a lawsuit with a judgement against future income.
Other items to consider
- Make sure the cost of defense will not reduce the amount available to pay damages
- If you are on a not-for-profit or charitable board, make sure your home liability and excess liability policy provide Directors & Officers liability coverage, not all do.
- Consider adding Uninsured/Underinsured Motorist coverage to your Excess Liability Policy. This provides additional payment to you above your Uninsured/Underinsured auto policy limits in the event you are in a car accident where the other person is at fault and you are badly injured, and they have less insurance than you.
- Remember, business exposures will not be covered on this policy
- Do you have domestic employees (housekeeper, childcare, driver)? Specialized coverage can be added on for Employment Practice Liability Insurance.
Excess Liability is an inexpensive way to protect your income, wealth and estate plan. What good are estate protecting trusts and LLCs, perfect asset allocation, correctly structured life insurance and even a plan for “asset protection”; if an uncovered liability claim can wipe out several million dollars of assets under management?
For more information on fee based risk management of personal property and casualty policies, email BBoak@BOAKS.com
Brian P. Boak, Private Client Risk Manager, P&C
Accredited Estate Planner®, Chartered Private Risk and Insurance Advisor, CLU®, LUTCF
BOAKS Advisors Analyze – Advise – Protect