Understanding Personal Liability Umbrella Insurance

Why a personal liability umbrella?

In short, personal liability umbrellas exist to provide you with more liability protection than is offered through car or home insurance policies.

To understand liability umbrellas, it’s important to know a few things. First, insurance companies are interested in making money by insuring the risks of living life. One of the main risks is to your property. For example, your house might burn down. Your car might get stolen or vandalized. These are property risks. But there is a second major category of risk called “liability,” and this is where umbrellas come in because they cover your liability.

What is liability?

Liability is based on the concept that if you do harm to someone, either injure them or damage their property, you have some duty to make it right.

Take a simple example. You, or your kid!, accidentally hit a golf ball through your neighbor’s window. You’d–hopefully–go over to your neighbor, fess up, and help make it right by paying for a new window. In essence, you’ve acknowledged your liability, that you’re “liable” for the damages you’ve caused.

On an insurance policy, “liability coverage” means that if you accidentally do harm to someone, the insurer will handle and pay your liabilities up to a certain amount.

Not all liabilities are simple.

Unfortunately, not all liabilities are as straightforward as your neighbor’s window. Some liabilities are very difficult to put a number on. This is especially the case with injuries (or “casualty”).

Let’s say you hit a 35-year-old. It was rainy, it was night, and it was downtown Hillsboro. It was a freak accident, and you feel horrible about it.

She misses time off work, she has medical care and physical therapy, and doctors say she can never again do her prior work. Moreover, she can’t expect to do several activities she used to enjoy with her family. How much is all that worth?

Whatever the number is, she knows it’s starting to add up fast, and considering the seriousness of the situation, how it will impact her life for many decades, she’s hired an attorney to help her figure it out.

Conservatively, her attorney thinks that she should be compensated $600-$900k.

So how much will your insurer defend you with? This depends on your car insurance. Specifically, what liability limits did you choose to purchase? If you have a very common $100k liability limits, then the insurer will probably make payments for medical care totaling $100,000 and then advise you to hire your own attorney to defend yourself. Why? Well, the insurer has paid out the limit of $100,000 and that’s what you purchased. They’re done.

But why should you now get an attorney? Remember, her attorney thinks that she should be compensated $600-$900k. So far, they have $100k.

Five minutes of online research reveals to her attorney that you have a decent job and maybe own some property. You’re probably worth taking to court. After all, you did cause the injuries that have changed their life. The extent of that liability? That’s what will be decided in court.

This type of situation is why those liability limits on your car and home insurance matter.

Those limits that you choose outline how much the insurer will defend you with.

This is where an umbrella policy most frequently comes into play. For situations when your liabilities, or alleged liabilities, exceed the limits of your car or home insurance.

If the liabilities exceed your car insurance limits, your insurer has another $1 million or more to defend you with. The insurer will pay for your defense and, ultimately, the resulting liabilities.

Umbrellas also can come into play for liability on your property or extending from the actions of one of your children or your dogs. If the home liability protection is insufficient to resolve the lawsuit, the umbrella provides more protection.

Important Note: Personal Liability Umbrellas are not for business activities. For that, you should consider business insurance and a commercial liability umbrella. (We don’t offer these.)

Should I get a personal liability umbrella?

This is fundamentally your decision.

The reality is that only you know your full situation. You know how much risk you’re comfortable with and how much you’re up for paying for insurance. Your agent can give you suggestions and some good thoughts, but it’s your call.

Start with knowing your current liability limits!

Sometimes I have clients who haven’t looked at the liability limits on their car and home insurance in a long time. We get it. Time flies. Insurance renews year after year. And we’re haunted by the suspicion that if we revisit our coverage limits, costs will go up even more. And who wants that!?

But don’t you think it’s better to know what level of protection you have? We do. Even if you decide not to change things now. Don’t you want to know what you’re purchasing?

Umbrella claims are rare, but they’re getting less rare.

It is very difficult to find reliable numbers on umbrella claims, but they do happen.

Also, inflation. As inflation makes everything more expensive, we can expect that umbrellas will play a more frequent role in resolving liability claims. Simply put, it’s easier for damages from a car accident to exceed your car insurance limits. And as the costs of living go up, it’s easier for juries to award larger sums to people recovering from an accident.

If you have a household income north of $100,000 or own a productive business, consider getting an umbrella.

Some people think “sure, I make decent money, but I have almost no assets.” Remember, you can be sued for money you don’t have (yet). Court orders can garnish your wages for years.

If you have significant assets, consider getting an umbrella.

If you own a home, have some property, have or will inherit some money or property, that means you have assets to protect. Here in our area of Oregon, the increase in property values means that if you own property, your assets have increased considerably in the past decade or so.

If it’s raining, consider getting an umbrella (kidding!).

Here in western Oregon maybe consider some other rain-gear first. And who hikes through the woods with an umbrella!?

Umbrellas don’t cost that much.

Considering that a personal liability umbrella provides $1 million or more of liability coverage, the annual cost of an umbrella is relatively meager here in Oregon, likely $300 to $700 annual.

That’s not nothing. But considering it’s protecting assets and income, maybe not so much.

If you’re not quite ready for an umbrella yet, start with where you’re at.

There are often middle steps you can take before getting an umbrella.

Consider strengthening your car and home insurance liability limits.

Your car insurance might have 100/300/100 liability limits, consider bumping that to 250/500/100 or a simple $500k. It’s probably a few hundred more per year but offers better protection if someone in your household injures people in a car accident. (You’ll also have better uninsured motorist coverage!)

Move your home liability limit to $500k or even $1 million. It’s probably only $5-20 per year.

Finally, make a note to revisit the umbrella idea at each renewal. Perhaps your assets or income have changed and you’ll be ready for one!

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