As a financial advisor, I come across a lot of people trying to tell me something about money that starts with "all you need to do is ...", followed by a piece of financial advice that is usually incorrect.
It might be a person trying to convince me you can tell people whatever you want online, even something inaccurate or illegal, and you can't be sued as long as you put a disclaimer on your profile. Or that if you own an investment property, you're completely shielded from liability if you transfer the property ownership to an LLC.
In actuality, there are very few ways to prevent yourself from being sued if someone really wants to sue you. There are, however, forms of insurance that can provide financial protections if you end up on the losing end of a liability claim. For certain professional pursuits, there's coverage like malpractice or errors and omissions insurance. And for certain instances of personal liability, there is umbrella insurance.
How Does Umbrella Insurance Work?
Umbrella insurance is aptly-named, as it exists as an umbrella over your existing property and auto insurance policies.
Auto insurance and homeowners insurance exist to protect the insured for not only the costs of injuries/damages that might occur as the result of an accident in a car or weather damage to a home, but also the liability the insured could face as a result of any covered events. As an example, if a guest in your home is injured in a fall and decides to sue, homeowners insurance could cover some or all of the resulting medical or legal bills if the cause of the fall is covered in your policy.
As it relates to personal liability, however, home and auto policies have two shortfalls.
First, they have coverage limits that may not protect you in instances of larger legal claims or medical bills.
Second, their protections exist under the condition that the legal exposure is connected to said car or property, meaning it is limited in protecting in areas where there might be an exposure not tied to your personal property.
Enter umbrella insurance, which aims to fill both gaps. In instances where the legal liability tied to your property rises above the coverage limits, umbrella insurance can provide additional protections. And in certain instances of personal liability not tied to property, such as libel or slander, umbrella coverage can also be a potential solution.
How Do I Get Umbrella Insurance?
Compared to homeowners insurance and auto insurance, umbrella insurance is one of the most cost-effective forms of property and casualty coverage. It's not uncommon to find $1 million worth of coverage for little more than $10 per month. And the $1,000,000 wouldn't be the total limit, but the limit per occurrence, meaning there could be multiple legal claims where the insurer could provide up to $1 million of protection.
The pricing of the umbrella insurance alone isn't the issue. The issue is that for most, if not all insurance companies, you must purchase the maximum coverage for both your homeowners AND auto insurance from them before you're eligible to secure umbrella protection. Applicants who hold their home/auto policies with other providers, or who hold their policies with the insurer but don't meet the coverage requirements, will be deemed ineligible. So it's not necessarily the cost of umbrella insurance that could add up, but you might be forced to increase the cost of the underlying coverages before you qualify.
Consider an insurer that states their minimum auto insurance coverage required for umbrella insurance liability is 300/500/100, meaning $300,000 of bodily injury liability per accident, $500,000 total bodily injury liability per accident, and $100,000 of property damage liability. The same insurer might also have a homeowners insurance requirement of 80% replacement coverage and $300,000 liability. A person seeking umbrella coverage through the insurer would need to hold their auto and property coverage with the insurer, AND make sure they have these required coverage amounts in force before they could apply for umbrella coverage.
Who Needs Umbrella Insurance?
A good rule of thumb is if the value of all of your assets, including investment accounts, exceeds the limits of your homeowners and/or auto insurance coverage, you're a good candidate for umbrella insurance. The reason is that in the event you're found personally liable for a legal claim or medical expense above and beyond these coverage limits, there is the possibility your personal assets would be on the line to cover the shortfall.
But even if your assets fall within your coverage limits, it doesn't mean there is no potential exposure that might warrant purchasing umbrella insurance. If you frequently host people in your home, have features of your home that might lead to bodily injury, or are even in a position of authority, umbrella coverage could be helpful. Here are a few specific, high risk activities characteristic of those covered by an umbrella policy:
- public figure that gives professional advice
- owner of an investment property with tenants
- board member of the public or nonprofit entity
- parent of an inexperienced driver
- frequent host of social gatherings
- owner of a pet (dog, snake, etc.) or property (swimming pools, guns) that could lead to injury lawsuits
- participant in potentially dangerous sports such as hunting or skiing
While not all-inclusive, each of the activities or characteristics above could make you more susceptible to a lawsuit whose damages rise above your property insurance limits. And even if the risks are small, the affordability of your typical umbrella insurance policy makes the decision to protect yourself even easier.
In another post, we'll hone in on investment property owners specifically, as many have been told they need to transfer ownership of their property to an LLC in order to shield themselves from potential liability. This tactic likely carries an extreme risk that we'll cover at that time, but for now, understand that a well-structured umbrella insurance policy is likely the best protection for an investment property owner.
That's umbrella insurance in a nutshell, and I hope it was helpful in showing how this coverage can act as a figurative umbrella over your auto and property insurance. If you feel you might be exposed in any area of your finances, I encourage you to see if umbrella insurance - or another form of protection - might be a fit for your finances.