Why You Need Umbrella Liability InsuranceSeptember 30, 2021
Minimal assets mean a minimal need for liability insurance, right? Wrong! Although this is a common belief when it comes to insurance, it’s not true. Here’s what you need to know about liability insurance as well as some examples that illustrate the need for higher liability insurance limits and also why you need umbrella liability insurance:
What is Liability Insurance?
First, what is Liability Insurance? This is monetary protection for bodily injury or property damage that you, the “third party,” would cause to another individual or entity. If you are responsible for economic loss of property or incurred medical expense from injury caused by you or a resident family member, then you most likely will be responsible to pay or reimburse the injured party.
The most common example is auto insurance where you have an insurance policy that would pay for damage or injury you cause in an auto accident. But, this kind of claim could also be an injury on your premises, such as a dog bite, a slip and fall, and an injury or accident due to equipment.
If you are a farmer there is great potential for incidents involving farm machinery on the farm and on the road. You have product liability exposure if you are producing any kind of food or fiber. So, everyone has a liability exposure to some degree.
What Does Liability Insurance Cover?
Liability insurance is purchased in increments of $100,000, such as $100,000, $300,000, $500,000 or $1,000,000. These are the most common options. These numbers represent the amount the policy will pay on any one claim.
It is important to understand what limit you may have because that is exactly how much protection for any one incident you are responsible for. Essentially, you are covered either through a liability insurance policy or your own back pocket!
It’s also important to understand that your risk changes and morphs as your life circumstances change. And, you may need to increase your liability insurance limits through an umbrella liability insurance policy. Here are a few real-life scenarios to demonstrate what liability insurance covers and where umbrella liability, or excess liability is needed:
Scenario #1 – There is a New Driver in Your Household and They Get Into an Accident
You have a new teenage driver in your household. There is nothing like the freedom to get from point A to point B, on your own, without mom and dad hauling you. And, what better way than to go with a bunch of your friends.
New driver with friends and a great time to impress everyone with their new freedom and “skills”. Are you seeing the picture? It can easily escalate into faster speed. All it takes is a bumpy road, another car pulling out, a deer, or something else, and suddenly the car is off the road.
If the passengers end up severely injured, hospitalized for weeks, or with potentially life-changing injuries, the injured teen(s) and their families may sue for injuries. Let’s say, in this case, the courts award in excess of $1,000,000 in damages. It is likely guaranteed that your personal auto policy does not have limits that high. How are you going to pay?
Scenario #2 – An Elderly Driver Gets Into an Accident
Perhaps, grandpa or grandma is extremely independent. They have been driving since they were 16 and now, they are 85 or older. Age brings changes and one of the most subtle is that of slower reaction time. Other things, such as impaired vision, poor judgment, etc., are just part of natural aging. But, don’t suggest that to them!
Let’s say grandma needs to get groceries, drive to church, or go visit her 85-year-old friend. She misjudges and pulls out in front of a young mother with 3 children and a horrific accident ensues with severe injury or death to the mother of the young family. Without enough liability insurance limits, the settlement against grandma takes her savings and the equity in her house. Grandma can continue to live in her house but the moment she sells it, the proceeds go to the injured party.
Scenario #3 – Your Dog Bites Your Neighbor’s Child
You live in a double home. Your neighbor on the other side of the house has young children. You have a female dog. You have not gotten your dog spayed. Your dog comes into heat and that attracts someone’s male dog. Funny how nature works, isn’t it?
Your neighbor’s young child has always played with your dog and so innocently they are there today, and they get between your dog and the male dog that is only there to do what nature would have him do. The child is a threat to the male dog and so the dog bites the child.
You are responsible for the treatment of the injuries to the child. If the injury is bad enough, such as permanent disability-loss of an eye for example-you may be facing a large financial compensation.
There was a case several decades ago where a young child was award $90,000+ just for the trauma of the dog bite. Today, that would probably be several times that amount. Your homeowner’s policy with liability protection on it would be the policy that would respond.
This is how homeowners insurance covers dogs. But. the question to ask is how much is your liability limit and is it enough?
Umbrella Liability Provides Extra Liability Coverage
With these examples, there are two things to consider. First, you have a legal obligation to make the injured party whole if you are the one responsible for their loss, injury, or property damage. Second, in the case of a substantial or severe loss, you want to be in a position to compensate and assist the injured party in a financial manner if at all possible. This is more of a moral obligation, and that will vary by the individual.
So how can you protect yourself? Purchase an Umbrella Liability Policy. It is exactly what it sounds like. It is a policy that sits on top or over the liability you have from your homeowner policy, your farmowner policy, and your auto policy. You can have an umbrella liability policy to sit over most any “underlying liability” policy, and is one of the home insurance considerations for multigenerational households. These policies are very cost-effective for the level of protection they give you. You can purchase them in increments of $1,000,000.
How Much Liability Insurance Should I Have?
Knowing you need to get enough coverage is one step; the next step is determining how much liability insurance you should have. That is a question that has no definitive answer. One way to think about it is to start with the value of your assets.
Depending on the value of your assets, maybe your liability insurance limit should be close to that value? For example, if you are worth $1,000,000, you should have at least $1,000,000 of liability. If it’s $2,000,000, then $2,000,000; $5,000,000 then $5,000,000, and so on.
If you are worth $10,000,000, do you need $10,000,000 of liability? It’s up to you how much coverage you want through insurance and how much you want to self-insure out of your own pocket!
Make Sure You Have Enough Insurance Coverage
So, the legal environment we find ourselves in and the attitudes we see within our society may cause you to pause just a bit to consider how much is enough and how you wish to protect yourself. Umbrella coverage is important in a variety of ways and situations, and is also a consideration for business succession planning and insurance.
Give one of our staff here at Ruhl Insurance a call to discuss your specific situation. We can be reached at 800-537-6880 or 717-665-2283.
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.