If you’re like many American homeowners, the only liability insurance you carry is what your homeowner’s insurance policy gives you, and it’s probably not enough.
Here’s why: liability insurance is supposed to protect you in the event that someone takes you to court for bodily injury or property damage caused by you, your family members, or even your pets – say, that snappy little dog you have to walk twice a day.
The typical homeowner’s policy covers you against only $100,000 in claims – $300,000 if you pay a small extra premium. And in this litigious age, it doesn’t take much of an accident for people to sue for far more than that, and if you lose, the courts can hold you personally liable for anything over and above the limit in your homeowner’s policy.
The solution is umbrella liability coverage, and the good news is that it’s cheap, effective, and readily available.
The liability coverage under your homeowner’s policy gives you worldwide coverage, so if you accidentally knock over some sweet old English lady with your suitcase rushing through London’s Heathrow airport, you’re covered. Ditto if the sweet old lady takes you home for a cup of tea and that pest, your dog, chews up the corner of an expensive rug in her parlor.
But don’t expect the coverage to go far if you try to compete with some nut behind the wheel on the roads in Italy, or if, closer to home, your teenage driver causes a serious abottom-up investingdent or one of the trees in your yard falls onto your neighbor’s roof or, God forbid, onto your neighbor during a storm.
When that happens, $300,000 quickly looks like chump change, in part because people have every right to sue folks who do them harm, in part because nothing’s cheap when somebody ends up in the hospital, and in part because your homeowner’s liability coverage pays for your lawyer’s fees, too.
What it doesn’t pay for is the difference between the limit of your coverage – that $300,000 – and any bigger judgment against you. Put another way, if all you have is $300,000 in liability coverage and your teenage driver causes a $1-million accident, check your wallet, because the courts can come after you for the difference. The laws in some states make some assets – notably your home – off-limits to seizure, but other than that, most states make it open season on your future income, even money you inherit.
Umbrella liability coverage solves the problem on the cheap; you can get $1 million in coverage for $200 per year, maybe $350 at the most. Umbrella coverage protects you against claims of personal injury – that is, bodily injury, mental anguish, and sickness, disease or death arising from any such injury. It also protects you against claims stemming from wrongful entry or eviction, humiliation, libel or slander, defamation of character or invasion of privacy.
It does not cover you against every claim imaginable. Most personal umbrella policies won’t cover you if, for example, someone sues you for damages having to do with your business interests, for which you need to buy different kinds of commercial insurance. Umbrella insurance also doesn’t cover liabilities you agree to assume in a contract or agreement, whether arising from your business interests or from other matters. Last but not least, don’t expect your umbrella coverage to pay if you cause injury or property damage arising out of your ownership or use of aircraft or many recreational vehicles including jet skis.
Technically, the coverage doesn’t kick in until you’ve exhausted your coverage under your homeowner’s policy. In plain English, this means that if you get hit with a $1-million claim, your homeowner’s policy picks up the first $100,000 (or $300,000, if you buy the extra coverage) and the umbrella coverage picks up the rest.
Those limitations aside, what factors should you consider when deciding how much umbrella coverage to buy? Start with your family situation. If you make a middle-class income, live in a middle-class neighborhood, drive a Ford or a Chevy, and don’t have teenage drivers in the house, you could probably get by with $1 million in umbrella coverage. If you live in a McMansion, drive Lamborghinis and paper your walls with speeding tickets, buy more. Ditto if that pest, your dog, isn’t some yappy little thing but rather a Rottweiler or a pit bull prone to toying with yappy little things on your twice-daily walks.
Other factors to consider: Do you do a lot of traveling? Do you serve alcohol when entertaining at home? Do you allow your favorite charity to use your home for fund-raising events, with or without alcohol? Do you operate a home-based business with employees or customers coming and going? In your spare time, do you teach rock climbing? Do you take young people into rugged territory to teach them survival skills?
If so, protect yourself with lots of umbrella liability coverage, because you’re a target. The insurance protects you against big claims arising out of everyday accidents, offering peace of mind at reasonable cost.
Juan Hovey wrote the “Finance and Insurance” column for the business page of the Los Angeles Times.