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Many HumbleDollar readers have saved and invested regularly over their working years and were able to retire comfortably. Unfortunately, a lawsuit could threaten that financial security.
One possible scenario: If, heaven forbid, you are involved in a traffic accident resulting in severe bodily injury or loss of life, a legal judgement against you could destroy your nest egg.
The liability coverage on a home or auto policy may not offer enough protection. For this reason, we are encouraged to purchase an additional umbrella policy.
Umbrella policies are usually sold in increments of one million dollars of coverage. Each additional increment raises the premium. But how much coverage do you really need?
The only recommendation I’ve run across is to match umbrella coverage to your net worth. But that is unsatisfying. If, for example, your net worth is $50 million, I can’t imagine you need $50 million of coverage.
For those HD readers who have an umbrella policy, how much coverage do you have, and how did you arrive at that figure? Have you ever heard of a rule of thumb for determining what a proper level of coverage might be?
Extremely large liability umbrella policies can be purchased from high net worth coverage insurance companies such as AIG. Was an article a few years ago about a pro athlete who bought a $25 million umbrella policy.
A case posted by a Boglehead (BH) a bunch of years ago. The BH was in a line of cars stopped at a stoplight, perhaps 3-4 cars back. An auto hit the last car in the back of the line at a high rate of speed pushing everyone forward far enough that the lead auto was pushed into the intersection where a crossing auto T-boned him. A young passenger in the T-boned car was rendered tetraplegic. The lawyers were licking their chops and sued everyone present within 100 miles (well…) The BH had an umbrella policy for $10 million (I think). When it was all settled and done that $10 million went toward the eventual very, very large settlement. And the BH wasn’t actually “at fault”; he was simply “there”.
Umbrellas are good. Be sure to have one. The downpour can be extremely heavy.
A client was at fault in the death of a motorcyclist. He did not have an umbrella policy. He had to take a $100,000 distribution from his IRA.
We have a 1 million dollar policy, costs us $184 per year; pretty cheap. I was not aware of independent insurers offering umbrella coverage. I will check those out.
Previous responses have pretty well covered the questions in this post. I wanted to make a couple of comments about Umbrella insurance. I think it is well understood that Umbrella policies provide higher coverage limits of liability above their underlying auto and HO policies. They also provide some coverage for liability in areas where you do not have underlying coverage. For example, if you go to the lake and rent a boat to go water skiing, your Umbrella will provide primary coverage. Because of this feature, these policies typically exclude coverage for renting airplanes or other very hazardous activities.
As far as the cost of Umbrella insurance goes, prices have been increasing partly because inflation has reduced the value of the underlying policy limits. In 1972 you could buy an Umbrella with underlying auto limits of 100,000 per person, 300,000 per accident. Umbrella losses were very rare. With inflation since 1972 being 7X, comparable limits would need to be 700,000/2,100.000 today to provide the same degree of coverage. As a result, the first million of Umbrella coverage has become more like primary insurance. And, there is a price connection between the primary and the umbrella. Higher underlying limits can reduce the Umbrella price.
If you want to explore additional sources of Umbrella coverage you need to consult an insurance broker rather than agents like those of State Farm, Farmers, USAA. Brokers can provide access to non-admitted insurance companies which are not regulated by state insurance regulators. As long as such a company has at least an A rating from A M Best, it would be satisfactory. Some of these brokers can place policies with Lloyds of London.
Finally, your Umbrella policy won’t cover any of your side gigs. It will exclude any business liability. It may or may not cover your activities as a board member of a charity, or church. Read the policy.
Mine is slightly higher than my net worth. I no longer own a home but while I don’t drive as much I may be a more dangerous driver as I age. I think I’m paying around $20/month, which isn’t much, but I’d be interested in a formula to calculate what I should really carry.
Most companies have a maximum umbrella of $5m which is fine for most people. When you need more than $5m most likely there are structural options, (for example, owning rental properties in corporations,) to reduce your direct liability.
Great topic Philip,
At the 2024 Bogleheads conference, under the tab 2024 – Bogleheads Advanced:501, Dr. Jim Dahle, M. D. presented on the topic of how extreme liability can be mitigated, including having appropriate umbrella coverage. The link to the Advanced:501 videos can be accessed on the splash page …..presentations from September 27th by clicking on the “here”. While there you may also enjoy the presentation “The Center Lane” by Adam Grossman, CFA whose comments are so familiar to regular readers of Humble Dollar.
https://boglecenter.net/bogleheads-university/
Dr. Dahle’s presentation objectives –
1. Show you how to get sued less
2. Describe frequency and amounts of above policy
limits judgments
3. Discuss general principles of asset protection
4. Describe a basic asset protection plan
5. Discuss some complex asset protection techniques
His comments as to how to Get Sued Less Frequently –
• Be competent
• Be nice
• Avoid high-risk activities
• Certain professions (like medicine)
• Pools, trampolines, playgrounds on your property, certain dog breeds
• Boating, ATV use, flying
• Driving drunk, tired, long distances, or in heavy traffic
And of course, have adequate umbrella and professional liability insurance.
I have taken the good doctor’s non-medical advice to heart.
I was sued after one of my kids was at fault in an auto accident. The USAA rep told me carrying at least $500K liability coverage was a good idea because it covers most circumstances. He also said my $1mil personal liability policy was a great idea because the two together would cover me in almost any circumstance.
Umbrella policies should be at least $1 million and probably $2 million minimum to cover liability of a catastrophic car accident – these policies are especially important for parents of young drivers. Car insurance liability is typically capped at $300K, but settlements in the $1-2 million range are not uncommon in cases of multiple injuries or accidental death.
$5 million of coverage is a common maximum, but if our net worth was $50 million, I’d probably buy more than the typical $5 million ceiling. Our policy has long been $3 million, which we have been considering increasing.
The cost of umbrella policies has increased lots over the last two decades due to increased settlement costs and that Warren Buffett’s team has cleverly bought out a bunch of independent insurers who used to provide stand-alone coverage. Major insurance companies now typically require purchasers to bundle the umbrella policy with home or auto insurance.
I’m sure the Humble Dollar community would be interested in knowing if anyone has found an independent and cost-effective umbrella insurance provider????
We use our net worth of legally vulnerable assets for umbrella coverage. So we subtract our retirement accounts which are generally protected by federal and state laws. Our house is not protected by homestead exemption which in some cases can protect home equity so we include that.
We have enough to cover our net worth. The cost is only a few hundred dollars for the coverage so I’m not sweating the details.
This is what we have. It is a reasonable cost for the coverage. Hope we never need it. Chris
Ours is big enough to:
We do everything we can to avoid ever filing an umbrella policy claim. I hope the policy remains pure profit for our insurer by the time the last of us goes.
I’m not an attorney and have no special expertise in this subject. That said, here’s how I answered your question for myself. I suspect like many of the really tough questions in life the answer is “it depends”. I had a family member that went through a litigation settlement process. My impression was that if the plaintiffs are willing to entertain a settlement than it’s likely very much “about the money”. If so, then the plaintiffs (and their attorneys) really want as much as they could get, but they also don’t want the risk, delay and expense of a trial. The deciding factor seemed to be if the settlement amount (ie. immediate payout) was high enough to incentivize them to settle rather than go court even if it’s likely they would get a larger award at trial. So my layman sense of it is that you want enough insurance, compared to your assets they can actually seize via a judgement, to make a settlement an attractive option for them. As a concrete example, in my state our complete home value is protected by our homestead. Our pensions are protected by ERISA, and our IRA’s are protected in our state up to $1M (by state law) and by federal bankruptcy law up to a bit more. With our $3M umbrella policy, our non-protected assets and non-protected future income are less than $500K total. So we feel comfortable that in most cases a quick settlement would probably be preferred by a plaintiff rather than incurring additional delay, risk, and expenses for only a maximum additional $500K (much of which would be consumed by trial expenses). Of course, if someone has $50M in assets that could be subject to a judgement, then they really should have expert legal advice on how to protect their assets from judgements. I don’t know but I suspect the answer will involve LLC’s, offshore trusts, and things like that. All that said, I’m not a lawyer nor an expert in this, but rather just sharing a few layman thoughts I had as I tried to figure out how much I needed for myself.
Phillip, I think this is an important question–wish I knew the definitive answer. If one of our resident attorneys doesn’t speak up, I think I’ll do some research. Meanwhile, my coverage is a step above my net worth, which is a long way from your example.