Schaefer Insurance Services, L.L.C.

Do You Need the Umbrella?

Odds are you’ll never be sued for a million dollars. But what if you are?  It’s unspeakable, unthinkable: You, or your teenager, cause an auto accident that leaves a passenger in the other car permanently disabled. It gets worse: The injured person sues you for $1 million --- and wins. 

How could you pay that much? Your automobile insurance might cover part of it, say $100,000 to $300,000. What about the rest? You could lose almost everything for which you have worked a lifetime, and you could still be paying years from now. 

Unless, of course, you’re among the growing number of people who own $1- million personal umbrella liability policies. In such a situation, an umbrella policy would kick in to cover the balance of the judgement, saving your assets. 

If you think it’s unlikely that you’ll ever need such protection, you’re right. Accidents that result in claims for huge amounts are rare. That’s precisely why you can get $1 million worth of extra insurance for $100 to $300 a year. Fireman’s Fund, for example, reports fewer than 40 claims a year on its 40,000 personal umbrella policies. 

But it takes a only one brush with tragedy to ruin you. “Severity, not frequency, is the critical point,” says Naig Neville, an insurance consultant in West Bloomfield, Michigan. He calls umbrella liability policies “peace-of-mind insurance.” 

Don’t think efforts in Congress to reform the legal system, including a possible cap on punitive damages in some type of cases, will reduce the risk. The proposed changes wouldn’t apply to most suits brought by one individual against another.

WHO NEEDS AN UMBRELLA? 

“A kid with a boombox won’t buy an umbrella policy,” says Robert Hunter, director of Consumer Federation of America’s Insurance Group and former Texas insurance commissioner. But, he adds, “the more significant the assets, the more advisable the insurance.” 

“The need depends on your vulnerability,” says William Warfel, professor of insurance and risk management at Indiana State University. When assessing whether you’re vulnerable, begin by considering that the vast majority of claims under umbrella liability policies --- 80% to 90% at one company --- spring from auto-related incidents. If you drive a car, then you’re at risk.  

OPENING AN UMBRELLA 

Basically, umbrella policies sit on top of other insurance that includes liability protection, such as homeowners, auto and boat policies. When your primary insurance is not enough, the umbrella policy is triggered, spreading its protection hence the term “umbrella”). Umbrella policies typically cover you and your family members who live with you for accidental injuries to another person or another person’s property. 

The smallest policies (and the most common) pay up to $1 million per incident beyond what’s covered by the underlying policy. If you have $300,000 of personal liability protection on your auto policy and a $1 million umbrella policy, then under most policies you would have a total of $1.3 million worth of insurance standing between an injured party and your assets.     Claims against individuals rarely go that high. According to State Farm, which has 1.4 million umbrella policies in force, the average total payout in cases in which the policies come into play falls between $300,000 to $500,000.    

The easiest way to buy an umbrella policy is through the same company that handles your homeowners or auto insurance. In fact, you may have to buy from the same insurer because some companies require that you purchase one or more underlying policies form them before they will issue an umbrella policy. Insurance companies also require that you maintain certain minimum levels of liability coverage on the underlying policies --- perhaps $300,000 on an auto policy and $100,000 on a homeowner’s policy. The umbrella protection kicks in only when those levels are exceeded.    

A mistake here could be costly. Say you buy your umbrella policy from your homeowners insurance company and it requires that you maintain $300,000 worth of liability protection on your auto policy. If your liability protection under your car insurance is only $200,000, you might have to fill the gap --- $100,000 before the umbrella will pay a cent. Other points to check as you shop for protection:

• Is all your estate covered? Homeowners insurance typically covers one or two homes, such as your primary residence and a vacation home. But if you want to cover more than that with an umbrella, or if you rent out a home, you may need separate underlying insurance.

• Is your home-based business covered? Most homeowners policies do not automatically cover home businesses, so an umbrella policy would not either. Alex Soto, an independent insurance agent in Miami, says your best bet may be to buy a separate home-based business policy or a regular commercial policy to get the coverage you need.  

• Are you on the board of a non-profit? Many homeowners policies do not cover claims arising from this kind of activity, and umbrella protection is iffy. Find out whether the organization has directors and officers insurance that covers you if you are sued as an individual, and ask what kinds of claims trigger coverage.     

Make sure you discuss issues and other risks you face with your insurance agent. Disclosure of risks is the best way to make sure that you are covered later.    

But it’s not just car wrecks that you have to worry about. Consider the following situations in which an umbrella policy could pay off: A friend breaks a leg after slipping in your basement steps; a babysitter is partially blinded when she is poked in the eye by one of your kids; your dog bites and disfigures a neighbor; a cyclist with whom you collide suffers a disabling injury. (See box on last page for examples of other accidents that have resulted in big payouts.)    

An umbrella policy can extend your protection to situations in which you would otherwise not be covered. For example, unlike your basic auto insurance, it covers you when you rent a car in a foreign country, as long as you buy enough of the rental company’s liability coverage.    

Most umbrella policies would also protect you if you were sued for libel, slander, defamation of character, or invasion of privacy. If you are wondering why you might need to worry about such things, note that cases have arisen among “friends” in social settings in which one person accused another of lying. You might scoff that such scenarios are merely evidence of a lawsuit-happy society. But remember that even if a court ultimately rules that a suit is without merit, you still have to defend against it. That in itself can be expensive. Both primary and umbrella insurers have the obligation to defend you, even if a suit is determined to be frivolous, and in most cases they do it without cutting into the face value of your policy.

Whether you should buy an umbrella policy depends almost as much on your tolerance for risk as it does on the assets you want to protect. At some point as your assets grow you may need one; however, not having an umbrella policy is foolhardy.  

Take this quick test to measure the risks you face. In most cases, the more often you answer yes, the more likely you need an umbrella policy. But for some people, one “yes” answer is sufficient to make them candidates for insurance.

• Do you own your home or condo?

• Is there a teenage driver in the family?

• Do babysitters or cleaning people work in your home?

• Do you have a swimming pool?

• Do you ever leave your home in the care of a housesitter?

• Do you regularly ferry other people’s kids around in your car?

• Do you have a big or excitable dog?

• Are you active in sports, such as golf, biking, skiing, or mountain climbing?

• Do you own a boat?  

THE PERILS AN UMBRELLA POLICY CAN PROTECT AGAINST AUTO ACCIDENTS cause most of the personal injuries that result in huge monetary settlements paid by umbrella liability insurance. But there are plenty of other calamities that can put your assets at serious risk. Consider these recent real-life cases:

• You know the game: One person kneels behind another and a third pushes the “victim” over. In a case settled last year, three 10-year olds were the players. One child broke his arm and the other two were sued. The case cost the kneeling boy $100,000 and the one who did the pushing $195,000.

• A 40-year-old window washer broke his heel in a fall after a downspout he was holding onto broke away from the house on which he was working. Although the worker was found partially responsible, the fall cost the homeowner $1.2 million.

• A 22-year old suffered permanent eye damage when he was struck by a golf ball. He sued claiming that the golfer who hit the ball had failed to look out for other players. The errant shot cost the golfer $160,000.

• A professional dancer suffered permanent knee damage --- an end to her career---when she was knocked down on a beginner’s ski slope. She offered to settle for the $300,000 covered by the defendant’s insurance, but was rebuffed. The case went to trial, where it cost the defendant $2.2 million.

• A woman suffered severe cuts when her leg was hit by the propeller of a boat she was attempting to board. She sued, claiming that the boat began to move before she was safely aboard. The injury cost the boat owner $175,000. • At an end-of-school swim party, a 16-year old dove and hit his head on the bottom of the pool. He became a quadriplegic, and the case resulted in a $1.5 million settlement against the homeowner.

• A 5-year old suffered brain damage when a dinner bell at his grandfather’s home fell and struck him in the head. A lawsuit against the grandfather led to a $500,000 settlement.   

(From Kiplinger’s Personal Finance Magazine – Article by Ronaleen Roha)  ______________________________________________________________________________________________ 

Schaefer Insurance Services, L.C. 13208 Executive Park Terrace Germantown, Maryland  20874 Phone:  301-428-0282 Fax: 301-972-9352 E-Mail:  This e-mail address is being protected from spambots. You need JavaScript enabled to view it