Umbrella liability amount and tips?

December 23, 2020 1:37 PM

We are looking into an umbrella liability policy but don't know what amount to get or anything to watch out for. Help?

We are in the fortunate position of having a positive net worth in excess of the liability limits of our car insurance policy. I think that means an umbrella liability policy might be in order. So how much do we get? This calculator says that 401(k)s don't count but some states allow creditors to sue for your other retirements. Nolo says California is one of those states (which is pretty amazing, put money in a 401(k) and it's judgement-proof, but a teacher saving in a 403(b) could get screwed!). Is there any benefit to having coverage over the amount of our net assets that are potentially subject to judgement? Any gotchas about policy exclusions or providers? This type of insurance is especially rarely used, since it would require us to incur a huge liability, so it's hard to judge.

posted by wnissen to Work & Money (8 answers total)

I suppose it depends on how much your net worth exceeds your car liability policy, but FWIW I have a $1M umbrella policy, and it costs $111/yr. I don't know whether subsequent millions of dollars increase linearly, geometrically, exponentially, or not really very much at all. I also don't know whether you can realistically buy less than $1M of umbrella, or why you'd bother doing that.

The advantage of a generous amount of coverage is that the insurer will take care of things up to that limit, and the hypothetical plaintiff is less likely to go slavering around your other assets and scheming a way to grab them.
posted by spacewrench at 3:11 PM on December 23, 2020

Our philosophy was to insure close to our full net worth. We bundled it with our home and vehicle policies and it’s not that expensive, although we would be considered in a very low risk category, with driving and owning property being our biggest exposures. As per spacewrench’s number above, I’d say it is roughly a linear scale of increase. I can’t remember exactly what we pay but it works out to around or a little more than they said per million, granted we also have quite robust homeowner and vehicle policies that are about at the limits you can reach.

I say this all the time to people that don’t grasp what you clearly do: no matter how good a driver you are, or how infrequent, or where you drive, there is nothing you do every day that places your assets and security at greater risk, irrespective of your level of fault in many cases. If you’d be the deepest pocketed person at a three car pileup caused by a broke and uninsured driver, your assets are seriously exposed. There is very little fairness or justice in that domain. And it’s really easy to do a million dollars worth of damage with a vehicle. Especially to human bodies. Max out to the extent you can. Driving is expensive. The number of people driving around with minimum liability coverage, or none, is breathtaking.
posted by spitbull at 4:35 PM on December 23, 2020 [1 favorite]

I would suggest insuring for *more* than your net worth - some people suggest twice your net worth, others your net worth + $1 million. The idea is that the rare horrible lawsuit that you are insuring against (by purchasing umbrella insurance) could theoretically result in a judgement against you greater than your net worth that obligates you to continue to pay over time. Umbrella insurance is a shockingly affordable way to protect yourself against the type of worst-case scenario that spitbull mentions. Above $1M increases slower than linear (at least with my insurer, $2M coverage was less than twice $1M).

Another way to think of it: if you are in a horrible accident and are sued for a large amount, you massively benefit if the experienced insurance-company attorneys are the ones fighting on your behalf. This is what spacewrench is alluding to.
posted by medusa at 4:52 PM on December 23, 2020

I've never seen an umbrella policy less than $1M, so that's a lower bound.

I have a $2M policy with a ~$1.6M net worth (exclusive of 401(k)). For me, a $2M policy was $304 compared to $190 for a $1M policy (only a 60% increase). I figure my insurer will provide the "extra special" lawyers when faced with $2M of potential liability on their part, and that's worth $114/year to me. That said, I've never understood going further than your net worth rounded up to the next $1M. No insurance agent I've asked has ever demonstrated a recent case that was settled for more than the defendant's net worth. I'm sure it happens, but I don't think it happens enough to justify extra cost. It's the same reason I don't have asteroid-induced injury insurance - useless insurance is useless even if it's cheap.

The number of people driving around with minimum liability coverage, or none, is breathtaking.

This is an example of a rider to pay attention to. Umbrella policies are, by default, liability-only, so they don't cover your costs in a hypothetical accident against someone with insufficient coverage. You can buy rider policies to umbrella policies that extend underinsured/uninsured coverage to the umbrella limit. I didn't choose to buy one, because I expect to be covered under my medical coverage for high-value medical claims and my car is not worth any significant amount.
posted by sockmypuppet at 5:19 PM on December 23, 2020 [2 favorites]

Yes to be clear I suggest maximum auto-policy-specific coverage for uninsured-underinsured driver accidents. And always read the riders. My point is more that in a scenario with multiple parties involved, the lawyers will go after the one with the better insurance and/or greater assets irrespective of relative fault. You can be sure most uninsured and underinsured drivers also don’t have personal umbrella coverage or (mostly) significant (on the books, some of them are drug dealers) net worth or assets. Else they’d buy good insurance.

I just assume everything I’ve ever accumulated is on the line every time I pull out of my driveway. Among other things it’s a bracing way to remind yourself to drive at the edge of perfection.

It’s also totally worth it to buy all your coverage from one agent and one company. They then have a 360 degree view of their and your exposure and a good agent can help you spot the holes and maximize the efficiency of your coverage.
posted by spitbull at 3:57 AM on December 24, 2020

It also matters how old you are and whether you have dependents. As I’m approaching retirement soon, I have less at risk beyond my net worth. I have relatively less earning potential left. And a judgement that left me on the line for say 20% above my net worth that was covered to my net worth by my insurance (meaning I’d lose 20% of that net worth in the end, like a deductible) matters less to me as I get older and my net worth exceeds my needs under a projected future life span that is far rosier than realistic. If you’re younger or expect to earn a lot more income over your life or have kids or dependents, I can definitely see the case for insuring above that net worth number. Same if you face unusual liability risk due to a hobby, for example.

And of course remember that if you have investments and income your net worth is likely to increase over time. Don’t set it and forget it.
posted by spitbull at 4:04 AM on December 24, 2020

When purchasing my umbrella policy, I was required to increase my auto insurance limits to the max before I could buy the umbrella policy. So, you might need to factor that into your cost as well. I think it was an extra $300/year for auto insurance + the cost of the umbrella policy.
posted by skunk pig at 8:02 AM on December 24, 2020

I hope someone can comment on this with more authority but the problem is that the umbrella policy pays up to its limit and then if the judgement against you is higher than that, you still owe. So, if you need to look at the likely range of liabilities and have enough umbrella to cover you. So, I think, if you lose a $4 million judgement and you have a $2 million policy and $1 million in savings, you could end up actually owing. So the probability of being in a situation where your liability is more than your auto or homeowners insurance covers is easy to imagine. The probability of being at risk for more than $1 million is smaller, more than $2 million even smaller.
So, if I'm right (and maybe I'm not) you want to focus more on the risk than the assets.
posted by metahawk at 11:42 PM on December 24, 2020