How Much Personal Liability Insurance Do You Need?

I am continually approached by individuals and families who ask how much liability insurance they need.  This is a very difficult question to answer because the answer is a function of the individuals’ or family’s assets and their life-style.  Both create risk.  The purpose of this article is to explain those factors that determine the right level of liability insurance.  Insufficient liability insurance is one of the leading threats to personal wealth.

What is Liability? Liability refers to being obligated or responsible.  Liability from an insurance perspective contemplates fault arising from negligence.   A person at fault is liable to another for damages because of his or her actions or failure to act, also known as an omission.   Types of liability damages include 3rd party property damage, bodily injury, and personal injury.   Damages include the cost to repair, replace or rebuild damaged property, medical expenses, permanent physical disability or disfigurement, economic loss, pain and suffering because of loss of family, social and other experiences, and reputational damage.  Damages also include the cost of investigation and defense.  And with liability, jurisdiction matters.

Risk Happens!  So what creates risk?  The list begins with the simply owning or renting the property in which one resides.  To that, add physical attributes such as stairs, pools, and hot tubs.  Add to that your life style.  Do you entertain often and have there been times when over-consumption has occurred?  What about driving; are you aggressive or do you commute?  Do you often find yourself driving your neighbor’s children to events?  Do you have teens?  Do you have vacation homes or toys such as boats, ATVs, or jet skis?  Do you play golf or hunt?  Do you have firearms?  All of these activities create risk that cannot be avoided.  Even the good golfer has been known to shank a ball into another fairway.

Another consideration is where you live.   Do you live in a highly competitive and successful community, where success is a given and wealth is obvious in the cars and homes that your neighbors own.  Clearly a run-in with a neighbor’s Aston Martin will be much more expensive than another vehicle.  Or for that matter, think of your children’s peers.  Are they all destined for greatness?  Do you have domestic help or do you sit on a not-for-profit Board?

What about social media?  One of the newer areas of concern is the use of social media, such as blogging or tweeting, where the instantaneous sharing of one’s opinions can result in lawsuits alleging libel and defamation.  Liability is not limited to the one who does the typing.

And one of the newer trends, parents can be sued for the actions of their children and there have been cases alleging parents did not adequately supervise their children.

Risk happens!!

What external factors impact appropriate limits?  It is important to understand what happens when there is an occurrence or an event that results in a claim alleging damages.  When an event takes place the plaintiff begins the process by retaining legal counsel.  You are either aware of the incident, such as auto accident, and have alerted your insurer in advance, or you are served with a civil complaint.  If you notify and seek counsel from your own attorney, it is at your own personal cost.  And there’s a dearth of other costs associated with it, including one of the more often overlooked costs of distraction from personal and other business interests as well as emotional despair.  Once your insurer is involved they will determine the best approach based upon:

  • the plaintiffs demands
  • the merits of the case
  • the jurisdiction
  • the court, and
  • The limits of liability insurance purchased relative to  the demands

Jurisdiction Matters – It is also important to note that not all courts are the same.  Where you live, where the injury/incident took place, and where the claimant lives may all impact where a claim is filed.  The plaintiff’s attorney will file suit in the jurisdiction that will generate the best financial outcome for his/her client.

There are those regions which are referred to as “judicial hellholes”.  Judicial hellholes are basically jurisdictions where judges systematically apply laws and court procedures in an unfair and unbalanced manner, generally against defendants in civil lawsuits.  There are numerous areas which fall into this category, including: California, West Virginia, Madison County Illinois, New York City, Albany NY, and Baltimore.  Five areas are on the watch list, Philadelphia, South Florida, Cook County Illinois, New Jersey, and Nevada.

An inexpensive “Call Option” on Legal Defense – Insurers are required to defend their policyholders against lawsuits. The costs of settling a claim include defense, litigation, and medical cost containment. Expenditures for surveillance, litigation management, and fees for appraisers, private investigators, hearing representatives, and fraud investigators are also included.  In addition, attorney legal fees may be incurred owing to a duty to defend, even when coverage does not exist, because attorneys must be hired to issue opinions about coverage.  Defense costs can quickly exceed the cost of an Umbrella Liability policy.  Typically, a $5mm umbrella liability policy costs between $650 and $1,200 depending upon the underlying exposure, such as the number of properties owned, vehicles, youthful drivers, and other factors.  Contrast this with the cost of a good attorney with expertise in the area of law needed at $600 to $800 per hour and the value is quickly realized.

Call Option Chart

How does a Personal Injury lawyer approach a claims value? Personal Injury attorneys estimate the value of a lawsuit or case based upon a variety of factors.  They interview their clients, hire consultants, and employ investigators.  Questions include:

  • The nature, severity, and duration of the injury?
  • Is there a wage loss for the time you have been injured?
  • Will there be a loss of future earning capacity? (Will you be returning to work and can you perform the same type of work?)
  • What are your current medical expenses?
  • Will you have future medical expenses?
  • Is there a psychological component to your injuries?  This would be mental and emotional pain and suffering for the      claimant and their family.  In other words, will the quality of life  be impaired or reduced.
  • How has your family suffered as a result of your injury? (This is called a “loss of consortium”)

Based upon the aforementioned, the attorney attempts to calculate the value of the claim.

How much liability coverage is enough? The decision is more art than science but you should purchase limits of liability to meet the extreme risks. Requisite limits vary widely depending on your own circumstances.  However, it is generally safe to say that even the most benign family should purchase primary liability insurance as part of their home and auto equal to at least $300,000, plus at least $5 million in excess limits. Families that perceive even a low level of liability risk should count upwards from there.  Lawsuits are all too common in today’s litigious society.  If any individual is involved in an accident and then sued for an amount greater than their existing personal liability coverage, assets such as their home, belongings, investments, and future earning could all be at risk.  And, high-net worth families are even greater targets.

Factors to consider include:

  • If you are sued, you cannot have enough
  • Consider your worth
  • Consider your expected future income
  • Think about generational issues – family trusts are not precluded from attachment
  • Consider philanthropy objectives
  • Compare the small annual cost of an personal umbrella versus:
    • The hourly charge of a quality defense attorney
    • The potential cost of an uninsured or underinsured claim

At a minimum, be sure the sum of the underlying home and/or auto liability limit plus your umbrella is greater than or equal to the market value of your assets plus expected future income.  In all 50-states if you are sued and the judgment exceeds the limits of your liability coverage, your wages can be garnished and/or assets seized.

umbrella

Lastly, do not assume an LLC or Trust insulates your wealth from a negligence suit.  Of course, the most exposed families should buy at the highest end of the spectrum because insufficient liability insurance is one of the leading threats to personal wealth.

Other Considerations – When considering purchasing an umbrella liability policy it is also important to verify that coverage is as broad as the underlying insurance you have and includes personal injury in addition to third-party bodily injury and property damage.  Also, be sure the underlying limits of liability on your homeowners, auto, and other insurances meet the minimum required to avoid unwanted gaps.  Some of the companies targeting the high-net worth segment include other options that can materially improve your protection.  For instance, you can add-on coverages such as not-for-profit Directors and Officers Liability and Employment Practices for household help.  Other features can include excess uninsured/underinsured motorists.  Lastly, consider the claims and litigation resources available to support the policy.  Some of the insurers provide a panel of defense attorneys with differing areas of expertise to choose from and also provide reimbursement up to pre-agreed limits for the costs of your own legal counsel that might advise you in the course of your defense.

A Final Note – New claims of liability continue to emerge in unprecedented and unforeseen areas.  Buy liability limits for the unknown, not the expected.

Umbrella Liability – Is it Necessary …Yes!!