When most people consider their insurance needs, they typically only come up with certain types of coverage. Health insurance and life (or sometimes disability) insurance protect you and your loved ones; Auto and homeowner / renter insurance protects your major tangible assets.
Personal liability insurance, often referred to as a “blanket” policy, is rarely on this list. But when a rainy day comes along, or an expensive lawsuit, sometimes only one umbrella will do.
As the name suggests, personal liability coverage exists primarily to protect against liability claims. In most cases, that means finding yourself and your assets at the target of a civil lawsuit. A personal liability policy may seem like a stretch to people who already have three or four insurance policies. It is true that not everyone needs such protection. But a blanket policy effectively defends your assets and future income against damage claims that can arise from a wide variety of scenarios. Like flood insurance for beachfront properties, liability insurance is a product you hope you’ll never have to use, but can create substantial peace of mind in the meantime.
Who Needs Liability Insurance?
Some level of personal liability coverage is built into homeowner (or renter) insurance and auto insurance. For many people, this may be enough. In part, this is because some types of assets are protected by state and federal laws. For example, a court cannot force you to use qualified retirement accounts, such as 401 (k), to pay a legal judgment, and most states have laws that protect traditional IRAs. Some states also protect Roth IRAs and other retirement accounts. Many states also protect your primary residence, although the precise rules vary; Florida, for example, offers very strong protections in this area, while other states may protect only a certain level of home equity.
You can also protect certain assets from lawsuits through estate planning tools, such as properly structured and funded irrevocable trusts. However, be careful about creating such trusts directly after an incident that you fear could trigger a lawsuit. If it appears that you are simply trying to elude future creditors, the courts could find the transfer of assets to be fraudulent, leaving these assets available to pay a judgment.
If you don’t have many assets outside of your retirement savings and your primary residence, then your current liability coverage may be sufficient. But second homes and non-retirement investment accounts are vulnerable. High-income individuals and their spouses may also want to consider their coverage options, as courts have been known to garnish wages to comply with judgments.
While amounts vary by geography and insurance policy, homeowners insurance generally includes up to $ 300,000 of personal liability coverage. Auto insurance generally covers up to $ 250,000 for each person and $ 500,000 per accident involving bodily harm, and less for incidents involving only property damage. However, serious accident lawsuits can sometimes result in millions of dollars in lawsuits or settlements. This is where general policies come into play.
Most people think of car accidents as the main trigger for such lawsuits, and rightly so, as car accidents are relatively common and can cause a lot of damage. But there are a wide variety of situations in which you can be responsible for an accident. You can organize a party at your house in which one of the guests is seriously injured. Your dog may bite a stranger or acquaintance. If you employ domestic staff, such as a babysitter or home health aide, the employee could sue not only for physical harm, but also for wrongful termination or harassment.
There are other liability risks that may not come to mind so easily. For example, the hyper-connected world of social media creates many more opportunities to smear or smear someone, even without deliberately setting out to do so. Your teens or preteens can create these problems too; At worst, they could end up involved in a cyberbullying or stalking incident that takes a tragic turn. Teens also increase their responsibility when they get behind the wheel. Even adult children can activate “vicarious liability” statutes that can leave you personally liable in certain circumstances, such as if they borrow your car and are later involved in an accident.
Another area that some people overlook is the risk of sitting on a nonprofit board of directors. Many nonprofits are too small to offer much, if any, protection for board members’ personal assets in cases where the organization and its board of directors are sued. Board members may consider directors and officers insurance specifically, as well as or in lieu of a general policy. People whose charitable work, or whose professional activities put them in the public eye, may also want to consider increased liability coverage because of the potential damage a lawsuit could cause to their reputation and financial health.
When considering the need for personal liability insurance, the common law concept of “joint and several” liability is also worth considering. In many jurisdictions, a plaintiff can recover all damages from any one of multiple defendants, regardless of fault. In other words, if four defendants are all equally liable, the plaintiff can recover 100 percent of the damages from one of them and none from the other three. Therefore, many attorneys focus on the defendant with the highest net worth in such cases, on the theory that this method is the one most likely to secure the highest payoff for his client.
How Much Liability Insurance Should You Carry?
As you can see, people with high net worth, high earning potential, or both have reason to be concerned about their exposure to liability. Once you’ve decided to buy a blanket policy, the next logical question is how much insurance to buy.
Unfortunately, there is no specific formula to determine the correct amount of coverage. A good rule of thumb is to have at least enough insurance to cover your net worth and the present value of your future income stream. A Certified Financial Planner ™ or insurance agent can help you with such calculations, and there are also a variety of online tools designed to help you calculate a figure. Keep in mind that insurance companies’ tools and advice will tend to want to sell you more insurance than you may need, but it can still be helpful to see what factors will affect your coverage. Some of these are intuitive, like your current net worth and the assets you own. Others are more immediately concerned about the possibility of accidents; For example, you may want more insurance if you own a diving board or pool, and you can expect slightly higher premiums as well.
As with any insurance decision, shopping around is a good idea. But there are real benefits to buying most or all of your insurance products from a single provider. Consolidating your coverage will not only ease the administrative burden, but also make it easier to spot potential gaps. For example, if your homeowners insurance covers $ 300,000 in personal liability insurance but your blanket policy doesn’t go into effect up to $ 500,000, you will be responsible for the $ 200,000 in between. To avoid this, most companies that sell general insurance require customers to increase their basic liability coverage to eliminate those holes. Sticking with one company can also simplify the process in the event of a lawsuit, as you won’t have two separate companies handling two pieces of your coverage. And the pool can guarantee discounts on the premiums of its various policies.
The good news is that, in most cases, general policies offer good value. Since catastrophically large lawsuits are relatively rare, companies can afford to spread risk widely among their group of clients. While the exact rates vary, $ 300 to $ 500 annually can often secure $ 1 million in coverage. This number may increase or decrease depending on the number of households, cars and drivers in the insured’s household, as well as the part of the country in which they live. However, it almost always happens that what you pay for the first million dollars of coverage, the second million will cost less. If $ 1 million in coverage costs $ 500 per year, $ 5 million will almost certainly be less than $ 2,500.
For such relatively low premiums, personal liability insurance offers great peace of mind. In addition to the basic function of the product, some policies go further. Extras you may find include not counting legal defense costs against the coverage limit or offering reimbursement of public relations firm fees to handle the consequences of the incident. Depending on your needs and lifestyle, it may be worth comparing the features, as well as the cost, when choosing a policy.
In the United States we live in a highly litigious society. Some of these demands are frivolous; many are not. The reality is that civil lawsuits can and often do result in lawsuits or settlements that run into the millions of dollars, and judges and juries are not required to limit damages awarded to an amount that the defendant can pay. comfortably. Personal liability insurance protects you in the worst case, even if the court finds you fully liable.
So while adding one more insurance policy may seem unnecessary at first, for people with assets vulnerable to creditor claims, a blanket policy is an economically sensible way to protect against a rainy day in court.