“Do I Have a Large Enough Umbrella Policy?”
Personal Excess Liability, or “Umbrella” insurance coverage, is a vital element of personal insurance programs and one of the best values in insurance. And yet, many people don’t avail themselves of this vital protection. Or, if they do, they don’t have appropriate coverage limits or are not with a well-suited insurance carrier.
Viewpoints from Dave Howard
What is Excess Liability Insurance?
As its name suggests, this insurance provides liability coverage “in excess” of your primary liability policies, such as for your home, auto, or watercraft. Primary liability policies respond first against claims by third parties. Once the limit of the underlying primary policy is exhausted, the excess liability coverage kicks in.
How Much Does it Cost?
The reasonable cost for high limits of coverage makes excess liability coverage the best value in personal insurance. For umbrella policies up to $10 million in coverage limits, annual premiums generally cost in the range of $220 to $225 per million, depending on the client’s particular underwriting profile. For example, the estimated annual premium cost for a policy with a $5 million coverage limit would be approximately $1,125.
How Does it Work?
Here’s an illustration. You are involved in a severe auto accident and your auto policy has coverage limits of $250K per person/$500K per incident. If you have an excess liability policy, it will pay any covered claim that exceeds your primary coverage limit. Assume you have a $5 million umbrella policy, and your lawyer has negotiated a settlement payment of $4 million from the accident. The umbrella policy will cover the amount that exceeds your $500K primary policy limit, namely $3.5 million.
A wealth management plan must include an appropriate level of personal excess liability coverage to be complete. Without the umbrella policy in the example above, the auto accident would reduce your personal net worth by $3.5 million.
What is the State of Personal Liability Risk in Society Today?
A phenomenon known as “social inflation” has caused a surge in high-value jury verdicts and settlements in personal injury lawsuits. Potential sources of liability include teenage drivers, dog ownership, swimming pools, home entertainment, domestic employees, social media and online activities, board membership, and rental properties. Damage claims by third parties are not limited by your ability to pay or your personal net worth.
Why do Many Successful People Have Insufficient Umbrella Coverage?
Many people who have accumulated wealth and assets seek out top wealth management and investment advisors. However, they may not follow the same approach with their insurance program, including their personal excess liability coverage. Remarkably, market research shows that most high-net-worth, and even ultra-high-net-worth individuals, do not have their wealth and assets adequately covered with appropriate excess liability coverage.
One reason may be that they have remained with their legacy middle-market insurance companies for decades, many of whom do not offer higher coverage limits. In short, if you are wealthy and have your insurance with a company that regularly advertises on television, you will most likely be underserved on umbrella coverage. In other cases, a client may have remained for many years with an insurance agent or broker who is not sensitized to the client’s wealth accumulation or does not have access to the best insurance markets for this important coverage.
How are Legal Defense Costs Treated?
This is an essential factor that varies among insurance carriers. The policy language of carriers catering to wealthy individuals – such as Chubb, PURE, AIG Private Client, or Cincinnati – generally treats legal defense costs as being outside your excess liability coverage limits. This can be vitally important, as protracted litigation could generate seven-figure legal defense costs. You are better served if those costs are paid without exceeding your coverage limit.
What Should My Excess Liability Limit Be?
A starting point is your personal net worth, but other factors should also be considered. EPIC Insurance Brokers and Consultants has developed an online tool to help you get a sense of what your umbrella coverage limit should be. While not definitive, it is a helpful first step in confirming you are adequately insured. We would be happy to discuss this or any other personal insurance questions you may have and perform a complimentary review of your current personal insurance program.
EPIC offers these opinions for general information only. EPIC does not intend this material to be, nor may any person receiving this information construe or rely on this material as, tax or legal advice. The matters addressed in this article and any related discussions or correspondence should be reviewed and discussed with legal counsel prior to acting or relying on these materials.
President, EPIC Select