Ah, the joys of home. So many comforts--and so many risks. The dog, the teenage driver, and the monster tree that hangs over your neighbor's yard can all become the stuff of lawsuits. And most homeowner's and auto insurance policies don't offer enough protection against major personal-liability claims. Especially now, with real estate values so inflated, the $250,000 to $500,000 liability limit in a typical homeowner's or auto plan may turn out to be woefully inadequate. "It's enough for your typical slip-and-fall situation," says Robert Hartwig, chief economist at the Insurance Information Institute. "But jury awards are becoming much larger and more frequent for serious incidents."
That's why it's important to buy an umbrella policy that adds an extra layer of protection on top of your primary insurance. For one thing, it's cheap, generally costing a few hundred dollars a year for $2 million or more in liability insurance vs. at least $1,000 for a typical high-end homeowner's policy that gives you much less liability coverage (table). Such supplemental policies encompass all types of personal-liability claims against you or your family, from harassment and slander suits to boating accidents--including ones that may not be covered under your standard policy. "You want to know that even if you've done nothing wrong, your defense will be provided for," says Mary Ann Avnet, vice-president for marketing at Chubb Group of Insurance Cos.
The easiest way to buy an umbrella policy is to go through the company that already covers your home or car. Allstate Insurance, for one, prefers to sell to existing customers because its underwriters have already assessed their risks. Plus, the same insurer can handle the entire claim. Getting umbrella coverage from an insurer who doesn't handle your underlying coverage tends to be tougher. As with standard policies, a history of reckless driving or incidents with a vicious pet may result in a denial of coverage.
The general rule is to secure enough insurance to cover the total value of all your assets. That includes the current market value of your investments, houses, cars, jewelry, art, and other possessions. Most common are judgments of $50,000 or less for claims ranging from dog bites to harassment, according to Jury Verdict
Research, which tracks verdicts and settlements. But insurers say larger awards are becoming more the norm. The median award for accidental death, for example, is $286,776, while cases of gross negligence can run into the millions.
While it's unlikely a court would render a decision that leaves you penniless, an award for negligence resulting in death could run into the millions. When reaching a verdict, a jury need not take into account your net worth--and this could mean having to sell your assets or declaring bankruptcy. "You conceivably could spend the rest of your life paying off a settlement," Hartwig says.
Naturally, most people don't expect the unthinkable ever to happen to them. Just ask the Pellerin family of Albany, N.Y., who are now fighting a $1.5 million lawsuit from a teacher who was allegedly kicked by their teenage son. Or former President Bill Clinton, whose umbrella policy covered a big chunk of his defense costs in the Paula Jones sexual-harassment case several years ago. Even O.J. Simpson got his umbrella policy to cover lawyers' fees in his civil trial for wrongful death. Of course, insurers don't cover damages for a policyholder found guilty of criminal behavior, but they generally foot the bill for legal costs and civil judgments.
You may be far more vulnerable to lawsuits than you think. Having young drivers in the family, a swimming pool you open to neighborhood children, a large net worth, or a high profile in the community are all risk factors that might make you a target of claim-seekers.
Despite the risks of going without, insurers say that only about 10% of holders of homeowner's and auto policies opt for an umbrella plan. Far too many people assume their existing coverage is adequate. But for myriad reasons--if your house has shot up in value, or you just love hosting pool parties--you shouldn't forget your umbrella.
By Diane Brady