You Don't Have to Be Wrong to Be Sued: Why Umbrella Liability Insurance Matters
We live in a litigious society. I don't particularly like it, and I don't always agree with it. While there are certainly legitimate reasons to pursue legal action, I also believe there are situations where the compensation being sought seems far out of proportion to the actual harm.
And will our insurance premiums continue to rise? Probably. Litigation costs and large settlements are among the many factors that can contribute to higher premiums.
Regardless of how we feel about it, a single accident or lawsuit can put years of hard-earned wealth at risk. That is why umbrella liability insurance is an important part of a comprehensive financial plan.
How Does Umbrella Liability Insurance Work?
Most of us have liability coverage through our auto and homeowners’ insurance policies. But what happens when a claim exceeds those limits?
An umbrella liability policy provides an additional layer of protection.
For example, imagine you are responsible for an automobile accident resulting in a $1.5 million liability settlement. Your auto policy covers $500,000, leaving you potentially responsible for the remaining $1 million.
A $1 million umbrella policy could cover that difference, subject to the policy's terms and exclusions, helping protect your savings, investments, and other assets.
Insurance is designed to protect us against unforeseen events that could result in catastrophic financial losses. Consider two very different examples.
Example A: A Legitimate, Life-Altering Loss
Imagine a young child is seriously injured in a lawn mower accident and loses a limb.
That child may need prosthetic limbs, ongoing medical care, and physical therapy for the rest of their life. The financial and emotional consequences could be enormous.
If another person was legally responsible, this is exactly the kind of situation where a substantial liability claim could be justified.
This is why we have insurance: to provide financial protection when an unforeseen accident results in a devastating loss.
Example F: F Is for Flunk
Yes, F as in flunk. And in my opinion, this particular lawsuit deserved a failing grade.
Several years ago, I served on a jury in a civil lawsuit involving two families following an automobile accident involving teenagers.
One teenager, who was a passenger, had sustained injuries but fortunately recovered well. He was attending a good college and appeared capable of living a full and productive life.
I was shocked when his attorney sought more than $1 million in damages. We were shown a scar on his shoulder that was so faint we practically had to squint to see it.
Ultimately, the jury did not award the plaintiff any damages.
I walked away frustrated by the time and resources spent on a lawsuit that, in my opinion, did not justify the compensation being sought.
But the experience reinforced an important lesson:
Just because you believe a lawsuit lacks merit doesn't mean you won't find yourself defending one.
We would all like to believe that common sense will prevail in a courtroom and that juries will distinguish between legitimate, life-altering losses and claims unsupported by the evidence. Unfortunately, we cannot guarantee the outcome.
My advice? Hope that the jury has common sense, but don't make your financial security dependent on it.
Protecting What You've Worked Hard to Build
When reviewing umbrella liability coverage, consider your net worth, future earnings, existing insurance limits, and potential risks, such as teenage drivers, rental properties, or recreational activities.
Umbrella policies are often available in $1 million increments and can provide substantial additional protection at a relatively modest cost.
As a financial planner, I spend considerable time helping individuals and families accumulate wealth and prepare for retirement. But building wealth is only part of the equation.
Protecting what you've built is equally important.
We cannot prevent every accident, control who might sue us, or predict how a jury will respond. What we can do is prepare.
An umbrella liability policy may be one of the most cost-effective ways to protect against a catastrophic financial setback.
Financial clarity isn't just about knowing where you're going. It's also about protecting what matters along the way.
At Vision Capital Partners, we believe risk management is an essential part of comprehensive financial planning. Review your liability coverage with your insurance professional to ensure it aligns with your financial circumstances.
This article is for educational purposes only. Insurance coverage varies by policy, carrier, and state. Consult your insurance professional regarding coverage, limits, exclusions, and legal defense provisions.