Lawsuits are an all too common consequence of car accidents. While your auto insurance liability coverage is designed to handle judgments against you, it isn’t always enough. The combination of a litigious climate and increasingly large jury awards spells trouble for any homeowner or driver, even with basic liability coverage. If the judgment the jury issues against you exceeds the liability coverage of your car insurance policy, you are responsible for making up the difference. In this situation, your assets, such as your home, could be seized in order to pay the judgment. To prevent a lawsuit from jeopardizing your assets, you might consider purchasing an umbrella liability policy. Umbrella coverage supplements existing insurance coverage in order to provide you with an extra degree of insulation against liability lawsuits.
What It Is
Auto and home insurance policies both have some liability protection to pay legal claims. Umbrella policies pick up where your liability coverage leaves off. For example, you might have $300,000 of liability coverage on your auto policy. After an accident, a jury issues a judgment against you for $700,000. Your car insurance liability protection would then leave you responsible for $400,000 of liability. If this were the case, almost all of your assets would become fair game for the purpose of paying the debt. Your home, cars, retirement savings, future income, and more would be in jeopardy because of inadequate liability protection.
An umbrella liability policy typically pays $1 million, $2 million, or $5 million of a claim in excess of what your basic liability coverage will pay. Given the large amount of protection umbrella policies provide, they are very affordable. Usually, for $150-$300 per year, you can purchase a $1 million dollar umbrella liability policy. The price of umbrella coverage will depend on your insurer, the amount of coverage purchased, and any personal risk factors, such as the number of tickets you’ve received in recent years. Umbrella policies also commonly have very high deductibles of $300,000 or more because they are designed to kick in when you have exhausted the liability protection of your other insurance policies.
How Much Coverage Is Enough
Some consumers are under the mistaken impression that umbrella policies are necessary only for the wealthy who have very valuable assets, but this is not the case. If you own a home and have any retirement savings, your assets could easily be worth $1,000,000 or more. Even if your net worth is well under $1 million, you still stand to lose a lot by not supplementing your liability coverage. For instance, if your assets have $500,000 of value and you carry basic liability coverage of $300,000, you have $200,000 of unprotected worth that could be seized in the event of a hefty legal judgment against you. When purchasing umbrella coverage, remember that juries don’t take your net worth into consideration when awarding large judgments or settlements. As such, it’s best to err on the side of caution when determining your coverage needs.
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