An Extra Layer of Protection

The per capita cost of the U.S. tort system has reached $835, according to the most recent data (from 2007). After adjusting for inflation, this marks a more than eight-fold increase in tort costs since 1950 and has far exceeded U.S. population growth.¹ Although $835 per person may not sound like much, when you consider that most Americans will never be defendants in a liability lawsuit, this leaves an unlucky few facing multimillion-dollar decisions.

Regardless of how carefully you live your life, there is simply no way to eliminate the possibility that someone could file a lawsuit against you. And if a jury should ever find you liable for damages to another party, it’s not likely to consider the liability limits of your homeowners and auto insurance policies when deciding how much to award the plaintiff.

Gimme Shelter

Before you can qualify for umbrella liability insurance, the insurer typically requires you to purchase the maximum liability coverage available on your homeowners and auto policies. In the event that you are hit with a judgment that exceeds your primary coverage, the umbrella policy will pay the difference, up to the policy limits. For example, say a hypothetical family’s homeowners insurance covers them for $500,000 and they have a $1 million umbrella insurance policy. If they were successfully sued for $900,000, their homeowners policy would cover the first $500,000 and the umbrella policy would cover the remaining $400,000.

Umbrella coverage can be fairly inexpensive, with premiums as low as a few hundred dollars a year for $1 million in coverage.

What Is Covered

An umbrella policy can also cover medical costs and lost wages you may be forced to pay, as well as your own legal fees and lost wages that you sustained during the legal proceedings.

In addition to the typical coverage afforded by homeowners and auto insurance policies, umbrella liability insurance can cover such things as libel, slander, invasion of privacy, and defamation of character. A complete statement of coverage — including exclusions, exceptions, and limitations — can be found in the policy.

The thumbs-down from a jury in a personal injury lawsuit could destroy what you’ve built over the course of your lifetime. Umbrella liability insurance can help protect your family from the financial ruin that a civil liability trial can bring.

1) 2008 Update on U.S. Tort Cost Trends, Towers Perrin

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2009 Emerald.