On the Need for Umbrella Liability Coverage: It’s All About Financial Independence

Have you ever heard the phrase “you don’t have to be a millionaire to be sued like one?” Well, it’s true. It happens every day in the court systems all across Texas. There are many nightmare scenarios that demonstrate the need for liability insurance protection; so many, in fact, that the most careful, most conservative person I know–yours truly–has an umbrella policy, and I highly recommend it for our clients as well.

A Nightmare Scenario

Let’s say, for example, you’re driving down the freeway safely, carefully, and within the posted speed limit, when suddenly an irresponsible driver pulls in front of you trying to get into the other lane to exit. For some reason he slams on his brakes, so you have to swerve over to the next lane to avoid hitting him, and you end up rear-ending a family of four at 50 mph while they’re stopped in traffic. You’ve done untold damage, and it’s really not even your fault, but because it was a rear-end collision, you will probably be held liable. Not fair, but that’s usually how it goes.

The cost of the accident after everything is said and done–medical expenses, lost wages, property damage, etc.–is off the charts. The next thing you know, you’re served with papers informing you that you’re being sued. The trial happens, a sympathetic jury rules, and the verdict comes down for the plaintiff: you were found to be “negligent.” With pain and suffering and all the rest added to the award, the grand total comes to an obscene $1.5 million, and to add insult to injury, it’s all due within 60 days.

What do you do? Well, at this point you have three options: Number one: You write a check for $1.5 million. Number two: If you don’t have the money, you liquidate all the assets you have except your home and a small amount of savings, and perhaps your IRA or 401k. If you’re still short, they come after you for the balance and you file bankruptcy. Losing that kind of money and assets is devastating, but it’s not all bad–at least after 10 years, the bankruptcy will be off your credit record, the judgment cleared, and you can start fresh again, right? Wrong! The judgment can be renewed every ten years, which means that the person and his lawyer can hound you for the rest of your life, or until you pay up, whichever comes first. Much better to avoid that nightmare and employ the third option: Call your insurance agent, file the claim, and be done with it. Of course option number three only applies if you have an umbrella insurance policy.

Cost Benefit Analysis

Which of the above scenarios sounds best to you? The third, of course–just do the cost benefit analysis. Why a cost benefit analysis? Well, it’s simple. Just like any important purchase or investment decision, you weigh the cost vs. the benefit. There needs to be a reasoned and logical rationale for any insurance buy. For example, if I told you that you could have a $2 million umbrella policy for $4,250 per year, you might say “no way, I’ll just be extra careful.” But if I tell you that you can obtain $2 million of coverage for $425, now you have something to think about. I think the latter scenario is a no brainier, which is why I secured umbrella coverage for myself: it meets the common “financial” sense test. If you can transfer that kind of liability to another entity (an insurance company) for that kind of price, you do it. Sign up as quickly as you can before they change their mind. I did it, and I sleep well at night. It’s called peace of mind…financial peace of mind!

How it Works

How does umbrella coverage work? Umbrella coverage simply “extends” the underlying or primary liability limits you have in place for your auto or home insurance. The need for umbrella coverage is created because carriers limit the amount of primary liability you may purchase. So, let’s say your auto carrier will only allow up to $500,000 of liability, but you determine that you need more insurance protection than that, so you have to seek coverage in the umbrella market to reach your desired limit or amount. Most often, you can secure an umbrella policy through your auto carrier, but not always.

Umbrella coverage is really that simple. It’s just a vehicle to increase your protection from legal liability.

What you’re accomplishing with liability insurance is the transfer of financial risk from yourself to another entity, the insurance company–an important risk management technique.

Final Thoughts

You can do everything right your whole working life–good investment returns, high rate of savings, careful conservative lifestyle–just to have it all dissolve like a desert mirage, right in front of your eyes, and all for one catastrophic mistake. It might be only one mistake in thirty years, but if it’s the mother of all mistakes, it could bring you all the way back to where you started when you were 25 and leave you indebted for a long while after that to boot.

It doesn’t matter who you are or what you do–anyone can be sued for the tort of negligence. The society we live in and the system of civil law we live under says you owe a “duty of care” not to inflict bodily injury or property damage on another person.

Many things in life are trade-offs–risk versus reward, cost versus benefit. It’s up to you to weigh the risks and make a wise choice. For me, the consequences of not securing coverage were unacceptable, but only you can decide what’s best for you! At the end of the day, it’s really all about Financial Independence, getting there, and staying there–everyone’s ultimate goal.