April is supposed to be the month for rain and umbrellas. In Colorado, we don’t get a lot of rain and, if we do, it often isn’t in the month of April. But you may need an umbrella for other reasons-to protect yourself from bad weather in your household finances. I’m talking about umbrella insurance, a relatively cheap addition to your portfolio that can provide your family with a very important, and often overlooked, element of financial protection.
Liability risk is the risk that you will be financially responsible for injuries you have caused. For example, you cause an auto accident, someone slips and falls on your sidewalk, your dog bites the neighbor’s child, or someone is injured on your outdoor trampoline.
"I have auto and homeowner’s insurance to cover those kinds of things," you say.
Well, here’s the problem. While it’s true that most people have auto and homeowner’s insurance and that these policies provide coverage for liability risk, the amount of coverage is often too small relative to the potential liability. If you are found to be responsible for losses that are greater than the limits of liability under your policy, your personal assets (home, savings) will be fair game.
The minimum required auto liability coverage in the state of Colorado is $25,000 per injured person, $50,000 total for all injured people, and $15,000 for loss or damage to someone else’s property. Although it’s not terribly expensive to pay for higher limits, a large percentage of people do not. Think about the outcome if someone under your policy caused a car accident that seriously injured several people. $50,000 wouldn’t be nearly enough. If an accident sends someone to the ICU, $25,000 won’t be enough for one person. And new cars generally cost more than $15,000.
Homeowner’s policies commonly provide $100,000 to $300,000 in personal liability coverage. If you’re a renter, you may have similar coverage under a renter’s policy. But, as with auto, if a claim exceeds your limits, you will be personally responsible for the remainder. A personal umbrella policy protects you from the rainy day when you have a million dollar verdict against you by covering your other liability coverage, kicking in when your other insurance runs out.
You can buy a $1 million or larger umbrella policy for less than $200 per year, a bit more in some areas of the country. It will typically be sold by your auto or homeowner’s insurer, it will require you to have higher than minimum limits on your primary policies, and there will be a deductible. These policies will cover personal injury risks (such as defamation, invasion of privacy), typically not available in auto and homeowner’s without an extra endorsement. If you serve on a board of a charitable organization, the policy may cover liability arising out of those activities.
However, it should be noted that your umbrella isn’t waterproof. It won’t cover intentional acts and it won’t cover claims that are due to a business venture-you need to insure your business separately.
Liability risk is important to those who have something to lose. If you have no assets, you are unlikely to be sued for amounts in excess of your insurance. They aren’t just for the wealthy-anyone who has assets that might be at risk should consider buying an umbrella for that rainy day.
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Vickie Bajtelsmit, Professor of Finance, Colorado State University College of Business, firstname.lastname@example.org