Umbrella insurance: An overlooked part of fulfilling the insurance promise
Insureds with significant assets can face serious financial risks during a claim if their policies have insufficient liability coverage.
We, humans, are risk-averse creatures.
For decades, psychologists have known that we recall negative events in greater detail than positive ones. (Quick test: Where were you when you heard about the 9-11 attacks? Now try this: What’s your all-time favorite birthday present? The 9-11 question was easier, right?)
We’re wired that way with good evolutionary reason. The ability to recall danger and avoid risk could save our lives someday.
Property and casualty insurance stands on the promise of mitigating risk. And not just for the good of individuals. It enables communities and economies to rebound in the face of calamity (wildfires, hurricanes, windstorms). Because of insurance, for example, lenders are able to grant mortgages knowing that if the home is destroyed, their investment doesn’t go with it.
Consumers embrace and understand that “property” half of the property and casualty equation. The “casualty” side — liability protection if we’re at fault for damaging someone’s property or injuring them — is equally important but more abstract.
That’s where our risk-averse brains take an odd turn.
Even people with significant assets to protect are often content to leave their liability insurance at the amounts of a standard home or auto policy.
A few years ago, ACE Private Risk Services surveyed people with a net worth of $5+ million. Twenty percent had no personal liability insurance beyond the limits of their ordinary policies. And of those who did, one in four didn’t carry amounts equal to what they had to lose.
If they were found responsible for catastrophic injuries or property damage that exceeded their home and auto policy limits, an umbrella policy could save them from the financially devastating impact of losing current assets and future earnings (wages, inheritances, etc.) in a legal judgment. An umbrella policy is a liability-only policy that “floats” on top of a person’s existing insurance policies. It kicks in once the limits of the underlying policy are exhausted, typically adding an extra $1 to $5 million in liability coverage to pay for everything from the injured party’s medical bills to legal defense costs.
As risk-mitigation professionals, we owe it to our customers to have a frank discussion about umbrella insurance. It might start with dispelling the myth that only irresponsible people get sued. Everyone is at risk, but there is a greater risk if they:
- Have a teen driver in the household. A catastrophic auto accident is the single biggest reason someone might get sued, and teen drivers have the highest per-mile crash rate of any driver on the road.
- Own rental property. Tenants can sue landlords if they suffer an injury on the property.
- Play sports or participate in recreational activities. An errant maneuver on a jet ski, for example, could seriously or even fatally injure someone.
- Share opinions online. If a business feels someone has damaged their reputation and earnings with an unfounded review, that person can be sued.
- Host parties. The legal system is just beginning to sort out liability what-ifs surrounding the pandemic and whether hosts can be held responsible for a “super-spreader event” the same way they can if a tipsy guest slips going down icy stairs. Even for hosts who’ve paused social gatherings, risks remain once the pandemic is behind us and socializing returns to normal.
Umbrella also serves an important societal benefit. It ensures that accident victims are fully and quickly compensated, not left to rely on potentially costly and drawn-out legal remedies. It also frees people to keep working, contributing and fueling local economies as they take responsibility for serious liability.
Umbrella isn’t an exciting product to talk about. No bells and whistles; no angles for catchy ads. As its relatively low price indicates, most claims are settled before reaching its kick-in threshold. Still, if the unthinkable were to happen, this unsung coverage protects clients in their time of need, safeguarding not only what they have now but future assets that could be jeopardized by a forward-looking legal judgment.
The opinions expressed here are the author’s own.
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