Take Cover

A student who hated her math class made several disparaging and false statements about the teacher online. The teacher sued the parents for personal injury. Amount paid: $750,000.

A woman suffered bite wounds to her right leg and arm while visiting the home of a dog owner. The verdict: $1.5 million.

A male driver was talking on his cell phone when he turned left and crashed into a motorcycle, causing serious brain and organ damage to the motorcycle passenger. The settlement: $2.9 million.

If you were the one being sued in a situation like any of these, what would you do? Your homeowners or auto insurance would cover a portion, but with costs near seven figures, you’re likely on your own. That is, unless you have personal umbrella insurance, which kicked in for all the real-life cases above.

Who Needs Umbrella Coverage?

Umbrella insurance protects you against lawsuits and is designed to pick up where the liability limits on one of your other policies leave off. While it’s often thought of as something only the wealthy with large assets need, the reality is you don’t have to be a millionaire to be sued like one. Even if you’re not worth $1 million, it only takes one bad accident to be sued for $1 million. Trying to pay that could be disastrous to your finances.

“Almost everybody should consider this policy,” says Liz Kramer, the head of umbrella business development for Gen Re, a company that provides insurance for insurance companies, including Texas Farm Bureau Insurance. “You have two types of risk you’re protecting. Most purchase it to protect their assets, but it’s just as important for an individual who may not have a lot of assets but does have a lot of risks.”

What are those risks? Kramer says if you have more than two or three of the following, you should seriously consider getting a personal umbrella policy:

• A young driver
• Dogs
• A swimming pool
• Firearms in the home
• Boats or other watercraft

Although graduated license laws have helped bring down the number of car accidents for teenagers, young drivers are still the largest single contributor to severe losses that Gen Re sees.

Pick the Right Policy

The good news about umbrella insurance is that it’s relatively inexpensive, which can make the decision to get it a little easier. “It is the cheapest $1 million coverage anywhere in the insurance industry,” Kramer says. Gen Re has found the average cost is about $260 a year for a policy, but it can go as low as around $150.

Policies typically start at $1 million, and most people buy $1 million or $2 million in coverage. How do you know what the right amount is for you? “We suggest looking at your assets and adding those up,” Kramer says. “At a minimum, cover your assets.” Next, look for the risks identified above and balance the size of your assets with your risk potential. Your Texas Farm Bureau Insurance Agent can help match a policy to your situation.

It’s important to remember there are some cases in which an umbrella policy won’t apply. If you or someone else in your household gets hurt, it won’t be covered — the umbrella is there to protect you from being sued for damage to others. It also doesn’t apply to business-related activities or damage that you cause intentionally to any person or property.

Drop-Down Benefits

While personal umbrella insurance is designed to cover liability where another one of your policies runs out, there are some cases where umbrella insurance can “drop down” and primarily cover a claim for which you have no other insurance.

In one recent case, the son of a man who had an umbrella policy carried a low liability limit on his car insurance. The son got into an accident, and because he was deemed a resident of the policyholder’s household, his father’s personal umbrella policy dropped down over his lower limit. In another case, an American man rented a car on vacation in Greece, where he got into an accident. His auto policy denied the claim — most do not provide coverage outside the country — but his personal umbrella policy paid the claim for him.

Another situation in which umbrella coverage can prove its worth is with cases of libel, slander, and defamation. Just a couple of decades ago, this was rarely an issue except with journalists using traditional media such as newspapers and television shows. With the rise of the Internet has come increased chances to disparage someone in a public forum. Young people, especially, might post comments without thinking through the ramifications. Even though these cases usually don’t go to trial, the cost of defending them can be exorbitant.

What’s at Stake

If you don’t have many assets, you may be wondering what’s at risk. Your home is usually protected, along with life insurance, pensions, some retirement accounts, and personal property (like clothing, jewelry, and home furnishings). The following, however, are all unprotected assets that could be tapped if you have a claim against you that exceeds your insurance limits:

• Non-Roth retirement accounts
• Money market accounts
• Checking account balances
• Savings account balances
• Stocks and bonds
• Commercial real estate
• Certificates of deposit
• Second homes

In extreme situations, future earnings can even be tapped.

Since you could potentially lose the above in the case of a terrible accident, it may be worth considering an umbrella policy. Just like carrying an umbrella as a preventive measure when the skies are gloomy, an umbrella policy can really save the day if you ever have to use it.