Liability coverages under homeowners’ policies are commonly offered at the following levels, all on a per-occurrence basis: $100,000; $300,000; $500,000; and $1,000,000. If a person wishes to purchase liability coverage with limits in excess of $1,000,00 per occurrence, he or she must often purchase a separate, personal liability umbrella policy.
Annual premiums charged for higher liability limits are usually quite modest. In light of the relatively low cost of increased liability limits and the magnitude of potential jury verdicts that can result in today’s world, the average person should not purchase less than $500,000 in liability limits as part of his or her homeowners policy. Limits of $100,000 and $300,000 simply do not afford sufficient protection in the event of a serious loss.
A good way of helping you to decide how much to purchase in liability limits is to assess the value of your assets—in other words, how much are you at risk of losing? In several major urban areas, the average value of many middle-class families’ homes exceeds $300,000. Many insureds would be surprised at the resulting figures if they were to conduct a complete inventory of their possessions to total what it would cost to replace all of them.
When you envision the value of your home, personal possessions, and savings, you can readily see the need for substantial liability limits. The greater your liability limits, the more protection afforded from a judgment creditor’s attempt to seize your assets to satisfy a judgment.
In the commercial liability insurance business, risk managers for insured companies, their agents or brokers, and the underwriters for insurance companies often refer to high level excess liability policies as sleep insurance.This means that the company management and shareholders of the insured need not lose sleep over the possibility that a catastrophic loss might exceed the company’s liability insurance limits and thereby potentially threaten or impair the future financial liability of the company.
The same concept applies to individuals. It is preferable to have the peace of mind that comes with the knowledge that you have taken reasonable and prudent steps to obtain the financial security and protection that comes with paying a small amount of additional premium for increased liability insurance limits.
For example, the annual personal umbrella liability policy premium, covering three cars and a homeowners policy, with limits of $1.5 million, can be found for a little over $300 annually, applying over a $500,000 homeowner’s liability limit and a $250,000 per person/$500,000 per accident auto liability limit.
If you purchase higher liability limits on your homeowners policy (and auto policy), the premiums for a personal umbrella policy will be reduced. This is because as the limits of the underlying policies are higher, the personal liability umbrella policy insurer’s exposure to loss is lower.
STRUCTURING YOUR LIABILITY INSURANCE LIMITS
Deciding on how to structure your liability insurance limits depends on who your insurer is and the limits of liability the insurer is willing to write under a homeowners policy for personal liability. There are two basic approaches to the problem. One approach is to purchase a moderately high liability limit with your homeowners policy, such as $300,000 or $500,000, and purchase a separate personal liability umbrella policy with a limit of $1,000,000 or $2,000,000 (depending on your needs) to apply in excess of the homeowners policy liability limits. The benefit to the personal umbrella liability approach is that the personal umbrella liability policy’s limits of liability will also apply in excess of your auto liability policy’s liability limits. For many per sons, their exposure to a large liability loss arising out of their use of the car or truck is substantially greater than that arising from the ownership or maintenance of their home.
The other approach is to purchase the maximum available liability limit on your homeowners policy alone, assuming your insurer will write policies with liability limits of at least $1,000,000. Usually, but not always, purchasing moderate homeowners liability limits of $300,000 or $500,000, plus the personal umbrella policy with limits of at least $1,000,000, will be more economical from a premium standpoint.
Insurers also differ in their underwriting approach. Some insurers do not offer personal umbrella policies, with the result that your agent will have to procure a personal umbrella from an insurer other than your homeowners or auto insurer. Other insurers offer personal umbrella policies, but not to insureds who have their homeowners and auto policies with that same insurer.
The issue here is the concept of pyramiding of risk. Some insurers simply do not want to commit to that much exposure for loss with respect to any one insured. Insurers that take this view are often willing to be either the primary (i.e., the homeowners liability insurer) or the excess (i.e., the personal umbrella policy) liability insurer, but not both.
Other insurers take the opposite view, particularly in the personal lines context. These insurers would rather be both the primary and excess insurer for the same insured (particularly when the insured has both his or her auto and homeowners insurance with the same insurer). Insurers that hold this view usually cite the fact that they are getting greater premiums and have complete control over a major claim, eliminating the need to deal with another insurer’s claim department.
Disagreements can often arise between the primary (homeowner’s) insurer’s claim department and the excess insurer’s (the personal umbrella policy) claim department over defense and settlement strategy in the event of a claim that presents a potential for penetrating the personal umbrella policy insurer’s coverage. What often happens is that the primary insurer believes the case has a settlement value in excess of its policy limits and wants the umbrella insurer to contribute some money in order to settle the case. The umbrella insurer, which is not exposed to the ongoing cost of defending the suit and which therefore does not have that financial pressure on it, will take a hard line, asserting that the genuine settlement value of the case is within the primary insurer’s limits, and will refuse to contribute to the settlement. When this occurs, cases can be forced to trial that ought to be settled, and can sometimes result in runaway verdicts that exceed the limits of both the primary and the excess insurance policies.
There is yet another reason why a personal umbrella policy should be part of your basic package of insurance policies. While personal umbrella policies have their own terms, conditions, and exclusions, they provide an important gap-fillingfunction. The usual personal umbrella policy insuring agreement provides that the personal umbrella insurer does not have a duty to defend—a duty that your homeowner’s or auto liability insurer has. Except—and this is the important exception—your personal umbrella policy insurer has a duty to defend a suit against you seeking damages within the personal umbrella policy’s coverage that are not covered under the underlying policies.
An easy example of how this might work is if the liability coverage of your homeowners policy does not include personal injury coverage. For things such as libel, slander, false arrest, false imprisonment, etc., your personal umbrella policy (in most cases) will provide coverage.
In short, a personal umbrella policy is something that provides a substantial amount of coverage at a modest price. The basic recommendation of a minimum qualifying homeowner’s and auto liability limit and over $1,000,000 personal umbrella policy is just the starting point. Each individual needs to assess his or her own needs and to determine what protection limit he or she believes is appropriate. Increasing liability limits over the minimum is usually not very expensive under either a homeowners or auto policy. Nor is increasing liability limits of $1.5 million or $2 million under personal umbrella policies. Each situation will differ. The cost of personal umbrella policies are often affected more by the auto liability exposures you present. A family with more vehicles and drivers can expect to be charged more than one with fewer vehicles and drivers.