Dear Liz: We are looking to get umbrella insurance coverage to increase the personal liability limits on our homeowners and auto policies. Is there a rule of thumb on how much umbrella coverage is appropriate? Enough to cover one’s entire net worth? Or a portion thereof? Granted, no amount of coverage would prevent a lawsuit exceeding that coverage. We have never had a liability claim but are looking for an extra degree of safety and peace of mind. The house (no mortgage) is worth about $2.5 million and we have financial assets of an additional $3 million. The maximum our carrier offers in umbrella coverage is $5 million, with a premium under $1,000 a year.
Answer: Walking the line between prudence and paranoia isn’t easy when you’re trying to predict the risk of being sued.
A report by ACE Private Risk Services noted that most auto and homeowners liability coverage maxes out at $500,000, but 13% of personal injury liability awards and settlements are for $1 million or more.
That means the vast majority of lawsuits result in six-figure payouts or less, but a spectacular few can cost more.
Insurance experts say trial attorneys typically settle for a liability policy’s limits. There are exceptions, though, particularly if the person being sued has substantial assets and income but not a lot of coverage.
One rule of thumb is to get liability coverage at least equal to your net worth, with a minimum of $1 million. A $5-million policy in your case would not be overkill, but you should discuss your situation with an experienced insurance agent to get a better assessment of your risk and options.
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