Rainy Days and Mondays...

■ Summary
Insurance is, first and foremost, a risk management tool. That is, it’s way to assign some or all of a financial risk to a third party. One such vehicle is an “excess liability” or “umbrella” policy.
 
■ Intro
Typically, auto and home insurance policies include a liability portion which pays others whom you have injured in some way (perhaps an auto accident, or someone tripping in your home and breaking an ankle). Liability payments include reimbursing those whom you’ve injured for their actual medical expenses, as well as lost wages and other out of pocket costs.

■ Knowing the Risk
Liability payments may also be used to settle court cases when one is found liable for such expenses. For example, perhaps one caused an accident and was sued. The liability portion of one’s policy would pick up some or all of any judgment.

The challenge is that judgments often exceed the amount of underlying liability coverage on ones’ policy. For example, if your plan has a $300,000 liability limit, and you’re found liable for $700,000 of damages, then how are you going to come up with the $400,000 shortfall?

■ Covering the Risk
That’s where an excess liability “umbrella” policy comes in. As the saying goes, “you don’t have to be a millionaire to be sued for a million dollars.” But increasing your homeowner’s and auto insurance policies to a $1 million can get quite expensive. And you’d really have to do both: insuring only your home leaves you vulnerable to a major auto claim, and vice versa.

And umbrella policies, because they cover both your home and your cars (and boat, and motorcycle, etc) offer a cost-effective way to buy a large amount of insurance at a reasonable cost. So a momentary loss of focus on the highway, or the waterway, doesn’t have to mean a permanent loss of assets.

■ Shifting the Risk
Umbrella policies function as supplements to ones regular liability coverage. For example, if one causes a 3-car pile-up on the way to the dentist, one’s auto policy’s liability coverage might pay the first $300,000 of the other drivers’ personal injury claims, and then the umbrella would pay up to (for example) an additional $1 million. And that extra million of coverage costs only a little more than the existing $300,000.

And it’s not just about physical injury to others: umbrellas can provide coverage for claims arising out of slander or libel, as well.

Another benefit to an excess liability umbrella is that many carriers offer multi-policy discounts, driving down the net price even further. And many plans include attorney’s and litigation fees which can add up pretty quickly.

■ Conclusion
Litigation and medical costs keep rising, and quickly. An umbrella plan offers a relatively inexpensive way to protect oneself from the risk of loss from high dollar liability claims.