Being wealthy doesn't mean having all the money in the world, just not having to worry about it.

Liability Insurance

Question: Our nightly local news is mostly funded by ambulance-chasing lawyer ads looking for clients who want to get rich by claiming an injury from fender benders to serious collisions. It would seem at first glance that having lots of liability insurance and umbrella policies would be a wise decision for anyone with significant assets. (Full disclosure: I have an umbrella policy.)

But I’ve always felt like having this type of insurance coverage might be an invitation for lawsuits because you have it! For instance, assume I was in an accident where I was responsible. If I had no assets, there would be nothing, beyond the auto insurance I carried, that anyone could recover from me. Now assume I have a multiple-million dollar umbrella policy and lots of investment real estate. The plaintiff’s lawyer will find out what assets you own and the insurance coverage you carry, then come after it. What level of coverage could ever be enough? Buy a two million dollar policy, a three million dollar policy or even a five million dollar policy? Couldn’t you expect the lawyer to go after everything no matter how much coverage you owned?

The more I think about this, the less sense it makes to own umbrella liability insurance. Am I missing something in these assumptions?

Answer: On the face of it, there is some plausibility to your concern, but the issue is not really whether a lawyer will TRY to get more money if you have higher liability protection, but whether the lawyer will succeed. It is difficult for me to answer this question based on public statistics, since I’m not aware of any such data. But based on the relatively low cost of umbrella policies, I’d say it is probably not a meaningful concern. If it were, these policies would likely cost a lot more.

Umbrella liability policies cover negligence but not criminal behavior, and the presumed offender is an individual rather than a corporation. As a result, the movie scenario of a sympathetic jury wanting to sock it to a faceless criminal doesn’t really apply, especially if the defense is competent. And it will be, since the insurance company pays out the big bucks before the covered individual can lose significant assets and so will provide the best defense possible.

Clearly, if you have no assets and no prospect of making lots of money in the near-future, you’re not a tempting target. But if you have significant assets or have the prospect of high income (which can be garnished), not having coverage not only means it won’t take nearly as high an award to hurt you as it would if an insurer were liable for the first million (or three or five) before you, but it also sends a message to a plaintiff’s lawyer that you are not likely to have as effective a defense team. So if you’re going to worry about a lawyer considering you a bigger target with insurance, remember that the lawyer might consider you a softer target without it. After all, you won’t have an insurer with experience in litigation helping to respond to plaintiff petitions and demands, and choosing a legal defense.

Having umbrella coverage, because it covers negligence rather than criminal behavior, is looked on as the behavior of a responsible individual wanting to ensure their ability to compensate people if they unintentionally cause harm. There is little reason to worry that it would prejudice a jury and even less that it would prejudice a judge on appeal. Plaintiffs typically take out-of-court settlements based on precedents in similar cases.

So I believe you are wise to have an umbrella policy and would suggest keeping it. At around $200 for $1 million of coverage and $100 for each additional million, with little reason to believe insurance companies are idiots that don’t know how to price their policies, I’d say the fear of harm is overblown. And that is before considering that umbrella policies generally cover some costs that normal home and auto policies don’t cover at all.

I know I’ll get questions on how much coverage to have, but this is more art than science. My feeling is that if you’re getting protection for peace of mind, make sure your coverage gives you that peace of mind. Nearly 90% of negligence awards and settlements are for less than $1 million, and $2 million is likely enough to provide nearly everyone with the peace of mind that comes from knowing they could pay virtually any claim for unintentional injury without being personally ruined and that they would have an insurance company strongly interested in preventing an outrageous award since the insurer would be paying that first $2 million. But at less than 30 cents a day for each additional million, you have my permission to “buy to the sleeping point” and get what you need to stop worrying about lawsuits and get back to enjoying life.