Liability Insurance: How Much Is Enough?

Personal liability risk is inherent in the ownership or rental of real estate, automobiles, recreational vehicles, and other real and personal property. Certain professional, business, and volunteer activities also result in liability risks.

Most individuals purchase casualty and liability insurance for their home and automobiles. State law governs minimum requirements for auto insurance. Banks that hold mortgages on the property generally require home insurance. In most cases, these policies should be supplemented with umbrella liability coverage. If an individual is liable and damages are awarded in excess of the amounts covered by the auto and home insurance policies, the umbrella liability policy will cover a portion of the difference (up to the total amount of umbrella coverage).

Example: Example: Mr. Crash has $300,000 auto liability coverage and $1 million umbrella liability coverage. Mr. Crash injures Mr. Lawsuit in an auto accident, and a jury awards a $1.1 million judgment to Mr. Lawsuit. Mr. Crash’s auto policy will cover the first $300,000 of the judgment, and the umbrella liability policy will cover $700,000 ($1 million less $300,000 auto coverage). Mr. Crash will be responsible for the remaining $100,000.

Umbrella Liability Insurance: Umbrella liability policies generally cover the policyholder, as well as members of the policyholder’s family residing in the same home (including dependent children attending college). It is important to understand what items are covered, and what items are excluded, under the policy. Items not covered in a standard umbrella liability insurance contract may include (1) damage to insured property, (2) intentional injury or damages caused by the insured, and (3) liability arising from occupational or professional activities.

Personal Liability Coverage: Liability insurance should be considered a "last line of defense." Proper risk management and planning will help in avoiding events that might lead to personal liability. Knowing the items covered by a liability policy will help identify areas of potential liability to avoid.

The amount of personal liability coverage will depend on several factors. For individuals not in certain professions (e.g., legal, medical profession), factors that influence the amount of liability insurance coverage include:

A minimum of $1 million of umbrella liability insurance is a good rule of thumb.

Automobile Insurance: A large number of individuals purchase the minimum automobile coverage required by state law. This decision is usually based on the cost of premiums, rather than on a consideration of the potential liability. The minimum amount of liability coverage is often very low (e.g., $30,000) -- the cost of a claim could exceed this amount and, if an umbrella policy is not in place, the individual would be personally liable for the difference. Purchasing the maximum amount of liability coverage offered will provide the greatest protection. Increasing deductibles and limiting add-ons to the policy can offset the additional cost associated with increased liability insurance coverage.

Real and Personal Property: When purchasing homeowners insurance, consider the fair market value and replacement cost of the home. Evaluate the value of all personal property, including artwork, stamp and coin collections, antiques, and jewelry.

Among the potential liabilities associated with the ownership or rental of property are accidents that may occur on the property. Careful evaluation is necessary when determining the appropriate amount of insurance coverage -- items that are frequently overlooked include (1) swimming pools or ponds, and (2) sports or playground equipment.

Director’s Liability Insurance: Corporations often purchase personal liability insurance for members of the board of directors. These policies usually cover certain "wrongful acts" (e.g., errors, omissions, misleading statements, negligence) committed while performing the duties of a director. Each director should understand the scope and amount of coverage provided by the corporation, and assess the adequacy of the coverage for his/her personal situation.

Nannies or Domestic Workers: Many families employ nannies and domestic workers in the home. Consequently, these families (i.e., employers) are exposed to potential liabilities from injuries domestic workers may suffer on the job. Additionally, these workers could cause damages that result in assessments against the employer. Therefore, liability insurance policies should cover nannies and/or other domestic employees, as well as their actions.

Volunteer Work: If volunteer work involves providing business or professional advice, the volunteer could face liability risks (even though no payment was received). In such situations, the volunteer should verify that (1) volunteer work is covered under the charitable organization’s liability policy, and/or (2) recipients of advice have reviewed and authorized appropriate disclaimers.

Professional Liability Insurance: Individuals involved in certain professional activities purchase specialized liability insurance. Professional activities include services provided by accountants, doctors, lawyers, newspaper employees, and public officials, as well as services provided by any other professional who may be exposed to lawsuits. In most cases, liability insurance for attorneys and doctors covers claims occurring due to acts of the professional and all individuals under his/her supervision or control.

These are some thoughts to consider about personal liability insurance. Your financial and insurance advisors can provide more information and should be consulted before any action is taken.

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	Liability Insurance: How Much is Enough? Personal Finance Advisor by Deloitte & Touche OnLine August 24, 1998