Umbrella insurance covers you where other insurance doesn’t

Homeowners insurance protects you if a fire burns your house to the ground. You might also need to think about protecting your home and assets against another equally dangerous scenario: a lawsuit.

California is currently ranked as one of the most litigious states in the country. If you live here, especially if you work in a high-risk fields like law, medicine or accounting, or engage in a lifestyle with some of the risk factors described below, it’s important to think about how to protect your home and assets from lawsuits.

California is a partial homestead state. This means, as a homeowner, a certain portion of the equity of your primary residence is exempt from judgments arising from lawsuits. The problem is that housing prices are very high in California compared to other states. With the annual double-digit home-value growth the last few years, many homeowners have significant equity in their properties. When a lawsuit occurs, many homeowners could find much of their equity at risk. Thus, the homestead protection in California is a way to secure only some of the equity in your home from a lawsuit. There are many exceptions to these rules, so check with your local attorney.

In California, if you are single, you have homestead protection up to $75,000 of equity. A head of household receives a $100,000 equity exemption. If you are over 65, physically disabled or have less than $15,000 annual income, your equity is protected up to $175,000.

Protecting your home and assets is a smart financial strategy. Do you have parties at your house, own a dog or have a teenage driver? If so, you have a few of the risk factors and potential for a lawsuit, at some point in your life. Most of us purchase various forms of insurance to be protected in case of accidents, property damage and liability.  We are also are required to purchase mandatory insurance policies to drive a car, purchase a home with a mortgage, purchase a car with a loan and, in some cases, rent a home.

With so many insurance policies out there, not many people want to think about paying for additional coverage. No one is requiring you to get additional coverage, so why would you?

An umbrella insurance policy is a financial strategy to help protect your family’s financial future. As you are thinking about your financial portfolio and risks, approaching the closing on a new home purchase or have significant assets, consider contacting your local insurance agent to learn more about umbrella insurance policies also know as “excess personal liability insurance”.

What is umbrella insurance?

An umbrella policy provides a personal layer of protection over the coverage already provided by your other personal insurance policies and kicks in when you reach your limits on these policies. It provides excess liability protection in $1 million increments.

Umbrella policies are designed to help protect you against liability claims. Some of most important reasons to have an umbrella policy may be to protect your income from being garnished and your assets from being used to pay off a claim if you’re found liable for damages.

Lifestyle Risk Factors?

There are many lifestyle activities that can increase your risk factors of being named in a lawsuit. Even with these lifestyle risks, you can take precautions to limit your exposure and net worth.

Do you have a swimming pool, a trampoline, an outdoor jungle gym, a tree house, a play set, an ATV or a dog?  Do you have a long commute, carpool, a ride share driver or have a teenage driver? Do you entertain at your home frequently? Do you have a high net worth you want to protect?  Do you participate in hobbies like boating, hunting or golf? Are you on a non-profit board?

Even if you don’t have millions in assets, you could still be sued for an amount greater than your entire net worth. This is where a personal umbrella policy can help you.

From the expert: Additional guidance on Umbrella insurance

To provide additional guidance on Umbrella insurance, I reached out to Jason Nelson, Managing Partner at Nelson/Nelson Insurance Services, a local Bay Area independent insurance agency. Nelson/Nelson Insurance Services was founded in Sunnyvale, CA in 1946 by Buford Nelson and is still family owned and operated by his two grandchildren, Jason Nelson and Steve Nelson. Jason answers some important questions regarding umbrella insurance.

Q: What’s covered in an umbrella insurance policy?

Jason: Examples of umbrella insurance benefits include protection from:

• Bodily injury. Your homeowners insurance liability limit may be insufficient to cover medical and other costs related to a guest falling off a balcony at your home, or being bitten by your dog.
• Property damage. Your standard auto insurance liability limit may be exhausted if you are at fault in an auto accident where you destroy another vehicle and/or other property.
• Attractive nuisances. Personal injury or property damage caused by you, members of your family, or hazards on your property for which you are legally liable. This includes what are called “attractive nuisances” such as swimming pools and trampolines.
• Off-premise activities. Personal liability coverage for occurrences that take place off your premises. For example, if your dog bites a neighbor.
• Vehicle liability. An additional layer of protection for your vehicles, beyond your auto insurance.
• Lawsuit settlement. Protection against slander, libel, wrongful eviction, or false arrest.
• Landlord liability. A tenant might file an expensive suit over an injury sustained while renting your property.
• Libel or slander. Lawsuits could result from something that you say or write about another person. Think social media!
• Malicious prosecution. You may file a suit against someone and in turn be sued for wrongfully, or maliciously, prosecuting that individual.

In these examples, you may have some amount of liability insurance through your home or auto policy, but umbrella insurance provides another layer of protection once your standard liability coverage reaches its limit.

Q: What’s not covered by umbrella policies?

Jason: Umbrella policies do not cover any of the following:

• Personal property
• Businesses
• Intentional or criminal acts
• Contract disputes

Q: When should someone purchase an umbrella policy?

Jason: The reason for purchasing umbrella insurance is to protect your assets from a lawsuit, it only makes sense to buy it if you have assets to protect.

Q: How much coverage should someone get?

Jason: The right umbrella amount depends on where you live, your profession, your net worth and your aversion to risk. The limit for liability coverage in home and auto policies rarely exceeds $500,000. According to Jury Verdict Research, the average money damage award for personal injury trials in California is $1,814,094 and juries in California put a higher value on personal injury cases than the average American does.

The amount of coverage you choose should have some relation to your net worth. But note: if you’re worth $1 million, that doesn’t mean you only need a $1 million umbrella policy.

Don’t skimp on coverage. Coverage at least equal to your current net worth is the typical recommendation. However, if coverage falls short, a judge could require you to pay the entire awarded damages by liquidating savings and investments (retirement plans and trusts are usually safe), real estate and personal property—and even garnishing your wages. Consider adding coverage to equal the present value of your employment income stream.

Bottom Line – Protect your home and assets against lawsuits

Protecting your home and assets against lawsuits is a smart financial strategy. A umbrella insurance policy is something you don’t expect to use. But the peace of mind it provides is better than needing it and not having it! For a relatively small amount of money, you can protect your home, your retirement, your savings, your kid’s college savings fund, your future earning and your family’s security.

Consult with your local personal property and casualty insurance agent. You are looking for an agent who will take the time to review your assets, discuss your lifestyle and consider your financial goals when matching you to the right umbrella policy for your needs.