Is Your Umbrella Liability Policy Leaving Your Assets Exposed?

An increasing number of people with assets to protect are finally getting it, and they are arming themselves with personal liability umbrella policies. However, just as they do with their homeowner’s risks, they tend to underestimate their personal liability risks drastically. Also, just as there are significant differences between standard homeowner’s coverage and coverage for high-end customized homes, there are some significant differences between standard umbrella policies and the specialized umbrella policies that better serve high-net-worth families.

How Much is Enough?

In determining how much personal liability coverage they should have, most people with umbrella policies tend to think in terms of what is available. For instance, when working through a traditional property and casualty agent, mainstream carriers may limit personal liability coverage to $1 million. While some carriers offer higher limits, typically up to $10 million, you usually need to jump through a lot of hoops to obtain it. The "hassle factor" drives most people to avoid it.

Like most other types of insurance, the $1 million umbrella policy has become commoditized. For the "measly" $200 in premium, insurance agents can almost shame their clients into getting one. So it typically becomes an add-on to other coverages their clients buy.

And high net worth people are not immune to this pitch. What the agents might not tell their clients is that this could easily increase their coverage, from a cost of around $80 per million to a high of $100 million. But they would rather write the $1 million umbrella policy than have to refer their high-net-worth clients to a specialized insurer.

It’s important, instead, to think in terms of your actual financial exposure. The most straightforward rule is that your personal liability coverage should equal your exposed net worth.

I say "exposed" because those who have undertaken asset protection strategies that remove some of their assets from the line of fire (i.e., offshore accounts, etc.) may only need to be concerned with their U.S.-based assets. And qualified plans, as well as certain trust arrangements, may also protect a portion of their assets from liabilities.

The single purpose of personal liability coverage is to protect your assets. So, for example, if your exposed net worth is $20 million - realizing that judgments can easily reach that high - you should have at least $20 million in personal liability coverage. You also have to account for your legal expenses, which can run into seven figures. And that coverage should keep pace with the growth of your net worth.

Standard Umbrella Policies vs. Specialized Umbrella Policies

For the wealthy, that level of coverage and the need to constantly update their personal liability coverage rules out working with most traditional property and casualty insurers. Most don’t offer the high limits needed, and generally, they aren’t equipped to personally assist high-net-worth people in assessing their financial risks. Only specialized insurers have the product, the expertise, and the services to provide the appropriate level of coverage while working with their clients to lower their exposure through risk mitigation measures.

With most standard umbrella policies, the insurer requires you to have all of your property and casualty coverage with them. That may be fine for people with minimal risk exposures, but it can be severely limiting for high-net-worth people. Not only will it limit the amount of coverage available, but the coverage itself may also have quite a few gaps. For example, standard umbrella policies typically protect only those assets held in the insured’s name. Assets held in trust, or any other form of ownership may still be exposed. Only a specialized umbrella policy can enumerate the various asset titles to ensure they are covered under the umbrella.