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December 03, 2004

The Dog that Ate My Net Worth -- and Other Stories About the Need for Umbrella Insurance

Press Release -- A dog on the loose, a party by the swimming pool, a teen driver on a Saturday night -- these are just a few of the accident-prone situations that can cost a consumer millions in a liability lawsuit. Awards of $1 million or more rose from 9 percent of all personal injury awards in 1996 to 14 percent in 2002, according to Jury Verdict Research. Consumers -- especially affluent consumers -- can lose their assets and income from such events if they lack umbrella insurance.

Unfortunately, most homeowners do not have an umbrella policy. The reason: many are unaware of umbrella insurance or mistakenly think their homeowners and auto insurance provide adequate protection. Those policies include liability coverage, but the amount often stops at $300,000. A consumer sued for $1 million could be forced to make up the $700,000 difference. As its name implies, umbrella insurance provides coverage over and above the liability limits of homeowners and auto insurance policies. It prevents a dog from taking a bite out of the owner's net worth.

"The affluent are especially vulnerable," says Dan Olmsted, president of Atlantic Mutual, "because their possessions and lifestyle put them at greater risk." Why? Such factors as:

* Owning vacation homes. A friend uses a vacation home, has a party, and someone gets hurt.
* Owning recreational vehicles and watercraft. A friend at the vacation home takes out a powerboat to water-ski and hits a swimmer. * Employing domestic staff. A family fires a nanny, who then sues for wrongful termination.
* Living in an expensive neighborhood: A tree falls onto a neighbor's house and triggers an electrical fire. The house burns down and costs over $1 million to rebuild.
* Volunteering on the board of a non-profit organization. The organization runs a community fair, and a child is injured. The board members can be sued.
* Renting vacation homes. A family rents a lavish beach house and is not required to take out insurance on it. It burns down. The owner's insurance company sues the family for the loss.
* High community profile. A consumer gets in to a heated discussion in a town meeting and is sued for libel or defamation.

"The practice of targeting individuals with 'deep pockets' is unfortunately alive and well," commented Olmsted. "That tendency alone underscores the affluent's need for umbrella insurance."

Umbrella coverage also steps in to handle the coordination and cost of legal defense against liability lawsuits if your home or auto insurer's obligation is exhausted. With some lawsuits lasting for years, legal fees can run over $100,000. The time and emotional strain of the proceedings can damage promising careers and family life.

A smart way to get umbrella coverage is through a comprehensive "package" combining auto, homeowners, and umbrella policies, Olmsted reported. "The package approach minimizes coverage gaps and eliminates wasteful duplications that can occur with a collection of standard policies," explained Olmsted. The company's Atlantic Master Plan automatically provides auto, homeowners, and umbrella coverage while allowing consumers to add coverage for valuables (including jewelry and fine arts), watercraft, and other assets.

Independent agents who represent Atlantic Mutual report that most consumers take advantage of umbrella coverage once they know about it. How much coverage is right? Affluent consumers should consult with their agents and financial advisors and consider factors such as risk exposure, current net worth, and future earning potential. Atlantic Mutual offers umbrella coverage from $1 million up to $10 million as part of the Atlantic Master Plan.

Umbrella coverage is inexpensive compared to the protection it provides. A $2 million umbrella policy typically costs $300-400 in annual premium. And, in the case of the Atlantic Master Plan, part of this premium is offset by a package discount on all the coverages.

Posted by Tom Troceen