The 4 Ws of personal liability protection – what is covered, who needs it, why and when

In our society today, anyone can face a lawsuit as a result of what they have done or failed to do. Those who stand to lose a lot in the event they are hauled to court should consider getting the protection offered by personal liability insurance which is also known as "umbrella insurance" or "excess liability insurance."

How personal liability insurance works

This type of coverage offers an extra layer of protection on top of a standard automobile, home, boat or renters insurance policy.

When a claim is made against you, the underlying policy is used first. Once the dollar limits on the basic policy is used up, the personal liability plan covers the balance. In addition, this policy also covers certain situations that are not included in any of the underlying policies.

Premiums on personal liability insurance are usually with the reach of many. However, deductibles are typically high. The reason for this is that the basic policy's dollar limits must first be exhausted before this coverage takes effect.

What it covers

Generally, what is covered includes bodily injury caused to other persons, damages suffered by another's property, and claims related to rental units owned by the covered individual. It may also cover protection against slander, libel, false arrest and invasion of privacy. This policy pays for attorney's fees or the costs of a legal defense.

What it does not cover

  • Damage that is caused intentionally by the insured or by a member of his household or family.
  • Damage that is related to a business activity or profession.
  • Claims made in relation to an agreement or contract.
  • Claims made as a result of owning, maintaining and using recreational, non-traditional vehicles like airboats, jet skis and also aircraft.
  • Damage to one's own properties.
  • Damages that are covered by workers compensation.
  • Claims that arise in relation to insurrection or war.

Who needs personal liability insurance?

  • Wealthy individuals or those who have significant amount of assets.
  • Those who own swimming pools or trampolines.
  • Those with potentially harmful pets.
  • Those with teenage drivers.
  • Those who own at least two cars.
  • Those who regularly host parties at their homes.
  • Those who own condominium units.
  • Those who travel abroad.
  • Those who own a shore or beach front home.

Why and when you would need it

How can you know why and when you would need personal liability insurance?

Generally, you start with a risk assessment. See what are the chances of you facing an injury claim or legal action by another party.

Statistics indicate that dog bite claims are on the rise - this should alert you if you are a dog owner. Swimming pool accidents also occur over 3,200 times in a year. Teenage drivers also get involve in around 13 percent of the overall fatal car crashes in the country. If you happen to own a backyard swimming pool or if you have a teenage driver, your risk level could be high enough to warrant a coverage.

Couple these situations with large amount of assets like homes, cars, brokerage accounts, retirement saving, then a policy would be invaluable.

Further discussion on how to know if you need this policy is provided in our article, "The must-know facts when buying umbrella insurance."

Examples that illustrate the importance of personal liability insurance

  1. Your net worth is over a million dollars. You own a sports car and regularly visit clubs and bars every weekend. Your hobbies include extreme sports like sky diving, rock climbing and snowboarding. You enjoy a casual drink even when you drive.

    Assessment: your risk level is higher than average. You need personal liability insurance with at least $1 million coverage.

  2. Your net worth is $3 million. You own a home, an SUV worth under $20,000 and you have a twelve-year-old son. You are a homebody and rarely go out to parties. You prefer watching home movies during weekends. In 6 years, your son will be going to college. Your homeowners policy has $500,000 liability coverage.

    Assessment: Your risk is about average. However, because of your net worth, many people might be tempted to go after your assets in case of a bad event. Consider a plan that will give you coverage up to $3 million.

  3. Your net worth is $800,000. You own a home, an $8,000 car, have three kids and are the only one working for the family. Majority of your time is spent at the office; thus, you do not have any serious hobbies. You do not go out to parties or social events and you do not drink alcoholic beverages.

    Assessment: Your risk level is average but you definitely need personal liability coverage. Your three dependents mean that if something bad happens then their future would be compromised. Get a plan with a $1 million coverage. In addition, consider a life insurance policy of $1 to 2 million coverage so that in case of your untimely death, your children's future will be secured.

  4. Your net worth is $600,000. You have two teenaged kids who are giving you problems. Their academic performance is not good; they run with the wrong crowd.  They are not into sports. You allow them to drive the family car.

    Assessment: Your risk level is high. Your teenage kids place you at a risky situation. Because you as a parent still bear responsibility for their actions, you need to have personal liability insurance of about $1 million coverage.

  5. You have a $400,000 net worth. You own a rental property. Your tenants tend to come and go.

    Assessment: You need coverage that is worth $1 million or more. Because many people come and rent in your property, your likelihood of facing a liability is increased. The $1 million excess coverage is needed because you have to remember that future earnings may be garnished to satisfy a judgment made against you.

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