From zero to a million in the flash of an eye: why Umbrella policies are important.
Imagine this: you’re mowing the lawn on an ordinary fall day. It’s one of those last nice, sunny days when all of the neighbors are outside doing lawn work or playing with their kids. The perfect Saturday. All of a sudden you hear that hideous noise that can only hear one thing- you’ve hit rock, buried somewhere deep in the grass, and your first thought is “ugh, I hope that didn’t bend the blade”.
You push the mower another couple of feet when you realize you are hearing screams from your neighbor- and you look up to see the nine year old boy that lives next door’s face covered in blood. He had been on his backyard playground, but he was clearly now laying in the grass, as if he had been knocked off his swing by a large sling shot.
You reach him at the same time his parents do and in looking close, it’s obvious that the rock that had come from your lawnmower had hit your neighbor square in his eye.
In the end, the doctors were able to save your neighbors eye, but his vision was permanently reduced to 30%. The rock flying from your grass out of your lawnmower had made him legally blind in one eye.
Talk about a freak accident! Do you know what this nine year old wanted to be when he grew up? I mean- had been obsessed with for the last five years? The same career his father and grandfather were? A pilot. Do you know what career you can’t do without really good vision?
Your neighbors file a lawsuit against you for 1 million- and they win. So now what?
There are two ways this could go down.
We’ll assume that if you own a home- you have homeowners insurance. Homeowners insurance comes with some liability coverage. It will have been a limit that you would have set for yourself. Usually, this coverage starts at $100,000 (included complimentary with your policy), but you can increase your coverage (for additional fees).
The problem with only having your homeowners policy is that you will have to pay out the difference between what your coverage limit is and what you owe in your judgement. In this case, if you went with what was included in your policy ($100,000), but the judge ordered you to pay your neighbors $1 million- how much would you have to pay out of your own pocket?
So would that be cash or check?
Your wages are going to be garnished for the rest of your life. You will have to sell your house and possessions, work three jobs, etc. You’ve just set yourself for a hard, hard, hard (if not impossible) life.
NOW… if you have an umbrella policy, on the other hand, you have a chance. You’re umbrella policy starts paying after your homeowners or auto (it requires you to have both types of insurance and it requires you to have larger limits on both) liability limits have been all paid out. Umbrella policies are higher limit liability policies to begin with and they are meant for these types of situations- they come in $1 or $2 million coverage limits.
So in this example, if you had a $1 million umbrella policy- you would know that your insurance policies would have paid out the entire thing. First, your homeowner’s policy would pay out. (You wouldn’t have been allowed to choose the $100,000 limit- you would have had to go with $300,000 as a minimum for an umbrella, so your Homeowners would have paid that out). That would leave $700,000 for your Umbrella to pay out- and since that is under $1 million- it would have paid it out and you wouldn’t have paid anything out of pocket.
I don’t know about you, but I would pay extra to know that I would be covered. I would pay for an extra policy. The extra $1 or less per day is worth it to me to know that I don’t have to worry about something like the example above ruining my life.
Not convinced you need an Umbrella policy?
Let me share with you some other real-life examples of when an Umbrella would have came in handy.
While driving on the Interstate, you look down for a second to change the channel on the radio. In that split second, a deer darts out and while it doesn’t run into the road, seeing it from the corner of your eye makes you grab the wheel and swerve just enough to hit a minivan full of a family in the lane to your left. You hit them hard enough that they run off the road and flip over; totaling the car and ejecting some of the passengers. The father of the family dies, but the rest of the family survives. The family sues you for $1,000,000 and wins but you only have $100,000 in bodily injury liability coverage on your Auto insurance coverage. That means you will need to pay the remaining $900,000 yourself. You will need to sell your assets and have all of your future earnings garnished to pay this huge debt. If you have minimum coverage- you have no way to pay for this. 25/50/10 won’t help you a bit. If you have larger limits, like 250/500- you will still owe $1 million. Having that $1 million umbrella will bring that out of pocket down to zero.
Your teenage daughter breaks up with her boyfriend and decides to “get back at him” for breaking her heart. Her version of “getting back at” includes posting some very inappropriate and false comments about the ex-boyfriend. She also posts several pictures of the ex-boyfriend doing things that tarnish his reputation. Because of this, he loses his part time job and is suspended from the basketball team. Ex-boyfriend’s parents sue for defamation and libel and are awarded $500,000. An umbrella policy would have paid anything above what the homeowners liability was, taking your out of pocket amount from potentially $200,000 – $400,000 to nothing.
A man loaned his boat to a friend for the weekend. His friend and some buddies took it out on the lake with a few cases of beer and became intoxicated; ultimately plowing into another boat late at night and killing another boater wrecking the boat. The survivors of the deceased sue the driver and the boat owner. The court finds that the boat owner is 20% liable for the $5 million judgement ($1 million) since it was his boat. His boat policy has a $300,000 liability policy. If he didn’t have an umbrella policy, he would have to pay $700,000 out of pocket. With an umbrella policy- he would have zero out of pocket expenses.
Parents hosted a party for their teenage children. Although they did not provide alcohol, it was brought by some of the guests. After leaving the party, one of the guests was seriously injured in a car accident and the injury was ruled due to his consumption of alcohol. The Wisconsin Supreme Court ruled that that the homeowners should have prevented the consumption of alcohol by minors on their premises. Both the homeowners and personal umbrella policies responded to this claim.
Talk to your Trusted Advisor
No one expects to use insurance, but they are usually awfully happy that it is there for them when they need it. No one likes to pay the monthly or annual premiums- but I would much rather pay the premiums than try to come up with a payment plan for a million dollars.
Your trusted advisor should be able to help you navigate your specific situation and answer any questions you might have.
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