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Personal Liability Insurance
What is it?
Personal liability insurance protects your assets if you
injure another person or damage someone else's property.
It's known as third-party insurance because it protects you
if a third party files a claim against you. If you are found
legally responsible for causing an injury or property
damage, your personal liability insurance will provide a
legal defense, if necessary, and pay the claim up to the
limits of the policy. Personal liability insurance can be
purchased as part of a package policy (such as a homeowners
or automobile insurance policy) or as a separate policy
(such as a personal umbrella liability policy).
Determining your need for personal liability insurance
Do you need personal liability insurance?
Some people mistakenly believe that personal liability
insurance is necessary only if you are wealthy (and more
likely to be sued because you have more assets than most
people) or if you are reckless. However, accidents can
happen anywhere or to anyone. You may, for instance, hit a
bicyclist or accidentally spill hot coffee on your
neighbor's arm. Your cat may scratch your neighbor's car or
your friend may fall down your icy stairs. No matter how
careful you are, you may one day be sued because you injured
someone or damaged someone's property. Although you can't
avoid all accidents, you can transfer some of the financial
risk you face to an insurance company by buying personal
liability coverage.
Tip:
Liability coverage under your policy may extend to your
relatives as well. For instance, your father may be covered
if he drives your car and injures another driver. Or, if
your child accidentally breaks your neighbor's window, your
policy may pay the damages resulting from the claim. Check
your liability policy to determine how it defines a relative
because the definition varies from policy to policy.
How much personal liability coverage do you need?
You probably need more liability coverage than you think you
do, even if you have few assets to protect. Lawsuits and
claims are being filed more frequently than in the past, and
the cost of defending yourself may be high. If you have no
liability insurance, you will likely have to pay the entire
cost out of pocket. If you do have liability insurance, your
insurance company might settle out of court because in a
major suit, your insurer's legal fees can exceed your
policy's liability limit. In addition, juries frequently
award damages that exceed the actual monetary amount of
damage done. They award money for pain and suffering, mental
anguish, and punitive damages. Even if you have liability
insurance, you may find yourself owing money if
court-ordered damages against you exceed the liability
limits of your policy. If you don't have the money to pay
damages now, your future earnings and assets may be subject
to liens and/or garnishment.
Because there's no optimum amount for every individual, how
much personal liability coverage you need depends partly on
your tolerance for risk. Can you afford to pay the cost of a
claim out of pocket or would even a small claim threaten
your finances? If you already have liability coverage, take
a look at your current policy. Determine whether your
liability limits are high enough, or if there are any
coverage gaps you'd like to fill (see below for more
information on coverage under typical personal liability
policies). For more information on purchasing personal
liability insurance, see Evaluating, Comparing, Replacing,
and Conserving Personal Liability Insurance Policies.
Basic liability protection under a homeowners or automobile
insurance policy
If you own a homeowners or automobile insurance policy or
another type of property insurance (e.g., mobile home
insurance or renter's insurance), you have basic liability
coverage. These policies will protect you against many
liability claims. Your insurance company will defend or
settle claims and lawsuits brought against you and pay the
sum owed for covered damages (bodily injury or property
damage) up to the liability limits of the policy (usually
$100,000 to $300,000 per occurrence). No deductible applies.
If you want maximum liability coverage or if you want
broader coverage, consider purchasing a personal umbrella
liability policy (see below).
Tip:
Bodily injury and property damage liability insurance for
automobile owners is often mandatory under state law,
although a few states don't require you to carry even basic
automobile insurance. When required, mandatory minimum
liability limits are usually low ($40,000 per accident is
common). Bodily injury and property damage liability
insurance for automobile owners is usually sold with split
limits (e.g., $100,000/$300,000/$50,000), which means that
your policy provides coverage up to $100,000 for any one
person you injure, $300,000 for all the people you injure,
and up to $50,000 for property damage. For more information,
see Automobile Insurance: Part A Liability Coverage.
For more information on other types of basic and
comprehensive liability policies, see Personal Liability
Insurance Policy Types.
Comprehensive personal liability insurance coverage under a
personal umbrella liability policy
What is a personal umbrella liability policy?
A personal umbrella liability policy supplements the basic
liability protection you already have by insuring you
against large losses or losses not covered under your other
personal liability policies. Although an umbrella policy is
often added to an existing homeowners or automobile policy,
it can also be purchased as a stand-alone policy from a
different insurer. In either case, your insurer will
ordinarily require you to carry basic liability insurance
with certain minimum limits.
Example(s):
Before his insurance company would issue him a $1 million
umbrella policy, Hal had to raise his homeowners insurance
liability limit to $100,000 and his automobile insurance
liability limit to $100,000/$300,000/$50,000.
Higher liability limits than basic liability coverage
One reason to purchase a personal umbrella liability policy
is that it will provide you with a higher amount of
liability coverage than a basic liability policy. Umbrella
liability policies are normally issued with a liability
limit of $1 million per occurrence. However, the umbrella
policy may pay numerous claims of $1 million each per policy
period, so your actual protection may be more. Some
companies set limits, however, on how much can be paid out
during the policy period or over a lifetime. A common limit
is $10 million. Since an umbrella liability policy is issued
in conjunction with basic liability coverage, your total
liability protection will be the combined limits of each
policy. For instance, if you have an auto policy with a
liability limit of $100,000 and a $1 million umbrella
liability policy, then your total liability protection will
be $1,100,000.
Broader coverage than other types of liability insurance
An umbrella liability policy will protect you from losses
not covered under basic liability insurance. It covers you
against damages for unusual occurrences, including personal
injury losses due to libel, slander, wrongful eviction,
false arrest, and invasion of privacy. Your umbrella
liability policy might also pay for damages incurred
worldwide. In addition, an umbrella policy might pay a
proportionate share of a claim even if your basic liability
insurance policy cannot pay its portion, either because you
failed to comply with the conditions of the policy or
because the company itself has become insolvent.
Claims are paid under an umbrella policy only after basic
liability coverage is exhausted or unavailable
If you have purchased an umbrella liability policy, it will
pay a claim in one of two main ways after you have satisfied
a deductible:
·
If you are found legally responsible for injuring someone or
for damaging property, your umbrella policy will pay that
part of the claim in excess of the liability limits under
your basic liability coverage
Example(s):
Hal purchased a homeowners insurance policy (with liability
coverage of $100,000) and a $1 million umbrella liability
policy. When Hal's swimming pool sprang a leak and caused
$25,000 worth of damage to his neighbor's yard, Hal's
homeowners insurance paid the total claim. However, when Hal
was sued after a rotting oak tree on his property toppled
and injured his neighbor's daughter, his homeowners
liability coverage paid only the first $100,000 in damages
(the liability limit on his policy). The remaining $900,000
of the court-ordered settlement was paid by Hal's umbrella
liability policy.
·
Your umbrella liability policy will pay total damages for
bodily injury and liability if the liability exposure is not
covered under your basic liability coverage but is covered
under your umbrella policy
Example(s):
Hal borrowed his brother's lawnmower and ran over his
neighbor's deaf cat that was napping in the yard. Because
the damage was caused by nonowned property in Hal's care
(which is specifically excluded from his homeowners policy
liability coverage), Hal's personal liability umbrella
policy paid the $1,500 veterinary bill.
Caution:
Although a personal umbrella liability policy is sometimes
called excess personal liability insurance, it is really not
the same thing. Excess liability insurance typically
provides additional coverage only if the basic policy
provides coverage as well, whereas an umbrella liability
policy will provide coverage that is sometimes different
than that provided under the basic liability policy.
What personal liability insurance does not cover
Although a personal umbrella liability policy covers more
types of hazards than basic personal liability policies, no
personal liability insurance policy will protect you against
every loss you might face. All types of personal liability
insurance generally exclude the following:
·
Claims stemming from the insured's business or profession
(some types of business activities may be covered under a
homeowners or automobile policy, so check your policy)
·
Claims resulting from the insured acting intentionally to
cause injury or damage
·
Damage to property owned by the insured
Other common exclusions under a homeowners policy are damage
caused by communicable diseases and acts of war. An
automobile policy might exclude accidents and losses that
occur overseas or while a vehicle is in transport. Umbrella
policies often exclude liability losses related to aircraft,
damages caused by watercraft not covered under your
homeowners policy, or injuries suffered by someone covered
by workers' compensation. For information on liability
insurance for business owners, see Business Liability
Insurance.
Questions & Answers
Can anyone purchase a personal umbrella liability policy?
No. It's the underwriter's job to determine who may purchase
a personal umbrella liability policy. Once an individual has
applied for the policy, the underwriter will evaluate the
application and may reject applicants who pose an undue risk
to the company. For instance, broadcasters may be denied
coverage because they face a high risk of claims alleging
personal injury. Politicians and actors may be denied
coverage because their jobs expose them to publicity.
Individuals whose property poses a hazard (such as someone
who owns an unfenced swimming pool) may also be denied
coverage.
Is a personal umbrella liability policy expensive?
Not for the coverage it offers. An umbrella liability policy
will generally cost between $150 to $300 per year and will
significantly expand liability coverage (typically $500,000
to $1 million of coverage). However, you may also pay more
for your homeowners or automobile coverage if you are
required to increase your policy limits.
Neither Forefield Inc. nor Forefield Advisor
provides legal, taxation, or investment advice. All content
provided by Forefield is protected by copyright. Forefield
claims no liability for any modifications to its content
and/or information provided by other sources.
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