When we do comprehensive financial planning for our clients we find that their liability coverage is often lacking. In today’s litigious society, it is extremely important to have adequate liability coverage to protect you from a broad range of risks. A presentation by Stacey Silipo, Strategic Development Manager for Chubb Personal Insurance was recently given at the Financial Planning Association of Michigan’s annual fall symposium. Ms. Silipo covered a broad range of risk exposures that we need to be aware of.

Liability coverage protects your assets and future earnings from lawsuits or settlements. Most individuals have liability coverage included in their auto and homeowners’ policies. Such coverage is called primary coverage.

Ms. Silipo discussed three types of coverage: Tier 1, Tier 2 and Tier 3. Tier 1 coverage includes bodily injury, defense costs if you’re sued, deductibles and medical payments. Legal (defense) costs may be included in the liability policy limits or outside of the policy limits. Defense costs also may be capped or uncapped. The best scenario is to have defense costs uncapped and covered outside of the policy limits. You need to understand exactly what coverage you have. Tier 1 coverage may also include personal injury coverage for extortion, defamation of character, libel, mental anguish and invasion of privacy. This is not universally included.

Tier 2 coverage includes worldwide coverage, protects Directors and Officers of non-profit organizations and provides excess uninsured/underinsured motorist’s coverage.

Tier 3 coverage includes identity fraud, credit card coverage, rented or borrowed vehicles, kidnap expense and employment practices liability coverage.

Most people carry around $300,000 liability coverage on auto and homeowner’s policies. Significantly higher liability coverage can be acquired in a couple of ways. You can acquire excess liability coverage, which extends the liability coverage on an underlying policy.

Another approach that we commonly recommend to our clients is an umbrella liability policy, which covers a broad range of liability exposures in addition to your underlying auto and homeowner’s coverage. Umbrella liability insurance requires that you have a minimum of underlying liability insurance on your individual auto and homeowners’ policies (usually $300,000 to $500,000 of liability coverage).

Umbrella liability policies are generally sold in multiples of a million dollars (e.g. $ 1 million, $2 million, $3 million, $5 million, $10 million, etc.). The cost of an added million dollars of umbrella liability insurance is often minimal (It can be as little as $200 to $250) but obviously depends on your specific risk profile. We believe everyone with significant assets or earning power should seriously consider an umbrella policy.

In our next article, we will discuss in more detail who needs higher liability coverage and how much is enough. We will also share with you some recent facts presented by Ms. Silipo to give you an idea of the magnitude of the current level of liability claims.