By Stanley Adamson, Ph.D.

Small business owners and citizens of southwest Missouri work very hard to provide for their employees and families every day. However, events in life may place all the fruits of years of hard work in jeopardy.

So, you might ask yourself, “Am I adequately protected from an accident that could occur?”

Most of us have insurance on our homes and autos. These items have a definite value when it comes to replacement, so we can insure accordingly.

However, what happens if our actions or failure to act causes harm to someone else? Again, most of us have liability insurance as required by law if we drive an auto. But how much protection do you have?

In the state of Missouri, an individual can meet the state’s financial responsibility law by having split-limit coverage of 25/50/10. That means the insured has liability protection in the amount of $25,000 for bodily injury to any one person in an auto accident. The second number means the insured has a total of $50,000 for bodily injury caused by an accident with no more than $25,000 provided to any one person. Finally, the last number represents a total of $10,000 property damage liability for any one accident.

Many of us who own homes have a homeowner’s policy that provides some protection with regard to bodily injury and property damage liability for non-auto related events. While varying from insurer to insurer, a basic limit is often a single limit of $100,000 per occurrence to be used as needed for bodily injury and/or property damage.

While not a frequent occurrence, what happens to an individual who finds herself involved in an accident with serious consequences? A few years ago, a lady called in to a national financial radio program telling her family’s story of being debt-free and managing to invest for retirement. One day when she was headed home driving into a bright sun, she failed to notice two runners on the side of the road, hitting them both.

This terrible accident resulted in serious injuries to one runner and the death of the other. How much liability insurance would be enough in such a case?

In such a situation, an individual or business owner needs to rely on a personal (or business) umbrella liability insurance policy. A personal umbrella policy is designed to extend coverage limits to underlying policies such as your homeowner’s or auto policies and broaden coverage in some circumstances where there is no coverage in the underlying policies. Such policies are generally sold in increments of $1 million.

While each family’s risk profile is different, you can often purchase a $1 million policy for $200 to $300 per year. Additional increments are usually less. This turns out to be one of the biggest bargains in the insurance business. Where else can you get $1 million of anything for less than $300? In fact, by increasing your deductible on your homeowner’s policy, you may save enough to purchase an umbrella policy.

While 85 percent of personal umbrella liability claims are auto-related, let’s consider some other situations where an umbrella policy might come into play. Some examples are:

• A guest falls off a trampoline in your backyard and is seriously injured;

• During a party, the deck on your walkout basement home collapses, and a number of people are injured;

• You are involved in a serious accident after renting a jet ski while on vacation, and another person is seriously injured.

• Your child is sued for slander after an ill-advised post on a social network.

After you are convinced of the need for a personal umbrella liability policy, the question becomes how much insurance should you purchase?

While a number of financial planners suggest having limits at least equaling your family net worth, I would suggest rounding your net worth to the nearest million and adding another million in limits.

To best answer the question of how much insurance to purchase, each person should consult with their insurance professional.

 

This article appeared in the May 3, 2014 issue of the Springfield News-Leader.  It is available online here.

Stanley Adamson, Ph.D., is an associate professor in finance and general business at Missouri State University and has held the Baker Chair of Insurance since 2008. Adamson specializes in risk management, employee benefits, property and liability insurance, as well issues of broad interest to the insurance industry. Email: stanleyadamson@missouristate.edu.