What should be the amount of Umbrella insurance?

Question

Hello everyone,

I've been trying to figure out the answer to a question about how to come up with the amount of umbrella insurance coverage I need. I used to have $1M umbrella, but my insurance agent says I am significantly under-insured. He is basically saying I need to add up market values for all my properties (1 primary residence valued at $4M and 5 investment duplexes/fourplexes valued at $2.5M). His rational is that someone tries to sue me, they'll go for my total worth, regardless of how much equity I have in all my properties (all of them have 30 year fixed loans). All of the properties are under personal ownership, not LLC.

$6.5M umbrella insurance sounds excessive and it's going to cost $3K per year. Plus he says I have to raise limits for my car insurance to $500K/$500K/$500K for bodily injury and property damage liability from the standard limits required by lease. All this doesn't sound reasonable. Am I being mercilessly upsold?

thanks,

Lenny

Jason Bott · Answer

@Lenny B. I do not agree that if a tenant trips on a stair, are they going to sue for $6.5M because they figured out how much your assets are worth. Chances are the claim is worth $5k-$15k on a good day.

So let’s say you buy that $6.5M Umbrella, and you have your 6.5M in assets. Using that agents reasoning, wouldn’t they now sue for $13M?

If they decide to sue for $15m, your now $2M short after everything settles. There is no exact equation, just reasonable estimates of how high a claim can go.

Ask for actual claim examples his company has seen the last 5 years on individuals like yourself. If he has a handful at $6.5M, then I guess you do need the Umbrella.

I personally have not seen any claim get that high for a Real estate investor.

Good luck

Jason Bott · Answer

@Lenny B. I do not put any weight in that equation. I'm not sure where it came from, but have a sneaking suspicion it started in some "Insurance sales 101" class and has been out there ever since.

Now if your agent has several examples of auto accidents in CA where the court awarded $6.5M to the plaintiff, then I would consider buying that Umbrella. But I think you will find that it's not that common to have claims that high unless you were completely negligent/out of control with your actions.

Your largest exposure is your personal auto and the 4 units. Focus on what you think is the highest possible claim on either of those and set your Umbrella limit accordingly.

At the end of the day, there is no right or wrong answer as to what the right Umbrella limit is. It's whatever limit makes you sleep well at night.

Account Closed · Answer

Google "umbrella insurance" and decide for yourself.

Do You Need Umbrella Insurance? What Is It and How Can It Help You?

The 1% Fear Being Sued But Shun Umbrella Insurance

I'm a risk-adverse individual. For example, I bought earthquake insurance when I lived in California, which is expensive (https://www.youtube.com/watch?v=dsKp2WYi4X8). My neighbor did not, figuring the Government would come to the rescue with low-cost loans should the Big One ever hit.

Account Closed · Answer

My insurance agent gave me the same advice -- get umbrella coverage for the value of the assets (rounded up to the next million [or more if you're worried about it]). The reason is that if I ever do anything stupid and seriously injure someone, the jury is going to be sympathetic to the victim. As a property owner, I would be seen as the rich dude.

Although some lawyers say they settle for the amount of the insurance coverage, there is nothing to stop the court from awarding a larger amount if the plaintiff's lawyer decides to go for it. Then if you happen to win the lottery someday, the plaintiff gets paid the outstanding judgement from the lottery winnings before you get paid whatever is left over.

Lenny B. · Answer

@Jason Bott, thanks for your input. You are saying "Your largest exposure is your personal auto and the 4 units." But my agent is saying that it doesn't matter where the exposure comes from. If I am at fault, the other party can go after all assets.

Michael Norris · Answer

Umbrella policies are priced on the underlying limits and depending on the carrier may require higher limits on your auto and primary home than what you may be carrying now.

Example - if your autos are only covered at 100/300 limits (that is very low!!) raising your auto limits to 500/500 is probably saving you hundreds off the cost of the Umbrella policy.

As far as "have to" raising your limits to $6.5 million - that part is up to you. In a textbook example that probably is how much liability coverage you "should" have but if you choose to carry less that is your decision.

I don't think the agent is giving you bad advice

Frank Adams · Answer

I'm not so sure about the "insure up to the value, regardless of your equity" bit. That sounds excessive. I'm surprised you've been carrying that low a rate on your cars. IIRC we've had 250K property and $500K personal injury on our cars for more than a few years. Our NET worth is a shade over $3 million and our umbrella is for $3 million. I think ours is just a bit under $1,000/year but we're in Colorado, not California

What should be the amount of Umbrella insurance?

What should be the amount of Umbrella insurance?

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