Yet another Umbrella Policy Topic

[ziggy29]

That sure seems like false economy on the part of the insurance company--save a nickel on lawyers and spend a dollar on the award/settlement. I guess they've figured it all out and it makes sense to them (or else they haven't done the cost/benefit analysis, which is improbable).

The problem seems to be that an insurance company may look at a particular case and, even if they think they would prevail in court, it may cost $20,000 to defend a $15,000 lawsuit. It's cheaper to settle out of court and pay out the $15K (or close to it) than go to trial, even if you prevailed in court.

The problem is that the more this happens, the more it "pays" to file weak lawsuits against insurance companies and the more human nature would tell us that more "junk" lawsuits would be filed.

Therein lies the rub -- if an insurance company is being sued because of something I allegedly did, I don't appreciate them "settling" out of court and paying off when I don't think I did anything to cause liability. It's almost like a tacit admission by the insurance company that "I did it." I know it's not that legally but it feels that way. It's like they wouldn't be defending me -- but simply agreeing on my guilt and paying off.

 

[haha]

It's like they wouldn't be defending me -- but simply agreeing on my guilt and paying off.

Well, it isn't about guilt. Come to think of it, although in criminal court it is called guilt, it really isn't about guilt or innocence there either.

Ha

 

[chinaco]

Therein lies the rub -- if an insurance company is being sued because of something I allegedly did, I don't appreciate them "settling" out of court and paying off when I don't think I did anything to cause liability. It's almost like a tacit admission by the insurance company that "I did it." I know it's not that legally but it feels that way. It's like they wouldn't be defending me -- but simply agreeing on my guilt and paying off.

I follow your logic... but in the end... it is about money.

Those cases are about money... compensation for a loss and possibly punitive damages for carelessness or negligence...

I think most Umbrella policies state that the insurer has the right to handle it however they choose (settle it or fight it). I suspect that they would settle the case if the value is small.

 

[cute fuzzy bunny]

I suppose in that scenario, if someone really wanted the "right" decision, they could waive the insurance payout pursue the court case on their own dime. The insurer did what they were supposed to do: financially insulate the policyholder from unexpected frivolous lawsuits. Its not an insulation from lack of justice.

I get the sentiment though. When my old megacorp had a legal issue they'd form a small committee with the folks directly involved, someone from the legal department and a randomly selected neutral management rep. I got tagged as the latter a handful of times. In most of the cases it was some contractor or supplier who got fired but pulled some scam by getting a lawyer and demanding some middling amount of money from 20-100k. Most of the time we ended up just paying the amount to make them go away since a full court brouhaha would cost about the same and we'd get bad press out of it.

I hated that. But I got it.

 

[FinanceGeek]

I have always figured that the low cost of umbrella insurance is a strong indicator that few successful claims are made against these policies. For example, try comparing the cost of a $1m umbrella policy against a $1m life insurance policy sometime...

If its so cheap to go from $1m to $2m to even $5m, then obviously the insurance company isn't really thinking its likely they will pay out anywhere near this much very often.

The implication I take away from it is that if the insurance company isn't going to lose even $1m, what is the chance of me losing anything above & beyond that policy's limit.

Miniscule.

 

[audreyh1]

Good point.

Audrey

 

[cute fuzzy bunny]

Yahbut...the thing to consider is...the weight of the loss vs the cost, no matter how small the likelihood. If its $200 a year to avoid getting royally screwed out of everything you've earned...good price to pay for the protection.

Plenty of folks around here pay very close attention to minor details around where to take benefits or pensions or SS to catch a 3-5% edge on the odds, with the likely cost being in the tens of thousands of dollars...

I consider it a small price to pay for the odds of being the guy who was changing the radio station just at the moment that a minivan full of 6 year old paraplegic nun lawyers pulled out in front of me.

 

[TexasGal]

Before I signed up for my $1M umbrella policy, I had to increase my liability limits on my auto policy to $500k. Now, my understanding of the policy limits are that if I were to get in a car accident that had damages, the first $500k would be covered by my car insurance policy and my next $1M is covered by my umbrella? If this is the case, isn't my effective liability coverage $1.5M, provided of course that the damages are caused while I was driving.

Hmmm . . . my insurance provider (Traveler's) told me that my $500K auto liability basically served as the umbrella deductible and that the umbrella policy of $1M will cover another $500K for a total liability coverage of $1M.

I have $300K on home and they explained that the umbrella would pay the other $700K on the $1M umbrella policy.

Does this sound totally wrong?! Maybe I misunderstood or Traveler's is screwing me.

 

[Martha]

Hmmm . . . my insurance provider (Traveler's) told me that my $500K auto liability basically served as the umbrella deductible and that the umbrella policy of $1M will cover another $500K for a total liability coverage of $1M.

I have $300K on home and they explained that the umbrella would pay the other $700K on the $1M umbrella policy.

Does this sound totally wrong?! Maybe I misunderstood or Traveler's is screwing me.

I looked at this after you posted, and it appears that you could be right. Your umbrella policy may look at the underlying insurance as the "deductible" on the umbrella. So, check your umbrella.

 

[TexasGal]

I looked at this after you posted, and it appears that you are right. Many if not most policies look at the underlying insurance as the "deductible" on the umbrella. So, check your umbrella.

rats . . . was hoping I had misunderstood. It would be nice if we were getting the full amount of the umbrella policy on top of basic underlying high liability.

Thanks, Martha!

 

[Martha]

Well, be sure to double check the policy. My understanding is that my policy is different. I am going to read the policy to be sure.

 

[haha]

I looked at this after you posted, and it appears that you are right. Many if not most policies look at the underlying insurance as the "deductible" on the umbrella. So, check your umbrella.

This makes it that much better to go up for some of that cheap coverage above the first million.

Ha

 

[WanderALot]

Well, be sure to double check the policy. My understanding is that my policy is different. I am going to read the policy to be sure.

I called up my agent again just to be sure and it looks like the umbrella limit is in addition to my homeowner's/auto policy. I'll also be reading my policy when I get home just to be sure.

There is another interesting quirk I found out about. My auto/home is structured as such:

Liability for Home: 500k
Liability for Auto: 250k/500k (single/max per incident)

With my $1M Umbrella, a single-individual lawsuit in my house would be covered up till $1.5M limit, but a single-individual lawsuit caused by my car would only be covered up till $1.25M. A multiple individual lawsuit would be covered for 1.5M for both. I guess this is pretty obvious, but I just didn't realize it.

 

[free4now]

In the case of umbrella insurance, the chances of it saving me from financial ruin are so incredibly small that it's not worth bothering with. There are so many things that can lead to financial ruin but which are unaffected by umbrella insurance: medical expenses denied by insurance, war, terrorism, "acts of god", government seizure, bad investment decisions in senility, embezzlement, bad marriage, bad divorce, the list goes on. When you see the risks that umbrella insurance protects against in this context, it seems kind of silly to sink money into protecting against such a small slice of the risk pie.

Many people here seem to agree with Bernstein that anything over about 80% survivability isn't worthwhile, meaning they agree that there's somewhere in the neighborhood of a 20% chance that they could be ruined by something besides SWR. Spending $200 on Umbrella insurance may protect you from ruin in say 0.00001% (my made up figure) of cases, but if there's still a ~20% chance you'll be ruined anyway what's the point? Trying to throw $200 at every 0.00001% chance would quickly bankrupt you unless you are ultrarich, not to mention that it would tire you out securing and maintaining all those policies. The only reason people do it with umbrella insurance is because, well, it's there. There are no policies available for most of the actual risks.

My take is that the benefit of umbrella insurance is more psychological than practical... it makes people feel like they are making a dent in the ~20% of possible ruin scenarios. But in reality if you take a look at an umbrella insurance policy it doesn't even cover most actual instances of personal liability.

 

[cute fuzzy bunny]

I think the difference is that with the <100% survival rates, you can cut spending, change asset allocations or alter your lifestyle to accommodate a problem like a depression, severe recession or heavy inflation.

I dont think you have as much flexibility with an 800k judgment against you because you ran into the orphanage minivan after spilling hot coffee in your lap.

While its unusual to find oneself in the position of the target of such a suit, a $200 payment to assure yourself relatively immune to it seems to me to be a bargain.

Would you pay $5,000 a year to make an 80% portfolio 100% survivable?

Wow, thats cheap!

Odds of your house burning down are pretty low as well. And thats gotta be a $700-1000 a year savings to drop that coverage...and a total loss to the property would probably amount to less than a lawsuit would cost.