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Is there a formula for this?
Old 01-04-2018, 07:00 PM   #1
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Is there a formula for this?

We had an earthquake last night. Everything's fine, everyone's fine, but it led me to question my coverages. So I took a look at my California earthquake coverage through USAA and determined that it wasn't enough. Then I looked at my homeowners insurance through them and discovered that it was only set at $200 per square foot. That's not enough to rebuild my house. So I raised both to $250 per square foot. As I'm talking to the rep at USAA she asked why my liability is only at 300K. I politely explain that I've got 500K on my car, 300K on my 1 story SFR house, and 2M umbrella.

So is there a formula for figuring out how much you need to have in liability insurance?

Help me if you have a formula!!!
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Old 01-04-2018, 07:20 PM   #2
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As for the umbrella policy, this has been discussed before and I recall the majority of responses were in the $1M-$2M range. What may justify increasing beyond $2M is simply having a net worth beyond $2M and wanting the liability coverage to match the net worth.

You were probably fine at $200/square foot since most earthquakes don't completely destroy a home and require a complete rebuild. But if the big one does happen, it can't hurt to have the extra coverage.

Glad to hear you're OK. Saw the quake on the news this morning.
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Old 01-04-2018, 07:34 PM   #3
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My liability coverage in total is close enough to my NW that I don't worry about it
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Old 01-04-2018, 07:39 PM   #4
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As for the umbrella policy, this has been discussed before and I recall the majority of responses were in the $1M-$2M range. What may justify increasing beyond $2M is simply having a net worth beyond $2M and wanting the liability coverage to match the net worth. ...
Except I've never seen any rationale for having the umbrella coverage match your net worth (and that has been discussed here).

You can always get sued for 2x your net worth, regardless if that is 1, 2 ,5 or 10 M. All you can do is try to guess what someone might sue you for. And having more coverage makes the ins company more motivated to settle for less. But anything above that will be your bill anyhow.

So I think the "match your net worth" is just a rule of thumb so people can say something, because they have nothing else to go by. That doesn't make it right, it just makes it convenient. Just like the talk about needing 80% of your income in retirement. It's a number, but it doesn't apply to any specific case, which could be far less, or far more.

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Old 01-04-2018, 07:40 PM   #5
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Ready & FlaGator: liability coverage = NW? How do pensions factor in or don't they?

ERD50: So drive / have dogs / city need more?
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Old 01-04-2018, 07:40 PM   #6
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My liability coverage in total is close enough to my NW that I don't worry about it
My apologies of my previous post made you worry then.

But it's true.

edit/add some clarity: The insurance company is not insuring your net worth. They are insuring you against a lawsuit, up to the limit you pay for. I can't see any connection between the two.

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Old 01-04-2018, 09:15 PM   #7
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Agree, coverage has absolutely nothing to do with net worth.
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Old 01-04-2018, 09:26 PM   #8
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Except I've never seen any rationale for having the umbrella coverage match your net worth (and that has been discussed here).

You can always get sued for 2x your net worth, regardless if that is 1, 2 ,5 or 10 M. All you can do is try to guess what someone might sue you for. And having more coverage makes the ins company more motivated to settle for less. But anything above that will be your bill anyhow.

So I think the "match your net worth" is just a rule of thumb so people can say something, because they have nothing else to go by. That doesn't make it right, it just makes it convenient. Just like the talk about needing 80% of your income in retirement. It's a number, but it doesn't apply to any specific case, which could be far less, or far more.

-ERD50
I'm not worried (your post above), and it wasn't a rule of thumb for me.

I based mine on the reality of living in plaintiff friendly FL (CA isn't much different) and having 2 teens at home, one driving, one in a few more years.

Understand how the PI lawsuit business works, including judgments and ultimate settlements.

No pension, living off investments. Much of what I have is not protected and subject to judgement.

If my calculation/"rule of thumb" isn't correct, what is the right way to determine the proper amount of coverage? Telling someone the rule of thumb isn't good without providing an alternate isn't helpful.
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Old 01-04-2018, 10:59 PM   #9
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OP - Remember your house repair cost from an earthquake would not need to include the land as it's not going anywhere, unless CA slides into the ocean

As for liability, a couple of million makes sure the insurance company takes it seriously enough to fight and your money in 401K, IRA is probably protected, possibly even the house (example FL).
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Old 01-05-2018, 09:21 AM   #10
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....
No pension, living off investments. Much of what I have is not protected and subject to judgement.

If my calculation/"rule of thumb" isn't correct, what is the right way to determine the proper amount of coverage? Telling someone the rule of thumb isn't good without providing an alternate isn't helpful.
I was thinking through that over my coffee when I saw there were more posts to this thread, but before reading your post.

My take on it is that there really is no good answer. And I think that is why a meaningless rule of thumb exists. I'd imagine if we looked at the average Umbrella policy owner (not the outliers that might have been engaging in risky behavior, but still within what the ins co would defend), the the odds of them getting sued for a large amount are really low. And then we'd need to look at the ranges of settlements, and maybe decide we want an amount to cover 90% of that range, 95%? Since many are settled out of court, this data might not even be available.

Your insurance person could debate this with you for months, running numbers and scenarios, and it still would pretty much be a crap shoot. Same reason we see the articles that you'll need 80% of your income in retirement. It's not meaningful, but it's an easy answer, so they go with it.

edit/add: And then we'd need to compare those settlements with similar cases where people did not have umbrella coverage. Were the settlements low enough to justify the cost?

But I always feel we should be honest with ourselves, so we best understand the choices we do make. And I think many people kid themselves, or lull themselves into a false sense of security by thinking they really have "net worth insurance". But they don't. They have $1M or $2M or $10M or whatever, of liability insurance. It has nothing to do with net worth, and it isn't helpful (and maybe hurtful) to think of it in those terms.

OK, the succinct version (do 'they' still do the 'tl/dr' thing - too long, didn't read?): I don't have an answer, and maybe you don't think that's helpful, but substituting a meaningless-non-answer can be harmful. So understand it for what it is.

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Old 01-05-2018, 10:18 AM   #11
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Sunset, CA isn't going to fall into the ocean but a lot of folks in the Fountaingrove area of Santa Rosa discovered that it took almost $300 Sq ft to rebuild. I don't have travertine floors so estimated $250 ...

Anyway, I think 2.8M in liability coverage should my laid back lifestyle cause harm (no dogs / minors under my responsibility) is enough for the insurance company fight it. I've only been sued (lost) once & that was for a 2nd grader in a school yard fight
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Old 01-05-2018, 11:12 AM   #12
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Sunset, CA isn't going to fall into the ocean but a lot of folks in the Fountaingrove area of Santa Rosa discovered that it took almost $300 Sq ft to rebuild. I don't have travertine floors so estimated $250 ...

Anyway, I think 2.8M in liability coverage should my laid back lifestyle cause harm (no dogs / minors under my responsibility) is enough for the insurance company fight it. I've only been sued (lost) once & that was for a 2nd grader in a school yard fight
There has been a lot of articles on fire insurance here in Sonoma County. As I recall USAA was one insurer that was mentioned as underestimating replacement costs for fire related insurance. That probably helped them pull in customers ... my evil guess.

We have earthquake insurance. I believe if you look at your policy it is not actually USAA but the California Earthquake Authority that really provides the earthquake insurance coverage (EIC) through USAA. That EIC has a high deductable. Should there be fire as a result of earthquake then I think your fire insurance will be applied, not just the EIC.

We have a very nice house here and I'm going to be looking at that rule of thumb number. I have read as much as $400/sqFt for some homes.

P.S. The situation in Sonoma County is unusual. There are so many structures destroyed or damaged, labor shortages, anticipated needs for materials, etc. Perhaps the square footage numbers we see in the news are somewhat inflated in the current times. Firestorms like experienced here are very rare events.
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Old 01-05-2018, 11:14 AM   #13
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I've only been sued (lost) once & that was for a 2nd grader in a school yard fight
How badly did you hurt the kid?
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Old 01-05-2018, 12:02 PM   #14
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LOL .... my son swung (eyes closed) and hit a yard duty. No injury but bruised. 10k 'emotional damage'
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