Umbrella Insurance Worry

slowsaver

slowsaver

Recycles dryer sheets
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Aug 8, 2013
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I had a conversation about umbrella insurance with a rich friend recently. It's bothering me a little, and I wanted to bounce if off y'all. I'm kinda hoping this isn't how it works.

Me: "I heard that a $2M umbrella policy is large enough for almost anyone, because the insurance company will send their lawyers to fight to avoid paying out that much money, regardless of your portfolio size."

Friend: "That's bad advice. Let's say you cause a car accident where someone loses a finger, or a hand, or a leg. The legal world has somewhat pre-determined rates for such injuries, e.g. a hand is worth $5M**. If you have a $2M policy but caused a 'known' $5M injury, they won't fight it because they know it would be near impossible to get "a lost hand" down below $2M. So they write the $2M check and walk away. You're still on the hook for the remaining $3M."

Me: "So if I have $5M, then I should get a $5M umbrella?"

Friend: "Yes. I know this because I have a teenage daughter who caused a car accident where the other person got hurt."

Me: "But let's say I have $5M and I have a $5M umbrella. Under your scenario, I'm still at risk if I cause an accident (death?) that's 'known' to be worth $10M? They pay the $5M and walk away. I'll still be sued for the other half."

Friend: "Probably, yes. Well, you'd have to get your own lawyer to fight it."

** P.S. I don't actually remember if it was a *hand* that was worth $5M or $2M, or something else. I don't think it's important.

(I'm also wondering how lawyers can find out how much money I have. They might assume if I have a $5M umbrella policy, then I must have $5M.)
 
you have to sign off on any personal injury settlement proposed by your insurance company.

they can't just cut a check and walk away leaving you holding the bag.

the insurance company lawyers are representing you so you don't have to hire your own attorney.

and IMHO your friend has never actually been involved in a PI case.
 
ncbill said:
you have to sign off on any personal injury settlement proposed by your insurance company.

they can't just cut a check and walk away leaving you holding the bag.
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I hope you're right. But I can imagine a scenario where they say, "this is worth $5M, whether you like it or not." I can't just hold-up the process forever (and force the insurance company to keep fighting on my behalf), because I don't agree with 'the reality' that I caused a $5M injury to someone.
 
It might take awhile but they will find out how much you have...

This was many many years ago but there was someone driving a big RV pulling a car... the cars rear tires seized so they kept pulling till it got to the rims... and then starting leaving sparks while they drove... started a big forest fire... OH, BTW, there were many cars signaling to try and have them pull over but they did not...

They had (IIRC) two insurance policies that were going to pay out millions but the state wanted a lot more.. from what I remember they got that info... never did hear what happened in the end...
 
Disclaimer: IANAL

Nothing is "known" to be worth "x". Every situation is unique. An at fault accident taking the finger of a bricklayer is different than if it were a brain surgeon. This comes about due to future lost wages.

And an insurance company is not going to just throw their hands up and automatically settle at the plaintiff's ask. Their lawyers will work to limit their exposure as much as possible.

The old advice about $1M or $2M is sounding stale to me. I've heard that for 25 years now. Inflation has done its dirty work. To me that old advice is translating more to $3M or $5M.

I say that from knowing about a judgement against a friend in the $2M range 25 years ago (covered by umbrella, BTW). This involved the car accident death of a very promising teenager. It would be more like $4M today.

Look, we all have to sleep at night. We can't worry about judgements in excess of umbrella. We could come up with many ways that could happen. The more likely case is you cause serious injury to someone and the judgement is below $1M, but over typical limits of your standard auto or homeowners insurance. You want the insurance to have as much skin in the game as possible. Enter the umbrella. Higher limits, more skin. But that umbrella number only has a weak correlation to your net worth.

One last reference of a recent case: my other friend's daughter had a bad dog that bit a neighbor kid. Homeowners insurance paid $100k on that and non-renewed them. They then had a really hard time getting insurance, got rid of all pets, and finally got insurance but pay an arm and leg.

Bogleheads is full of threads on this topic that will make your head spin. One thing that did come up there: once you do have an umbrella claim, it is nearly impossible to get umbrella insurance ever again.
 
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I also have a 2M umbrealla policy, which offers some peace of mind.

If you have retirment savings in a 401K plan with ERISA coverage,that adds more peace of mind.

At age 62 and retired, I am considering Roth coversions -- and as we all know here, there are many things to consider. One of them is the better protection of retirment money in the 401K vs an IRA. The same motivation to purchase an Umbrella policy argues for leaving more money in my company's ERISA plan.
 
If you are as careful as you reasonably can be (don't speed or drive drunk or leave a shotgun propped against a chair pointed at the front door) then a small umbrella policy of $1M to $2M is probably good enough. Having your assets protected in your 401K helps a lot, because you can tell the person who falls into your fenced pool while trespassing to go pound sand.
 
"It might take awhile but they will find out how much you have..."

Does having your money (cash & investments) under a trust shield it from litagation? This umbrella insurance topic is interesting and like many people I haven't thought a lot about other than just having one.
 
Dropped mine to $1M (slightly cheaper than increasing underlying coverages and covers the weird stuff in case I slander someone here). The more money on the line the better they will defend -most will go to settlement and most plaintiffs are likely to take a settlement unless you are very wealthy and there is a high likelihood of collecting. I'm comfortable with that. FL law protects retirement accounts fairly well in bankruptcy so with a catastrophic claim in excess of my insurance would likely only get about a 1/4 of my LNW that is unprotected and my house is protected by homestead. I have a friend that is a fairly senior negotiator for an insurance company that makes the call on what to pay or to litigate, I'll have to ask him the pragmatic course next time I see him.

There is also the moral aspect, if you really are at fault, would you sleep well knowing the injured party will suffer forever without compensation because you were under-insured/had no attachable assets? I know that I was ticked that the idiot that crashed into me only carried minimum required for property ($10k set in 1979 barely buys a bumper today but back then would cover the full value of most cars on the road). Fortunately, was only property damage.
 
Drake3287 said:
"It might take awhile but they will find out how much you have..."

Does having your money (cash & investments) under a trust shield it from litagation? This umbrella insurance topic is interesting and like many people I haven't thought a lot about other than just having one.
Click to expand...
Pretty sure it wouldn't unless irrevocable... suppose any income distributed to you IAW the trust would be considered income though.
 
slowsaver said:
I hope you're right. But I can imagine a scenario where they say, "this is worth $5M, whether you like it or not." I can't just hold-up the process forever (and force the insurance company to keep fighting on my behalf), because I don't agree with 'the reality' that I caused a $5M injury to someone.
Click to expand...

You're forgetting the plaintiff's attorney wants to get paid.

And that attorney is working on contingency which means the attorney fronts all the costs of the litigation.

So there is significant pressure on the plaintiff to settle once a 7-figure offer is on the table.

Of course, one also has to ask how much of their assets are actually exposed to collection?

Assets in a traditional retirement account like a 401k are protected under federal law.

State law here in the USA can offer even more protection...here any type of IRA of any amount is protected.

And real estate purchased by a married couple is automatically titled 'tenancy by the entirety.'

So that's off-limits as well.
 
I have $3 million Umbrella and my assets are now over $4 million. Remember that you also have underlying coverage- in my case, $500K per person/$500K per accident for auto liability, so that's really $3.5 million total. I also just checked my state and the state to which I'll be moving and I see that IRAs are protected, so I have more than enough to cover any assets they can attach.

My jaundiced point of view from 38 years as a property-casualty actuary: if, heaven forbid, I were to cause a serious accident, (a) the insurer would aggressively defend their interests and (b) most plaintiffs would be so tickled that I had that much coverage that they'd take their millions form the insurance company and go away happy.

FLSUnFIRE said:
There is also the moral aspect, if you really are at fault, would you sleep well knowing the injured party will suffer forever without compensation because you were under-insured/had no attachable assets?
Click to expand...

Sadly, there are plenty of people out there who do. I spend a lot of time on the Insurance section of Reddit and so many people get burned because an at-fault driver with no insurance totalled their car and they don't have Uninsured Motorists coverage and/or they ended up with huge medical bills and had no medical insurance of their own. (Typically the health insurer will pay the claims but then go after the at-fault driver's liability coverage. If there is none, health still insurance covers it.)
 
Drake3287 said:
"It might take awhile but they will find out how much you have..."

Does having your money (cash & investments) under a trust shield it from litagation? This umbrella insurance topic is interesting and like many people I haven't thought a lot about other than just having one.
Click to expand...
Trusts can help, but most people don't have that kind. If you have a self-directed trust where you are the trustee and the beneficiary, then the trust is not going to help you. If you are a beneficiary of a trust where you are not the trustee, then that may protect the assets of the trust. As always, consult your attorney about your trust to find out for sure.
 
We have, I think, a $5 million umbrella policy. We had to max the auto policy coverage and it went up a good bit with our kids on the auto policy (both now in college).

It was a little bit of a weird conversation with the agent when I requested it (small town agent, LCOL area). First comment he made was that he hadn’t seen any that large before and would have to kick it to the home office, followed by asking me why I thought I needed that much.

I mean, how am I supposed to answer that?
 
I just looked it up. Federal law apparently protects all 401k funds from judgements and IRAs are protected to the tune of 1.5ish $M, again federal law. Another reason, beyond the guaranteed income fund access, to keep the 401k open.
 
I'm not a lawyer, and I've been out of the insurance claim industry for 13 years. That disclaimer aside, every injury is not worth millions. It's based on many factors but typical injury claim settles for much less. Truly catastrophic injuries can be in the millions. But there's a practical side to this. If a claim is indeed worth millions, and the insurance policy limit is, say, $2 million, in many (all?) jurisdictions the insurer needs to offer the policy limits as a full settlement. Regardless, where the liability might exceed the policy limit, the insurer must notify you of your potential exposure way before any settlement. Finally, from another practical perspective, it's difficult for a lawyer to pursue assets of an individual (vs the insurance policy) so they will often be eager to settle for the policy limit.
 
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Wouldn't most people spend down at risk assets defending against the lawsuit? Seems like this would also discourage a lawyer from going after that as he would make nothing. Obviously if you are Bill Gates it is different from widow Mary Anne who has $100,000 in the bank and a $800,000 401K.
 
Fermion said:
Wouldn't most people spend down at risk assets defending against the lawsuit? Seems like this would also discourage a lawyer from going after that as he would make nothing. Obviously if you are Bill Gates it is different from widow Mary Anne who has $100,000 in the bank and a $800,000 401K.
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Using the insurance company's lawyers the entire amount of coverage remains available for settlement.

You've paid for their lawyers via the premiums on your umbrella and underlying coverage.
 
sengsational said:
I just looked it up. Federal law apparently protects all 401k funds from judgements and IRAs are protected to the tune of 1.5ish $M, again federal law. Another reason, beyond the guaranteed income fund access, to keep the 401k open.
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From what I read the protections on the 401K flow to a Rollover IRA as the contents can be directly tracked back to ERISA protected assets.
 
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