Many times, the maximum amount of liability coverage you can purchase in a homeowner’s insurance is roughly $500,000. And the maximum amount of auto insurance liability coverage you can purchase is roughly $250,000. So what if somebody is injured at your house and they sue you for $1M? Or what if you wreck your car and cause more than $250,000 in injuries or property damage? Are you simply out of luck and on the hook for the damages?
If you’re found to be liable in one of these situations and your insurance is completely exhausted, you’ll more than likely have to provide for your own defense – meaning you’ll need to pay your own legal fees. Additionally, should the other party prevail in their claim against you – you’ll be responsible for the amount above and beyond what the insurance company paid on your behalf. If you fail to pay, you run the risk of having your bank accounts levied, your wages garnished, and even liens placed on property you own.
So what do you do?
You plan ahead for the worst-case scenario by purchasing an umbrella policy. An umbrella policy is sold in blocks of $1M in additional liability coverage. It can provide additional liability coverage if you find yourself in a situation where you’ve run out of liability coverage on your home or auto insurance policy. And one of the best parts about an umbrella policy is this – it can help to pay for your legal fees.
Want an example?
Here’s a scenario to help understand how this policy works – let’s assume you get in an at-fault car accident and unfortunately you cause $750,000 in property damage. In this scenario, let’s also assume that you only have $250,000 in property damage liability coverage. If your auto insurance carrier agrees that you’re at-fault, they’ll cut a check for $250,000 and then they’re done. They’ve met their obligation to you and no longer have to provide for a defense. You are now on the hook for $500,000 and any legal fees moving forward.
However, if you have an $1M umbrella policy, which is commonly written on what’s called a follow form, your umbrella insurance will kick in and provide for your defense moving forward and could also pay the additional $500,000 allowing you to move on with your life.
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