Explaining Personal Liability Insurance and Who Should Have It

June 10, 2023 Stan

While anyone who owns a home or drives a properly insured vehicle has a good idea of what respective liability insurance plans protecting each is for, many have no idea what personal liability policies are about and who should purchase such protection. Also known as umbrella insurance, such policies pay the costs that go beyond what traditional protection is provided through vehicle or homeowners insurance policies and pay the costs those types of coverage can’t.

A car insurance or homeowners plan comes with marginal levels of liability protection in case someone is injured or property damaged by some event caused on or by the insured property. If a vehicle swerves and strikes another, for example, the cost of the damages and any injuries inflicted would be covered up to policy limits.

But those limits can be very low compared to the potential cost of medical payments, damage claims, lawsuits, and court judgments against the owners of the vehicles. And in such situations, many people might find themselves filing for bankruptcy and seeing their homes and other assets turned over to the accident victims and their attorneys.

And if someone is injured or killed or their property is damaged or destroyed while in an insured home or on a property owned by the policyholder, the costs could wipe out those assets. While the potential for a total loss could be alleviated through a simple bankruptcy filing for many people who own very little and might rent their homes instead of owning them, those who own a great deal more and have a large bankroll, as well as many tangible assets, benefit greatly from personal liability insurance plans.

Personal liability insurance plans generally are very affordable for the levels of protection than can provide. Policy limits can run as high as $1 million or more, and they have relatively low premiums because home, auto, and other property plans already provide a measure of such protection, which limits the number of likely claims to be paid by the broader personal liability coverage. Because of the comprehensive protection provided, such plans earned the name “umbrella” insurance due to the broad range of coverage provided.

People who can benefit the most from umbrella policies include owners of large, expensive homes and other properties, business owners, and those who have a great deal of cash or investments that would be vulnerable to costly lawsuits and legal settlements without the protection of umbrella coverage. While unfortunate to acknowledge, the more assets a person has, the more likely he or she is to be targeted by a lawsuit, whether or not it has merit.

But even the cost of a frivolous lawsuit can run high. And the right kind of protection can keep family homes and assets in family hands instead of being liquidated to pay for a legal challenge or potential court settlement. When the possible cost of losing a home or other assets greatly outweighs the cost of carrying umbrella coverage, purchasing such protection is a necessity.