Umbrella Coverage: Protect Your Exposed Assets

There’s no doubt that we live in a litigious society.  Jury awards continue to bankrupt individuals and many small companies.  Some trial lawyers constantly search for deep pockets, and reach far and wide for defendants.  Underwriters continue to be amazed to find seemingly unconnected insureds “invited to the dance.”

The most common protection for a business, or for an individual of means, to use against a crippling judgment, is an umbrella policy.  Umbrellas provide high limits of liability, usually with a small ($10,000 is typical-and this is sometimes waived) self-insured retention, above those offered by primary Commercial General Liability and Auto Liability policies.  Umbrellas may also provide coverage for certain losses not covered by primary policies.  Professional exposures such as Directors and Officers Liability or Errors and Omissions coverage, are excluded from “conventional” umbrella policies.  High limits for those risks are available from specialty markets.

How do you know how much umbrella coverage is enough?  While the question is best answered by information you’ll collect from your accountant, attorney and insurance agent, many company underwriters recommend buying limits of two to two-and-a-half times the value of your exposed assets.  Exposed assets are those that would not be exempt from liens or judgments, and a list of specific items may well be different for every insured.  For example, the deed to a wealthy individual’s primary residence might be in a foundation, blind trust or some other instrument that’s out of reach, but the vacation home, boat, stock portfolio, etc., might be exposed.

If that individual’s liquid net worth is $2,000,000, a $4M to $5M umbrella might be adequate.  There is some science, and some art, to making a decision on limits.  If you or your client is “luminous,” you might consider the exaggeration that will likely occur should you or that client be found at the defendant’s table.  A few years ago, a very successful professional tennis player, at the zenith of a stellar career, carried $50M in umbrella limits.  The player, unmarried and with no dependants to support, had five homes, nine cars, and significant other assets.  That player attracted a lot of notoriety off the court as well, and while celebrities are often the targets of frivolous lawsuits, our tort system can find that the same injury to an innocent party is worth more if it was caused by an individual of means.

A business, especially one with stockholders, has to answer the “adequate” question from an entirely different perspective.  Not only do physical properties, product inventories, valuable research, good will, cash, bonds, etc., have to be fully protected, the company’s value to stockholders must also be covered by adequate liability limits.  A stock certificate is owners’ equity, and a successful class action suit or an uninsured product recall campaign, could prove catastrophic to its value.  Imagine the aggregate costs if, say, a bug in a Microsoft product fried the motherboard in all those millions of computers that run its software.  Imagine the cost if, say, a hole in the AOL gateway gave someone with malicious intent a free ride through all the data on the PCs of their some 30,000,000 subscribers.  And high tech isn’t the only vulnerable industry-what if Dial soap suddenly made all our hair fall out?  Or what if Minute Maid (owned by Coca Cola) Orange Juice made us break out in hives?  The immediate and consequential dollar losses stagger the imagination.

Finally, the right number for an umbrella or excess limit is one you, your accountant, attorney and insurance agent and carrier(s) are comfortable with.  Remember that in some cases, plaintiff’s counsel has the right to know how much insurance coverage there is to pay a given claim.  Don’t buy so much that you make yourself a target.  Get the best advice you can, and buy limits that make sense and that you can afford.