September 20, 2023

You Can Stand Under My Umbrella

In Insurance, Wealth Strategy

In a world where unforeseen circumstances can swiftly turn the tides of fortune, safeguarding one’s wealth becomes paramount.  For wealthy individuals, protecting their hard-earned assets requires more than the average homeowner’s insurance.  Enter the realm of large umbrella insurance policies, a vital component to protect against the unforeseen and unpredictable.

The internet is full of insurance claim stories that operate outside of “normal” perimeters.  There is the goose that, instead of laying the golden egg, devoured a diamond ring, which was never seen again (it was reported that the woman who lost it did go through droppings for several weeks in hopes of recovering it). What about the burglar who got locked in a garage for a week and had to subsist on dog food and soda?  He sued the homeowners for mental anguish and was awarded $1M for his troubles in trying to escape a home he was robbing!  And the heartbreaking tale of a homeowner who lost their entire collection of expensive wine to a sewer line bursting.

Now, I know what you’re thinking, “these things could never happen to me.”  And while we hope a goose never takes off with your ring, more common accidents could happen (e.g., teen getting into a car accident where the friends in the car are injured, your rental property tenant becomes ill from carbon monoxide poisoning, or your dog bites a guest in your home).  How does one mitigate risk when the unpredictable happens?

Most homeowners have insurance – it’s on the cars, the home, and the people (through medical and dental).  However, there are many – especially those living in the “Success Geography Bubble” – that don’t realize they are significantly underinsured based on their neighborhood alone.  People living in these bubble neighborhoods (also known as the “Palo Alto Bubble” effect) don’t take into consideration both their own balance sheets AND the balance sheets of their neighbors.  Meaning, if something happens to a neighbor’s property and it’s attributed to your household, you could be held liable.  Accidents will happen and an umbrella policy needs to be broad enough to cover the unexpected.

The first thing a homeowner needs to assess is the risk posed in their immediate household.  This is the baseline “balance sheet” of assets and risks of the known entities in the house.  Questions to ask oneself include (but are not limited to)[1]:

  • Do you entertain guests in your home?
  • Do teenagers live on the premises?
  • Do you host children’s birthday parties at external venues?
  • Do you employ household staff, such as chefs, nannies, housekeepers or house managers?
  • Do you and your family travel regularly for business or pleasure?
  • Do you own a second residence?
  • Do you own a pool, hot tub, or trampoline (or other recreation equipment) on house grounds?
  • Are your home(s) held in trust or LLC?
  • Do you serve on the board of a non-profit or charitable organization?
  • Do you own or operate recreational vehicles, such as jet skis, watercraft, motorcycles, etc?

If “YES” was the answer to any of the above questions, insurance coverage became more complex.  Inviting guests into a home opens up the possibility of others being hurt or injured on your property.  If a child gets hurt at a birthday party you are hosting, you could be held responsible for the safety and care of all guests present.  Pools and other bodies of water on a property pose a risk of drowning even under the most vigilant eyes.  And don’t even get us started on teenagers; even the most responsible of teens are at risk of distracted driving or are one reckless decision away from hurting themselves or others.

Unlike conventional insurance that has capped coverage limits, umbrella policies provide extended liability protection when the underlying policies are exhausted.  This comprehensive coverage ensures your family is shielded from substantial financial losses due to lawsuits, accidents, or other unforeseen events.  The simple math for assuring adequate insurance is Your Home’s Value + Assets + Annual Income = basic coverage amount.  Large umbrella insurance policies can be customized to your specific needs and potential risks.  This adaptability ensures that the coverage aligns with your unique lifestyle, assets, property holdings, and investments.  This can include properties, art, wine cellars, cars, or other collections that need safeguarding.  That said, in many affluent areas, the minimum umbrella policy is $10M, and increases based on the assets covered.

It’s also a good policy to do research around both the laws and the average awards for litigants in your region.  Washington state, as an example, is implementing a new system for hit-and-run alerts which will give law enforcement additional tools to catch those involved in a hit-and-run accident.  While the state may be able to find the driver that hit your car, it doesn’t guarantee monetary compensation for a driver that doesn’t have insurance (and probably doesn’t have enough money to cover damages either).  In many insurance lawsuits, the plaintiffs are awarded more than $10M, which if not properly covered by insurance, could be the defendant’s responsibility to repay out-of-pocket.  Knowledge is power, and understanding what an ‘average’ insurance lawsuit could be will help guide you and your financial advisor on how much is reasonable for an umbrella policy.

While large umbrella insurance policies can come with a premium cost, they offer substantial benefits that we believe far outweigh the expense.  Especially for those living in the success bubbles of today, umbrella insurance should be viewed as an investment which safeguards your assets and those of a neighbor.  Many high-net-worth families underestimate the needed coverage and can be under-insured based on current insurance trends.  A good rule of thumb is to re-evaluate your umbrella policy every 24 months to ensure it is kept up to date with the value of your assets and liabilities.

[1] Questions provided by CHUBB Masterpiece Excess Liability

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