r/personalfinance • u/dereku1967 ​ • 9h ago

Too much umbrella insurance? Auto

I am not an attorney, but I work with one in a large company. We were talking a few weeks ago about umbrella insurance. She said she only carries $1M, because the first thing the opposing attorney will ask for is for the total insurance amount available. She believes a higher Insurance value makes you more of a target. I’m currently insured for $5M, and if there’s any logic behind this, maybe I should drop mine down to just $1M.

For context, I’m in my mid 50s, but have one son who will be driving on his own in about a month, and a daughter who is still only 15 so I’m just now approaching my nervous years.

47 Upvotes

84% Upvoted

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u/murppie ​ 9h ago

So I used to sell insurance and your attorney friend is the kind of customer who worries me. The fact that they are a lawyer makes them a target because your umbrella policy should cover your assets.

Think of it this way. A normal person making 50k/year who rents an apartment and owns an old Toyota Camry. They've got $3k in their bank account and they get into an accident and kill someone. What money could the family of that person go after? $3k in the bank? garnish their wages? If that person has a $1 million umbrella policy any personal injury lawyer takes a settlement.

Now take your attorney friend making $200k+/year. They own a $2 million home, $1 million lake house, rental properties, they own 3 BMWs, they have $100k stashed away for a vacation fund, they've got $10 million in stocks. They kill someone in an accident and they have a $1 million umbrella policy, why would any lawyer accept that $1 million settlement when ? They would see $$$$ and the amount of assets they have and pursue that until they win.

At the end of the day, your liability coverage should protect your assets.

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u/dereku1967 ​ 9h ago

Great feedback. Makes a lot of sense. Thank you.

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u/agreetodisagree2023 ​ 5h ago

I’m an attorney. What that guy said.

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u/jocall56 ​ 8h ago edited 8h ago

Thanks for posting this helpful answer - I have a follow up I’m hoping you won’t mind answering…

What prevents someone from going after both the liability policy AND the assets?

I’m in between those extremes you described above - moderate assets and an equivalent liability policy. I know its responsible to have the liability policy, but I never got a straight answer as to how I’m not simply doubling what is available to go after.

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u/SpiteFar4935 ​ 7h ago

The short answer is nothing. If you screw up badly enough the injured party (or more likely their estate) can go after both your insurance and your assets. But your insurance pays first. A trial is a risk and there is guarantee a jury will award a high dollar amount. If you have enough umbrella coverage the other side is overwhelming likely to settle within your coverage limits unless the damages are really, really severe. 

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u/uptimefordays ​ 5h ago

Is this actually common though? I see this hypothetical on Reddit semi frequently but don’t see this happening in the insurance industry.

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u/SpiteFar4935 ​ 3h ago

I don't think it is common which is why umbrella insurance is not very expensive. But uncommon is not the same as impossible.

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u/thegreatgazoo ​ 2h ago

Plus umbrella policies bring out insurance lawyers with teeth. My dad had an at fault accident and his lawyers brought the guy he hit down to his knees. The guy was claiming a $150k/year income but when pressed it was discovered he hadn't filed income taxes in years. Oopsie. He sued for something like $350k and ended up settling for around $30k.

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u/BurningBridges ​ 6m ago

Yeah. This. If the insurance company is on the hook for up to $5m, they will fight tooth and nail to keep the payout as low as possible. You’ll get the A team.

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u/uptimefordays ​ 54m ago

I mean isn’t insurance a game of risk assessment? If you’re getting $3m coverage for $30 a year, like someone else in this thread mentioned, the risk seems remote.

This seems like something unsophisticated people do for asset shielding.

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u/RockAndNoWater ​ 36m ago

It was $30/month, not $30/year, and that still seems low, though it depends on a lot of things including location.

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u/uptimefordays ​ 22m ago

Ah that’s my mistake but still $360 a year for $3m coverage is quite a deal.

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u/Getthepapah ​ 5m ago

For me, in my HCOL area with my insurer, Travelers, it’s ~$400 for $1M, ~$775 for $2M, and ~$1K for $3M (annually).

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u/murppie ​ 6h ago

Generally untrue in my experience just FYI. When insurance pays out you generally have to agree not to pursue the other party.

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u/SpiteFar4935 ​ 6h ago

That assumes you are willing to settle at or under the limits of the insurance policy. Your insurance does not determine my damages. If you run me over in a crosswalk because you are texting while driving, me (or more likely my estate) is going to sue you for a heck of a lot more money than your standard auto insurance liability coverage. 

Now, you can't get blood from a stone so if you are broke I will likely settle for the policy limit. But if you have assets I am going to want those assets over and above your insurance policy. Now, if you have 3M in an umbrella policy I might settle for that 3M and not pursue you other assets but no guarantees.

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u/W_HoHatHenHereHy ​ 7h ago

Nothing. And, more and more Plaintiff's attorneys, I am seeing, are doing just that.

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u/Available_Media_9164 ​ 5h ago

This raises my question of, how much larger should the policy be above my personal assets? I am new to learning about car insurance

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u/johndoe5643567 ​ 3h ago

Perfect point. However, I’d love to know what attorney or any professional with 200k in yearly earnings owns a 2 mil primary home, 1 mil vacation home, 3 BMWs, 10 mil in stocks, etc.

I know it was illustrative but it gave me a good laugh

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u/Hiredgun77 ​ 3h ago

I think you vastly overestimate the assets of a typical attorney.

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u/GoogleOfficial ​ 1h ago

Every attorney has an 8 figure net worth. They just work 80 hours a week for fun since being an attorney is low stress and emotionally rewarding.

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u/Superb_Republic1573 ​ 5h ago

Except that - speaking as someone who has collected on quite a few verdicts - collecting money from a house (which is usually jointly owned) or from the sale of a used car (even a bmw) is more difficult than it would seem. And I’ve seen plaintiffs attorneys add defendants who really weren’t involved just to add an insurance limit to the tally sheet.

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u/lilkil ​ 7h ago

I'm a personal injury attorney and this is the correct answer. I always do an asset search on a defendant before I accept policy limits to settle.

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u/johndoe5643567 ​ 3h ago

How easy is it to do an asset search? Like could someone from the general public do one or do you need special software (Lexus nexus or the like)?

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u/centex ​ 8h ago

Just because someone is a lawyer doesn't mean they know anything about insurance.

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u/coelomate ​ 1h ago

or law.

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u/Technical_Slip393 ​ 9h ago

Wouldn't the second question be how much in assets? And if the second is significantly more than the first, that's bad news. I have a spreadsheet with two net worth numbers. True net worth and exposed net worth. The true net worth includes everything. The exposed net worth excludes 401ks and state's homestead exemption. IRAs are fair game in my state, but not in a lot of them. I make sure my umbrella is as much as my exposed net worth. 

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u/UGA10 ​ 3h ago

Where can I find what assets are protected in my state (Georgia)? Google isn't very helpful but it seems like Retirement Accounts (401k and IRA) and Home up to homestead exemption.

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u/Elegant_Gain9090 ​ 7h ago

You buy umbrella insurance so that your insurance company will give your case to the "A Team".

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u/SomePeopleCallMeJJ ​ 6h ago

I wasn't aware that Mr. T was a claims adjuster.

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u/Frosty_Yesterday_674 ​ 6h ago

I pity the fool why doesn’t get sufficient umbrella coverage.

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u/hippo96 ​ 6h ago

Exactly. If you carry a lower liability limit, they won’t fight as hard, or even at all, in some cases. When the potential payout is 200k vs 2 Mil, the insurance company gives the claim a different look. It is easily worth 15k on investigation when the payout might be 2 mil.

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u/JayFBuck ​ 6h ago

What's your net worth outside of your primary home and ERISA-protected accounts (401k, etc.)? If it's less than $1 million, then you only need $1 million insurance. You only need $5 million if your net worth exceeds $4 million.

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u/blacklassie ​ 9h ago

There may be some truth to this but it’s probably better asked in a legal sub.

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u/lurkinglestr ​ 4h ago

Free legal advice from internet strangers is worth as much as you pay for it (nothing). Any lawyer that gives advice on the internet without meeting the client and talking through the problems is, at best, breaching ethical responsibility, and very likely committing malpractice. Source, I'm a lawyer.

Tl;dr, don't take legal advice from reddit -- anywhere on reddit.

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u/MommotDe ​ 5h ago

How much do people pay for this kind of coverage? I only just learned this existed this year, and also only reached the point in life where I have some assets, but I know nothing about umbrella insurance and don’t have any.

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u/mezolithico ​ 5h ago

Its cheap but you have to have all your insurance under the same company typically. Ours is like $30/month for $3 mil

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u/TradeCivil ​ 9h ago

In the end, it comes down to your assets. If your net worth is below $5m, you probably may want to reduce this. If it is close to, or above, that you probably want to keep it there. What is your auto policy limit?

In auto accidents, the injured party can only (usually) go after total damages. Meaning, if they have $25k in medical treatment, they are capped at close to that amount (they may settle for $50k). They can't go after the $1m in umbrella coverage. If their medical bills exceed your policy amount, they can go after the umbrella, but only for the amount that exceeds policy.

Do you insure a vehicle that is used for work purposes (delivery, etc)? There are a lot of reasons why one would need a higher umbrella policy and just as many as why one wouldn't. More information is needed, though.

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u/Flashy-Chemistry6573 ​ 2h ago

If you’re making 300k a year but only have 50k in assets they’re definitely going after more than just your assets.

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u/kepler1 ​ 8h ago

If that logic holds, she better just drop the coverage to $0, then no one will ever come after her! The less the better -- what's the point of insurance anyway, huh?

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u/clybstr02 ​ 9h ago

From what I’ve heard previously, it depends on the state whether opposing council can discover this. I’d seek advice from local attorney

I personally only have $1M, but I also don’t own many assets outside of retirement and primary residence.

If I think about my liability. Biggest risk is injury to another driver, say long term health care. I’d have $300k with my primary insurance, $1M with my umbrella, and any of the rest would be on me. I’m comfortable with that level of risk.

Now, when my kids start driving (next year), I might up it to $2M.

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u/MHGLDNS ​ 9h ago

I can’t speak to the number that makes you more of a target. To me, you can’t be a target unless something happens (a real accident/incident) or people think you are wealthy enough to go after for frivolous things.

Umbrella insurance is cheap. I think for folks who can afford it, 1M is a good baseline number just because a single accident could easily hit that number. Beyond that, it depends on what you have and what you want to leave vulnerable to being taken away if something terrible happened. Employer sponsored retirement accounts appear not to be vulnerable in many states. But, IRAs are vulnerable. Other accounts are vulnerable. Depending on where you live, your real estate may be vulnerable.

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u/FRICKENOSSOM ​ 1h ago

Besides covering your assets if you have a $5M umbrella your insurance company is motivated to hire good attorneys to defend the suit as they don’t want to pay out.

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u/93195 ​ 9h ago

If you’re already at the point of potentially getting sued over something, having $1M or $5M of insurance doesn’t change the outcome.

You’re still getting sued.

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u/W_HoHatHenHereHy ​ 7h ago

Umbrella/insurance use to be to cover your assets. What I have found is that Plaintiff's attorneys are no longer settling just for policy limits. They are looking at insurance policy limits as a part of a defendants total assets for potential recovery. So, if you're worth $1MM and have $1MM in coverage, and the Plaintiff has $2MM in reasonable potential damages, more and more Plaintiffs' attorneys, I have found, are going to push for more than just policy limits.

FWIW - Attorney and carry $5MM in umbrella coverage as that is the worst case scenario I can reasonably come up with for how much damage myself or a person covered by my policy could cause someone else to suffer.

Edit - * for clarification

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u/SpiteFar4935 ​ 7h ago

5M is a healthy amount to carry but you can exceed that in a motor vehicle accident, especially if you live in an area with a lot of high earners. Basically worst (reasonable) case scenario is to be at fault in an accident with a mid-career professional with a family. You really don't want to run over a 40 year making 400K a year. High earners with lots of potential earning years left will mean a LOT of future lost earnings. 

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u/W_HoHatHenHereHy ​ 7h ago

I agree, it's possible for us to injure someone at higher than our current limits. But, in my own cost-benefit analysis, $5MM is where I landed.

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u/SpiteFar4935 ​ 6h ago

Honestly I think that is reasonable and agree. You can't insure everything and 5M will protect you from the vast majority of bad outcomes. 

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u/dereku1967 ​ 9h ago

Interesting perspective. Thank you. I like making decisions with the help of spreadsheets. Helps me “see” the issue better. I’ll look into this.

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u/AdamN ​ 4h ago

The policy limit is how much the insurance company will pay their lawyers to defend you, because they’re a business. The higher the limit the more effort they’ll put in to minimize their outlay in the case of a liability suit.

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u/IKnowAllSeven ​ 2h ago

I thought you wanted the total of your auto pilicy and umbrella to be the same or more Than your assets, and assets include 401k and primary residence. Is that not right?

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u/Ineedanro ​ 13m ago

No. They stack, meaning the umbrella policy has a floor. It does not start at 0; you need it to start at the top of your "underlying" insurance. Your liability coverage on your automobile and home policies should match that floor, so you don't have a gap, but not be higher than that floor, so you don't waste money. If a 1M umbrella policy starts at, say, 500k, then your umbrella policy is providing only the 2nd 500k of coverage, which is why it is so cheap, and you have to carry 500k liability on your auto insurance. Most claims won't go over 500k, so if it is an auto accident the umbrella policy does not come into play.

This is also why you need to inform your agent promptly when your circumstances change, especially if you add a person to your household or add a driver, because your policy may need to be rewritten.