Umbrella liability insurance is a must for successful entrepreneurs. An Umbrella Liability policy sits on top or over (hence the term umbrella) your other property and casualty insurance coverage, such as auto and home insurance.
Umbrella coverage can protect you against a lawsuit for libel and slander or even an accident on the golf course. It can protect others in your household. Do you know what your child is doing on social media? Their activity can be the basis for a lawsuit against you that an umbrella policy can cover.
Managing risk and minimizing liability are important in protecting your wealth. I bet there are half a dozen ways you have done this in your business that you could think of if you stopped and thought about it. So, why not do it in your personal life?
Let’s say an entrepreneur is distracted by his phone while driving and makes an illegal turn which causes an accident. The other driver sues the entrepreneur. Once you consider legal fees, settlement, medical expenses, and punitive damages the entrepreneur may quickly discover that the standard $300,00 is insufficient.
If you didn’t have an umbrella liability policy and all you had was the $300,000 of protection offered through your auto insurance, the insurance company my pay the $300,000 and wish you luck. It would be your responsibility to find the best attorneys to take on your case and you would be responsible for all legal expenses and any potential settlement in excess of the $300,000 in coverage.
Maybe the entrepreneur has a $1 million umbrella policy that kicks in once the $300,000 limit has been reached. But $1.3 million may not be enough protection for a person who has millions of dollars in investments, cash and other assets that are vulnerable to plaintiff attorneys.
And don’t think you can hide your assets. The plaintiff attorney’s livelihood is based on their ability to find assets quickly and effectively. Attorneys have tools to search for all your assets and will immediately raise their sights even higher for a larger judgement against you if they discover that you have significant assets that they believe they can pursue successfully.
A wealthy entrepreneur may need an umbrella policy for at least $5 million or maybe more. Most insurance companies can provide this for you as part of your property and casualty package.
What if all your money is tied up in your business?
Entrepreneurs often ask me why they need millions in protection if their money is tied up in their business. The reason is simple. Judgements against you require you to pay. PERIOD. If there is a judgement for $3 million and you are making $1 million per year, a judge can garnish your wages for $250k per year until you have paid off the judgement. Even worse, they can pursue your ownership of your business if the judgement is large enough. It is critical to have an umbrella policy large enough to cover all your possible exposure.
An umbrella policy is essentially prepaid legal protection. If your umbrella policy is with a strong insurance company and you are in a costly accident, you can be sure the company will not simply hand over a check for $10 million. They will bring in attorneys and fight the claim. In fact, some policies will pay for you to hire your own attorney to represent your interest alongside the insurance company’s interest in fighting the claim.
The policy that I use also allows me to have they say in any possible settlement. Why is this important? The reason is that while it might be expedient for the insurance company to settle the claim, a quick settlement may be detrimental to your business or your professional reputation.
It is very important for you to understand the terms and conditions of the umbrella policy that you purchase. You may end up with an umbrella policy that does not pay for your attorney and will only focus on the insurance companies’ interest exclusively, no matter what the impact it has on your business or your reputation. Not all umbrella insurance policies are the same, and it is important to find the right insurance carrier that offers the type of coverage you want.
Umbrella liability policies are an important buffer between you, the risks to your assets and your reputation. In fact, it is the biggest bang for your buck because it is some of the least expensive insurance coverage you can obtain. Generally speaking, each $1 million of umbrella coverage will cost you about $300 a year. Assuming you have a clean driving record and don’t engage in any high-risk activities.
High risk activities such as being a private pilot can easily drive up the cost of an umbrella policy. But I’ve seen $10 million umbrella policies that cost just $2500 a year. That is a relatively inexpensive way to shift risk from you to an insurance company. I use the analogy of insurance providing the curtain walls around your castle. The umbrella policy serves as a fire break to absorb the impact of a lawsuit so that your personal assets are either completely protected or the threat to your assets is greatly diminished.
This is a great example of the adage to “control what you can control.” Just like the due diligence you perform prior to purchasing a business lowers the risk of the acquisition, ensuring that you have liability protection in place significantly reduces the likelihood of losing your hard-earned assets to a lawsuit.
Asset protection strategies can be layered on top of one another and coordinated so that legitimate claims against you can be settled with adequate compensation to a victim of an accident and still protect your wealth. And just as importantly they can provide a powerful deterrent to illegitimate or excessive lawsuits against you.
