Having spent several years in the insurance industry where I saw my fair share of claim situations, I still get a chuckle out of all the commercials out there. Whether it’s the Farmers Insurance “We are Farmers” commercials, which include a moose destroying a motor-home as it tries to untangle its antlers from a swing; or Allstate’s infamous character, Mayhem, portraying a poorly secured Christmas tree falling from a car in the middle of traffic and causing a major accident; or jogging as the “hot babe” who distracts a young driver, causing him to plow into a telephone pole. As uncommon as they sound, these accidents actually do happen in real life.
One of my former colleagues once related a story about a sad pizza delivery driver who tried to dislodge his car from a ditch. Since he was all alone, his idea was to place the car into gear, run to the rear, and push or kick the rear bumper repeatedly until the vehicle was free. He tried this approach, and to his surprise and horror, the car came out of the ditch and began traveling down the road, taking him along with it. His pant leg had become caught on the bumper and he was dragged mercilessly for one whole mile until the car finally stopped. Along the way, the car struck a parked vehicle on the side of the road. Although he suffered from a broken ankle and abrasions up and down his body, the pizza guy lived to report the accident. While it didn’t seem like an accident to most reasonable minds, it certainly wasn’t intentional. The damage caused to the parked car was covered under his property damage liability coverage within his insurance policy.
Liability Insurance 101
All crazy accidents aside, liability insurance is very important for the preservation of one’s wealth. Liability coverage pays for the treatment of injuries and the repair of damage caused to others in an accident. It will also provide a legal defense for you in the event you are sued.
Automobile liability insurance limits are the maximum amounts the policy will pay out for an accident. You’re legally responsible for any costs that exceed the limits. Generally, the liability limits are expressed as three numbers that refer to the amounts the coverage will pay for bodily injury and property damage. A policy with 250/500/100 liability coverage means it will pay up to:
- $250,000 for injuries per person, but limited to
- $500,000 for all injuries per accident
- $100,000 for property damage per accident
Most states require car owners to buy liability insurance. For example, the Washington state minimum amount is $25,000/$50,000/$10,000. State requirements are obviously not coverage recommendations—they’re just the minimum amounts needed by a person to be able to drive legally. Injuries and property damage from a car accident can easily eclipse state minimums. Can you imagine “totaling” a Tesla, or any newer car for that matter, with only $10,000 in property damage coverage?
Shifting over to bodily injury claims, according to ISO, an insurance risk information service, about five percent of injury claims exceeded $100,000, while two percent reached $300,000 or higher. Additionally, Jury Verdict Research recently reported that the average award in a wrongful death case was $1,450,000. If an individual only had the state minimum level of coverage in any of these situations, they would be legally exposed to the injured party or related parties (i.e. insurers, hospitals, etc.), devastating their personal net worth.
How frequently do auto accidents occur in the US? According to Driver Knowledge, the US had an estimated 6 million crashes within one year, causing approximately 33,000 deaths, with three million individuals reporting injuries.
Understand your current coverages to protect wealth
As part of our client review process, we always want to understand our client’s entire financial situation. As our clients grow older, their net worth is also growing. It is not uncommon for individuals to have a net worth of several million dollars when they reach retirement age. So, it’s very important for them to properly protect their assets, not just for themselves, but for their loved ones.
If your insurance agent has not been made aware of your current level of assets, you may only have either negligible coverages or the state’s minimum coverages. That is precisely what one of my clients recently found out. Although he had worked with his insurance company for over 25 years, he only had the state minimum level of coverages. This client, who was nearing retirement with a net worth over one million dollars, could have easily had his life’s savings wiped out because of a lack of insurance protection.
Costs are minimal to improve protection!
The Insurance Information Institute estimates that it costs about $200 extra annually, per vehicle to take your liability limit from $50,000 to $1 million per accident. In my client’s case, his coverages could increase from 25/50/10 to 1.3M/1.5M/1.1M for around $250 more per year—approximately 30 times more coverage for about $20 more per month. That was an easy sell for my client and his insurance agent! (These limits included an *umbrella policy.)
Speaking of umbrella policies, the Insurance Information Institute also reports that a $1 million umbrella policy costs about $150 to $300 a year. A second million is another $75, and a third is $50. The umbrella policy typically has a $300,000 or $500,000 deductible, meaning that you must raise your basic coverage to match-up the two policies and prevent a gap in coverage.
In Conclusion
Some areas of life are insurable, others are not (or they become too cost prohibitive.) However, protecting one’s wealth through a proper and appropriate level of liability coverages, including an umbrella policy, is one of the easiest and relatively lowest cost insurance products available. As our clients’ Financial Partner for Life, we want to be certain their long-term financial objectives are met. By working with our clients and their property and casualty insurer, we make sure they have the best and most appropriate levels of protection available. Since most of our clients have accumulated assets over many years of hard work, it always makes sense to protect their wealth from whatever life throws at them, or for that matter, that Mayhem guy.
Bob Lagonegro, CFP®
*An umbrella personal liability policy extends the basic coverage provided in different types of liability coverage, including home, auto, boat and tenant policies. This type of policy provides broad coverage, meaning that some claims that would not be covered by a standard policy may be covered under the umbrella policy.
