Mike Kueber's Blog

August 25, 2012

How much liability insurance is enough?

Filed under: Insurance — Mike Kueber @ 5:56 pm
Tags: , ,

An op-ed piece by Ron Lieber in today’s NY Times discusses a subject that was near and dear to my heart as a career auto-insurance attorney – i.e., how much liability insurance is enough?  The subject has renewed interest for me now because I am currently deciding whether to renew my $1 million umbrella policy that I have on top of my $300k auto-liability coverage.

I have always felt that the insurance industry and its consumers fundamentally misunderstood this subject, and I was optimistic that the august NY Times would use its renowned critical-thinking skills to develop a new framework for selecting liability limits.  Boy, was I disappointed.

The major flaw in the op-ed piece is that it unnecessarily complicates itself by including several references to uninsured/underinsured motorist coverage (UM/UIM coverage).  UM/UIM coverage and liability coverage are fundamentally different coverages and the factors that should be considered in selecting the amounts of coverage are different.  Because the scope of this op-ed piece was to discuss the factors relevant to deciding how much liability insurance is enough, there is no good reason for discussing UM/UIM coverage other than giving Lieber an excuse to start the op-ed piece with a long description of a scandalous trial in which Progressive ostensibly fought to blame its insured for an accident and defend the actions of the uninsured/underinsured driver.  To avoid ruining the story, Lieber fails to explain that is exactly what UM/UIM insurance is designed to do – i.e., it is liability coverage that insureds buy for the uninsured or underinsured drivers so that the insureds have a source of recovery for their damages incurred in an accident with the uninsured/underinsured drivers.

After wasting much verbiage on UM/UIM coverage, Lieber provides some relevant and useful liability-coverage information regarding (a) the likelihood of large liability claims that might exceed modest liability limits, (b) the small cost to increase those limits to $1 million, (c) the amount of an individual’s current and future assets, and (d) the practical risk to individuals who are subject to large judgments that exceed their liability limits (house and 401k are usually protected).  Based on these factors, Lieber concludes that he is willing to buy peace of mind by spending an additional $25 a month.    

Although Lieber’s four-point analysis is helpful, it contains three flaws:

  1. $1 million of coverage.  Umbrella policies typically start with $1 million of coverage, but offer limits up to $5 million.  Lieber assumes peace-of-mind is achieved by $1 million of coverage, but fails to apply his factors to higher limits that are available.
  2. Coverage vis-à-vis assets.  Insurance companies often suggest there should be a direct correlation between the amount of an individual’s non-protected assets and the amount of the individual’s liability coverage.  This suggestion incorrectly assumes that a bankruptcy would be more devastating to a person who has $3 million in assets than it would be to a person with only $500k in assets.  That is not necessarily true.  A more relevant factor would be whether the bankrupted person has an opportunity to rebuild an estate.  Thus, a bankruptcy to someone approaching retirement with $500k in assets would be more devastating than a bankruptcy to a young wunderkind who already has $3 million in assets.
  3. Ability to pay.  Lieber attempts to sidestep this issue, which I think is the most important, by placing the cost of $1 million in umbrella coverage at $25 a month, which he assumes everyone can pay.  That position fails to recognize that for some individuals $25 a month is a major sacrifice.  By contrast, others can easily pay more than $25 a month and those people should consider the elevated peace-of-mind that would come with $2-5 million of umbrella coverage.  

Based on Lieber’s factors and mine, I think that continuing my umbrella policy makes economic sense.  Plus, although Lieber failed to mention it, an umbrella policy covers several types of liability claims that aren’t covered by an auto or homeowners/renters policy. 

For me, money well spent.


1 Comment »

  1. Usually, the liability insurance policy shields against things takes place on site or perhaps at the location of the business. This generally protects legal damages due to accidents to property or individuals that were brought on by the company.

    Comment by Kevin Johnson — November 24, 2012 @ 3:56 pm | Reply

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