A California driver ran a red light at 50 to 70 mph in a 25 mph zone. He collided with a taxicab carrying two passengers, got out of his car and fled. One jury gave him a three-year prison sentence and $271,000 fine for fleeing the scene of an accident. Another one awarded his victims more than $2.7 million in damages. While an appellate court returned the case to a trial court because of mistakes made in admitting evidence, the final judgment was likely more than $2 million.
The news was even worse for a Florida driver. His car collided with a motorcycle at an intersection, killing the bike's driver. A jury ordered him to pay the driver's estate $8 million. He had purchased only $100,000 of insurance.
Three homeowners on Long Island, New York hosted a party that spilled over from one day to the next afternoon. At some point, a 29 year-old woman became severely intoxicated and drowned in the swimming pool. Her mother sued the homeowners and party guests for wrongful death and other counts, seeking $40 million in damages.
In each of these cases, a personal umbrella policy would have helped the people being sued. It picks up where an auto or homeowners insurance policy leaves off and provides extra protection.
Every insurance policy states in its information pages the maximum amount that the insurance company will pay for a loss. These amounts are called "limits" of insurance; insurance buyers usually have several choices for limits, up to the most the company will offer.
In the cases of both auto and home policies, if the amount of the loss is greater than the amount of insurance, the policyholder is responsible for paying the rest. The driver whose car killed the motorcyclist owed $8 million, $7.9 million more than he had in insurance.
An umbrella takes over when the insurance in auto and home policies is used up. Usually, the insurance company will require the home and auto policies (the "underlying" policies) to have limits at a certain level or higher. This reduces the likelihood that the umbrella will have to cover a claim. Once the underlying policies have paid out their full limits for a loss, the umbrella takes over, paying up to its own limit.
The higher the umbrella limits, the more protection the policyholder has, and the additional cost to increase the limits gets smaller the higher they go. For example, the cost of going from $1 million to $2 million is a fraction of the cost for $1 million; the cost of going from $1 million to $5 million may be about the same as for the first $1 million.
Large amounts of liability insurance are affordable and can save a family from financial ruin. Every family should consider buying as much liability insurance as it can afford.