Do You Have Enough Personal Liability Insurance In Your Homeowners’ Policy?

Quick Answer

Standard homeowners policies start with $100,000 personal liability coverage. That number sounds like a lot until you look at the claims data. About 1 in 830 policyholders faces a liability claim in any given year, according to the Setnor Byer Group (2012). Limits that low can leave real money exposed.

An umbrella policy fixes that gap for surprisingly little money. It picks up where your homeowners or auto policy stops paying, and it typically runs $150 to $300 a year, per the Insurance Information Institute (III, 2013).

Homeowners insurance does more than patch a roof or replace a burned-out kitchen. It’s the thing standing between you and a lawsuit that could wipe out everything you’ve saved.

A typical policy has two halves. Property coverage pays for repairs and replacement of your home and belongings. Liability coverage pays when someone else comes after you for injury or loss they blame on you. That liability piece splits again into personal liability, which handles lawsuits, and medical payments, which covers small injuries on your property no matter who’s at fault.

Personal Liability Coverage, Explained

Most policies default to $100,000 in personal liability protection, based on III figures from 2013. That’s a starting point, not a guarantee it’ll be enough. For a lot of homeowners, it isn’t.

Picture a neighbor who slips on your icy front steps and decides to sue. Or a post your teenager shares online that leads to an emotional distress claim. Coverage usually follows you off your property too. Dog bites at the park. A minor collision while you’re out for a walk. Business losses and auto accidents beyond your car policy’s limits, though, are off the table.

Here’s the math that should worry people. The average annual homeowners premium hit roughly $1,000 by 2012, up 5% from the prior year according to Kiplinger. Now say a lawsuit costs $500,000. Your policy caps out at $100,000. You cover the other $400,000 yourself.

Liability Claims Happen More Than People Assume

In 2012, 1 in 830 homeowners filed a liability claim, according to the III. Do the math and that’s under 0.12% of all policies in force. Small odds, sure. But it only takes one bad afternoon to turn into a six-figure problem.

Florida and California see this more often, thanks to dense populations and outdoor lifestyles that create more opportunities for accidents. Wyoming’s claim rate looks nothing like Florida’s. Yet a single incident there can still trigger a lawsuit that wrecks a family’s finances (III, 2012).

Where Standard Limits Fall Short

A $100,000 limit sounds reasonable until a judgment lands. Then your savings, your retirement account, even a rental property you own can become fair game if a court sides against you.

A Florida case from 2012 makes the point well. A guest slipped on a homeowner’s kitchen floor and sued for $850,000. The court awarded $675,000. Insurance covered $100,000 of it. The family sold investments and drained retirement funds to pay the rest (III, 2013).

Umbrella Insurance Fills the Gap

An umbrella policy works like a backstop. Once your homeowners or auto liability limits run dry, the umbrella takes over automatically, per the III (2013).

There’s a catch worth knowing. Insurers usually require at least $300,000 in underlying liability coverage on your home and auto policies before they’ll sell you an umbrella. Clear that bar, though, and the price is almost embarrassingly low: $150 to $300 a year for a policy that could save your house (III, 2013).

What This Looks Like in Real Life

Say your teenager posts something online that damages someone’s reputation, and that person sues for defamation. Your homeowners policy caps at $100,000. An umbrella policy picks up whatever comes after that.

Texas offers another example. Standard homeowners policies there provide fairly thin liability protection, so a lot of residents in the state buy a separate umbrella policy to close the gap, according to the Texas Department of Insurance (TDI, 2013).

How to Pick the Right Umbrella Policy

Start with your net worth. A $500,000 home, $250,000 in savings, and a nice car add up fast. String together the wrong lawsuit and you’re staring down a $1 million judgment.

Risk factors matter too. A pool in the backyard raises your exposure. So does an aggressive dog. So does living somewhere like New York, where juries tend to award more (III, 2013).

Talk to an agent before buying anything. Sometimes raising your base homeowners or auto limits costs more than just buying the umbrella outright, so it’s worth comparing both routes.

Who Actually Needs This Coverage

Own a home? Have savings? Then you’re a candidate. High net worth households, parents with teen drivers, freelancers, landlords, and anyone with strong earning potential should treat this as close to mandatory.

Even people without much saved up benefit from the protection. A lawsuit judgment can wreck your credit and follow you into future job applications or loan approvals, according to Experian and the CFPB.

Common Myths About Liability Coverage

Myth: your car insurance has you covered everywhere. Reality: auto policies stop at the edge of your car and don’t touch incidents on your property or unrelated to driving.

Myth: an umbrella policy covers anything and everything. Reality: it won’t pay for intentional harm, criminal acts, business liability unless you’ve added it, or damage to your own home.

Is an Umbrella Policy Worth the Money?

Run the numbers yourself. Homeowners insurance averaged about $1,000 a year in 2012. Tack on a $1 million umbrella policy and you’re paying roughly $200 more, according to III data cited by Kiplinger. That’s not much for the protection it buys.

Compare that to the alternative. An American Bar Association study from 2013 found that one in four personal injury lawsuits ends in a judgment over $100,000. Most standard policies stop paying right around there.