Sometimes, life's bittersweet music of chance hits a really bad chord. And that's when umbrella liability insurance coverage-or excess liability coverage-can help your client.

Maybe it's black ice in front of his house and somebody trips on his gravel. Maybe it's an auto accident where he happens to be a hair above the legal blood alcohol level. Maybe he's in a tangle on the road and ends up paralyzing another driver or killing a bicyclist.

Whether you believe in Murphy's law or favor the teleological position that everything happens for a reason, sooner or later, people often find themselves on the business end of a big lawsuit, and the half-million or so in homeowners insurance isn't going to cut if a child gets hurt on a trampoline in your client's backyard. Or if there's an accident in his swimming pool. Or if his dog bites somebody. Maybe one of his errant golf balls smacks somebody in the head or he gets sued for sexual harassment. Or his child libels somebody on the Internet.

Have you done enough to make sure that they are covered? In other words: Have you reminded them of getting excess liability insurance? Very often, they don't have enough, and you may make life easier for these clients later if you push them to get it now-and send them back to the property and casualty agent.

Basic homeowners insurance normally taps out at about $500,000. Car insurance can sputter out at $300,000 to half a million. Where those policies leave off, umbrella policies take up the slack, kicking in and providing the excess coverage for a much bigger claim. Such policies can sometimes even drop down in situations where for some reason the insured person cannot collect from the primary underlying policy (as long as they aren't specifically excluded by the underlying policy). In some instances, says Loretta Worters, vice president at New York's Insurance Information Institute, personal umbrella policies may also tackle losses that don't qualify for the underlying liability insurance, in other words, they "drop down."

Almost all insurance companies offer umbrella coverage, but many won't go above $5 million in coverage. To go above that, the sterling names for the wealthy are Chubb, AIG, Fireman's Fund, the Hartford and Atlantic Mutual, according to New York's Insurance Information Institute.
The best part is, this insurance is still very cheap-starting at $200 to $500 a year for a million in coverage. Many planners say that, if you've got any substantial assets to protect, there is no good reason to not get it.

"I would always strongly recommend it because they are not real expensive," says Brian Boak, a personal insurance specialist with Singer Nelson Charlmers, a Teaneck, N.J., firm that sells policies for clients and in many cases provides independent analysis of them. "You can get $1 million in excess liability for between $250 and $500 a year, and then every million on top of that is, say, another $150 or so. Once you go to $5 million, then the next step is generally $10 million and then $15 million to $20 million. I can get $50 million in excess and $100 million if I have to."

Given the increasingly high sums being paid out by defendants in personal injury suits, there are those who believe even a million is not enough coverage anymore. "Most people should have more than a million," says Dick Weber president of insurance consulting firm the Ethical Edge Inc. in Carlsbad, Calif. "And here's the example: My close friend's wife was in an automobile accident, and while there still seems to be some question of whether the other driver was perhaps going over the speed limit-or she, in turning left, had a legal left-all of that pales to the fact that the other driver was injured to the point of being paralyzed for life. Now there are lots of real expenses associated with that. There is the vast consideration of pain and suffering and there is the consideration of this young man's livelihood being limited by his physical limitations."

Excess liability coverage has often been deemed the private preserve of the ultra-wealthy, but advisors say that, given how cheap it is and how far it goes toward protecting vulnerable assets, anybody in a multi-million-dollar lawsuit (in other words, anybody with a pool, a dog, or teen drivers at home) could be taken to the cleaners if they don't have it.

Missing Inaction

However, despite its value and low cost, many are without it or they are underinsured. Some planners insist that it is undersold by the property and casualty agents who are supposed to be its most vigorous defenders.

"I've never had anyone resist the need for liability umbrella insurance," says Keith Newcomb of Full Life Financial in Nashville. Yet, he says, "I have lots of clients who have never heard of it because the agent didn't bother to quote it. It's one of those coverages that's an afterthought from the P&C agents. I would imagine the reason is that it's a very low premium, which means a very small commission."

Dwayne Aaron, a property-casualty agent with State Farm Insurance in Scottsdale, Ariz., denies this and says small commissions are not the reason fewer policies are sold. Instead, he says, it's more often simple parsimony on the part of the customer who comes in to buy insurance on a tight budget.
"The P&C agent wants to sell it," says Aaron. "They don't get paid for not offering it. [The client has] got an idea in mind what they want to pay. And when you suggest the other coverages they need, it's all well and good that they need additional coverage, but they've already set their minds on what their budget is for insurance and at that point they may not be that receptive to purchasing an additional policy."

He says, however, that when the clients hear it from a planner, they often come scurrying back to the P&C agent now that the idea has been reinforced by a trusted fiduciary.
It sounds like a passive-aggressive way to sell the insurance. But it also underscores an advisor's role as the person who has the potential buyer's ear more than the carrier or the insurance broker. This goes for the rich as well.

"I'm not sure if your high-net-worth client is going to initiate the need for an umbrella," says Patrick Gillotti, vice president at Duble & O'Hearn Inc., a New Haven, Conn.-based insurance broker for high-net-worth individuals. "I think with their lifestyles and the responsibilities they have to their business and family, I'm not sure this is something they're thinking about. I think the initiation of an umbrella should come from a center of influence ... an advisor, etc., etc."

Dropping Down

Gillotti's colleague Greg Wheeler, president and owner of Duble & O'Hearn Inc., says that, beyond offering people higher levels of coverage, an umbrella policy can be helpful to broaden the coverage beyond what the underlying liability insurance might take care of. It depends on each policy, but the more aggressive players like Chubb, Fireman's Fund and AIG, he says, are coming out with more sophisticated contracts that can be more extensive in the protection they provide.

"For one, when you have a personal umbrella of a certain magnitude, you may have broader territorial definitions," Wheeler says. "For example, you may have a primary auto liability policy in the United States that doesn't follow you overseas. And yet the use of a hired or non-owned car overseas, or what have you, may be covered by your personal umbrella. It varies from one insurance company to another."

He also mentions umbrella contracts for things like sexual harassment and what he calls personal injury torts-discrimination, libel and slander. "There may be broader coverage in these areas with the personal umbrella in our experience," he says. Furthermore, depending on the policy, an umbrella may help provide a broader definition of the name who is insured-meaning that resident relatives and people within your client's care can also be covered. It all depends on the policy.

Mind The Gap

Knowing how much insurance a person needs often means that as an advisor, you have to do an extensive fishing expedition for information.
The way the policy usually works is that the customer must have purchased the maximum amount of primary, underlying coverage (which in many cases they don't want to do). Again, this maximum coverage is often $300,000 for auto (though Boak says some companies will go up to $500,000) and $500,000 for homeowners insurance. These maxed-out coverages are necessary not only for defensive purposes but also because they are acting as the deductible on the umbrella; if the gap is not closed, your client might have to buy a whopping amount out of his own pocket to make up the difference.
Boak says that when he is analyzing policies for non-clients, one of the biggest problems is that people find themselves underinsured because they haven't told their advisors about extra homes, extra property-extra whatever-that a grabby plaintiff might eye covetously in a lawsuit.

He uses the example of a vacation home or a junker the client keeps elsewhere, say in Florida, that they don't tell their insurance agent back home about. "And they won't add the condo or the auto onto the excess liability policy because they'll forget about it-or they'll add it on, but [then] they won't have enough liability coverage. Now they have a gap in their coverage."

For example, take a woman who has bought an umbrella policy for a million dollars, but has an auto policy down in Florida that she hasn't told her insurance agent about for a car she uses during vacation. The policy down south gives you $100,000 per person and $300,000 for accident and liability. But the umbrella policy requires you to first get higher limits of $250,000 for the car and $500,000 per accident. Maybe the agent in the customer's main state of residence has not seen the copy of the declaration page. What you have here, Boak says, is a recipe for disaster.

"Let's say you get into a lawsuit. The insurance company pays out the first $100,000. The umbrella policy says: 'Well, you had to have $250,000.' So instead of paying out the $900,000 difference between the $100,000 and a million, you're only going to get $750,000. So there you have a $150,000 gap in coverage. You pick up $150,000 out of your own pocket and the insurance company picks up the remaining $750,000."

It can happen with a car, says Boak, or with something like an uninsured condo-something the clients sometimes don't even get primary coverage for. Suddenly that uninsured pretty pink stucco condo is standing between you and your umbrella payout if something happens.

"I've seen it on many reviews that I've done," Boak says. "Either they don't add it onto the policy or the insurance broker forgets to ask them for the declaration page so that they make sure they have proper coverage. I've had lots of people say, 'I bought a condo because I want to save money on residency for my son to save money on in-state college tuition.'

"You bought it six months ago? Were you ever going to tell me?"

How Much Is Enough

According to Wheeler, price is driven by the number of houses and cars and toys the client has-where someone with one home and two cars for $5 million might pay $300, the person with three homes and five cars may pay $800 or a $1,000. But in the vast scheme of things, umbrella coverage is still cheap to $5 million. However, $5 million is where a lot of insurance companies stop, he says, which is when you go to the higher end players-the Chubbs, AIGs, Fireman's Funds. These carriers will likely require that all of your primary insurance switch to them as well. And beyond that level, the insurance will start to climb back up in price, because that's when reinsurance costs become more part of the process.

"The price of the second $5 million typically is double, if you will, because there is the cost of that reinsurance sneaking into the limited market of those who provide it," Wheeler says. "So if the first $5 million costs a thousand bucks, the second $5 million might cost another $2,000. It's counterintuitive, but it's all about reinsurance and availability."