Becoming the CEO of Your Personal Life –
A Personal Insurance Series: Review Your Liability Limit

Private Client Group

When it comes to risk management and insurance, it’s important to apply your business best practices to your personal life as well. All too often, we overlook assessing our risks and updating our insurance when we make lifestyle changes, grow our wealth, and add (or delete) valuable assets. In this series, we will discuss common sense steps that you can take to be an effective CEO of your personal life.

Your homeowner and auto policies include liability coverage, which responds when you are held legally liable for bodily injury or property damage to others. You may have other policies, such as watercraft and motorcycle, that also include liability coverage. These policies are your primary liability policies. We recommend that all of our clients carry $500,000 liability limits on their primary policies, which will cover the vast majority of liability claims.

An excess liability (or umbrella) policy provides additional limits over your primary coverage for rare but severe large liability claims. While catastrophic losses are uncommon, it’s important to have adequate excess liability coverage for one. After all, your objective is to protect your financial security and lifestyle.

There is no excess liability limit that is appropriate for everyone. Your limit should be based on two factors: your net worth and risk exposures.

The rule of thumb is that your limit should be at least equal to your net worth. Some financial advisors recommend including future income as well. An appropriate limit is important in our litigious society. Once your liability limit is exhausted, courts can liquidate assets — including vacation homes, rental properties, and valuable collections — and garnish future income in order to fulfill your obligations.

Risk factors that increase the chances of a severe liability claim include swimming pools, trampolines, young drivers, toys (e.g. ATVs, motorcycles, snowmobiles), watercraft, large-scale entertaining, and pets. If you are high profile or perceived as a “deep pocket,” people are more likely to sue for a large amount.

It’s important to periodically review your excess liability limit and increase it to reflect your assets, wealth growth, and lifestyle risk factors. People build wealth over time and their lifestyles change over the course of their adult lives. While a lower excess liability limit may be reasonable for young people starting out, it will not remain so as they advance in their careers, marry and have children, buy homes and autos, inherit or invest in property, purchase art and fine jewelry, make a name for themselves in the community, and build wealth over their lifetimes. When we work with prospective clients, we often find that liability limits have not kept pace with the client’s lifestyle changes and financial success, leaving them vulnerable in the event of a large liability loss.

Insurers offer limits from $1 million to $50 million and higher. Premium is based on the limit and exposures (number of homes, autos, watercraft, toys, drivers, etc.), and is typically several hundred dollars per $1 million of coverage. However, the higher the limit, the less expensive each $1 million increment becomes.

While excess liability is a coverage that you hope that you never have to use, it’s essential for a healthy wealth management plan.

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