The conventional wisdom seems to be that people with a higher net worth need to buy more liability insurance on their auto policy, homeowners policy, for their business, an "umbrella" policy, etc. The reasoning given is that people with a high net worth "have more assets to protect," so they should opt for a higher amount of coverage. I've even seen advice that you should buy an umbrella policy that matches your net worth essentially dollar for dollar.
I agree that it makes sense in many cases to have reasonable amounts of liability insurance. Courts have been known to award damages in excess of $1 million to plaintiffs who have been seriously injured in car crashes, slipping on the sidewalk in front of someone's house, or plenty of other circumstances. I'm just curious where the logic comes from that says you should increase your coverage as your assets grow.
My understanding of the process is that if you are sued and lose, any liability insurance you have will pay out up to the coverage limit, and you're responsible for the rest if the verdict says you're liable for more than the insurance limit. The amount of damages awarded should theoretically be determined only by the nature of the victim's injury, and should not be in any way influenced by the quantity of insurance you bought or how much money you have available to pay any court-ordered damages. After the verdict comes down, if you don't have enough money to pay what you owe, you may have to go through bankruptcy and the victim will get most of your assets, but they will not end up collecting as much as the court ordered. Am I wrong about the general process here?
Back to the question of how much insurance to buy...
Suppose you have two people: Mr. A has a $1 million net worth and Ms. B has a $2 million net worth. Each of these people carries a $500,000 liability policy on their auto insurance when they get into a crash that kills the driver of the other car. In each case, the court awards $2 million in damages to compensate the victims' families. In each case, the insurance pays the first $500,000 of damages, leaving $1.5 million left for the defendants to cover. Mr. A doesn't have $1.5 million, so he goes bankrupt and is left with nothing. Ms. B, on the other hand, has $2 million, so she pays the defendant $1.5 million and is left with $500,000 in assets after all is said and done.
Obviously Mr. A and Ms. B would both have benefited from a higher liability limit on their policies in this case, but it seems like Mr. A was left worse off by the judgement than Ms. B was. So why then does the conventional wisdom say Ms. B should carry a higher amount of liability insurance than Mr. A? She does have more assets to protect, but those assets also help to make any lawsuit less likely to cause bankruptcy, even if there was no liability insurance at all.
It seems to me that no matter how much insurance you have, there's always a possibility that you could be found liable in a lawsuit for a higher amount than that. Someone with a small (or negative) net worth would have less need for liability insurance beyond any legally required minimums because they would be unable to pay any meaningful amount to the victim and would have to declare bankruptcy whatever the amount of the judgement was. Someone who has managed to save up some assets, on the other hand, has plenty of reason to insure themselves to protect what they have. But again, it seems to me that the more assets you have, the more able you are to weather the storm of any lawsuit, so if anything you should buy less liability insurance.
Am I missing something here, or is the conventional wisdom wrong?
