Insurance Coverage Limits (What I am missing)

[TheContinentalOp]

Under the theory that your liability insurance should protect all your assets, I recently upped my coverage on my car insurance to U$300,000. (I have about 300,000 in assets outside of my IRAs and 401-k.)

But what would happen in car accident where I am at fault and the victim sues me for six hundred thousand dollars? It seems to me I am still at risk. And if I upped my coverage to a million, what is stopping someone from suing for 1.3 million or more.

Yes, the actual damages could prevent a victim from suing that much, but if that's the case, the amount of coverage I should have should be based on the damage I can do, not the assets I own.

Somewhere I believe my reasoning is wrong on this issue. But I am not sure where. Who can point out my error?

[jim555]

IRAs and 401-ks are exempt assets when it comes to lawsuits.  Anyone with assets should increase liability, or get an umbrella policy for at least a million.
Lawyers look for deep pockets.

[Mississippi Mudstache]

Lawyers are likely to sue to the extent of your insurance coverage or assets. It makes no sense to sue a homeless dude for $100,000, because you'll never recover the money, and it makes just as little sense to sue a guy with $1 million for $10 million, because they will be equally unlikely to recover. Lawyers are really into getting paid, and extracting your assets or insurance coverage is far easier than assets that you don't own or insure.

[startingsmall]

I have an umbrella policy worth (I think) $2 million.

Do I have anywhere near $2 million in assets? Heck no. But I'm a veterinarian.... and I worry that in my (low-income, impoverished area) people and their lawyers will see "Dr." and assume that I have deep pockets, leading to a situation in which my future wages could be garnished. Do I really need the umbrella policy? Probably not, but it's not very expensive and it helps me sleep better at night.

[TheContinentalOp]

I think I am not making myself clear.

Someone suggested that you will be sued for the total amount of your assets or the maximum coverage of your policy. Why wouldn't the lawyer sue you for your total assets PLUS your policy limits.

What good is a $2 million umbrella policy if they sue you for 2 million plus the value of your assets?

If the answer is the damages are unlikely to be that high, that suggests policy limits should be based on the damage you could do, not your net worth.

[WerKater]

I think I am not making myself clear.

Someone suggested that you will be sued for the total amount of your assets or the maximum coverage of your policy. Why wouldn't the lawyer sue you for your total assets PLUS your policy limits.

What good is a $2 million umbrella policy if they sue you for 2 million plus the value of your assets?

If the answer is the damages are unlikely to be that high, that suggests policy limits should be based on the damage you could do, not your net worth.

For what it's worth, I agree with you.
In practice, I suppose the problem is that the damage you can cause is essentially limitless, so a damage-based rule doesn't get you anywhere. That may be why "insure your total asset sum" is used as a rule of thumb.

[terran]

This is just a guess based on nothing in particular, but perhaps the thinking goes that a person is unlikely to put up a big fight if they go after the full amount of your insurance, but once they start going after your assets you're likely to put up a bigger fight. So if the relative value of your assets (big fight) compared to insurance (easy money) is high, it might be worth the fight, but if it's low (at least as much insurance as assets) then better to just take the easy money and move on to the next case. Just a thought.

[patchyfacialhair]

The whole "cover yourself with liability limits that are the amount of your assets/net worth" is an ineffective way that agents are trained to discuss liability limits on Day 1 of "insurance agent training." Its meant to get customers thinking about limits higher than state minimums, which, believe it or not, is the most common coverage selected.

If you cause $2 MM damages, and only have $1 MM coverage, could the difference come from your personal assets? Of course. Especially if you have $1 MM in assets (see a lawyer in your state to find out what assets are excluded from judgment). Could a third party decide to settle for the $1 MM policy limit because collecting anything beyond that isn't worth more lawyer fees? Absolutely.

Here's a better way of thinking: what's the likelihood of causing $2 MM damage? Very slim. $1 MM damage? Also very slim.

Therefore, I urge you to just ask yourself if the cost of the coverage is worth the piece of mind? If $1 MM costs you $100 a year...well, maybe you think that's a drop in the bucket, and a no-brainer for 7 figures of coverage. If you're high income or high profile (meaning you have Dr. in front of your name), and have worked hard for many years to obtain high income/assets, just realize that the same advice above applies, only that some extra scrutiny from third parties is likely if you cause injuries to said third parties. In that case, you may want to spring for the next level of coverage.

Source: Former licensed agent.

[Mississippi Mudstache]

This is just a guess based on nothing in particular, but perhaps the thinking goes that a person is unlikely to put up a big fight if they go after the full amount of your insurance, but once they start going after your assets you're likely to put up a bigger fight.

Not exactly what I was thinking. When you take out, say, a $1 million umbrella policy, the insurance company agrees to be liable for the first million of any judgment rendered against you (with specific exemptions, typically). The insurance company doesn't want to pay out that million. They want to take your money and keep it. They employ good lawyers who will fight to keep the money and make it very difficult for anyone with a frivolous lawsuit. If you are clearly liable for a judgment (and possibly even if it's not clear) they will probably push to settle out of court, and the opposing lawyers will usually be eager to avoid court as well. It's not cheap for either side, and there's no guarantees. Court is typically a long, drawn-out process, especially when millions are on the line, and it's usually advantageous for the opposing lawyers to milk your insurance company for as much as they can get out of court and move on to the the next client, even if that's not what's best for the client.

Anyway, I'm not an expert, but that's how it was explained to me when I asked the same question. Any lawyers/insurers care to chime in on this one?

Edit to add: patchyfacialhair chimed in just as I was posting. Thanks for your insights, I was hoping to hear from an insurance agent!

[nawhite]

For a more MMM type of response:

"Your liability limits should equal your net worth" is totally bullshit advice and isn't based on reality. Like everyone else here is saying, get limits to cover the most expensive thing you are likely to be liable for that you can afford because if you are sued for more than that, just assume you'll be going bankrupt.

Personally I see the most expensive thing I could do as either "I fell asleep at the wheel and crashed into a minivan full of attractive, young cheerleaders" or, "the house I rent out blows up while full of attractive, young cheerleaders." I use attractive young cheerleaders as the example because they win huge settlements in court compared to old, ugly people with no dependents. Young attractive people who are killed win settlements of between 1mm and 5mm per person in court. So worst case for me, 8 cheerleaders at $5mil each is $40million is the worst thing I could do. That's the cap for liability limits, not my net worth.

The only question is "how bad is it if you went bankrupt?" If bankruptcy is "I might commit suicide" bad, you need to insure against the worst thing you might do ($40 million). If bankruptcy means "oh well, I don't have any un-protected assets anyways" then you can get minimum coverage. If you're somewhere in between like "I guess bankruptcy makes me 3 years farther from FIRE than I thought, oh well" then maybe you cover X% of the van full of cheerleaders.

For me today, that math works out to $1 mil in umbrella coverage. As I get closer to FIRE, that number will go up because bankruptcy would be worse for me. I don't think it will ever hit $40 million for me, but it might be close to that high in the couple years leading up to my FIRE date and slowly go down as I get closer to collecting social security. To each their own.

[woodnut]

I have 500k limits on auto, 300k on home, plus a 1M umbrella.  Sure your upper limit exposure is technically limitless.  My attitude on really big liability exposure is this.  If you've done something in your car that exposes you to a multi-million dollar liability, then the lawyer with ads on TV is the least of your worries.  The lawyer with DA after his name is your bigger concern.  My point being is that I don't worry about really big exposures, because your life as you know it will be over anyway.  No need to insure against it.

Oh and our insurance company just settled for $250K for a fuck up my wife had 3.5 yrs ago.  I'm glad we had the $1.5M coverage.

[Dezrah]

I have a relative who is a plaintiff's attorney (personal injury, auto accident, workplace accident, etc.).  Inevitably, all they care about is policy limits.  Mostly it's just very rare that the liable party is independently wealthy.  Even if they are, it's an enormous expense and hassle to actually seize and liquidate real property.  Insurance settlement is a comparatively smooth, expedient process.  Negotiating within the insurance limits makes all parties more likely to settle and move on.  Asking for more basically guarantees you'll be going to trial and nobody likes that.

That's not to say they won't come after you if you're wealthy.  They told me about a case where they had a client with substantial and ongoing medical bills.  It was very clear the other party was at fault.  The guy tried to settle by claiming he only had some low amount of insurance (or maybe even none at all), except he sent this on letterhead from a prestigious wealth management and legal firm.  Maybe he was trying to impress or intimidate them, but all it did was clue them into the fact he was worth tens-of-millions.  He was hardly derelict by the time they settled.  I have no idea if it was any more or less than they would have gotten if there had been more appropriate insurance limits.

It's unlikely a firm would come after your $300k in stocks and property, however.  That's not an amount that would be worth the hassle.  Eventually though they will start to care, but again, they'll probably leave you alone if there is adequate insurance limits instead.

Bottom line: get a reasonable amount of insurance, keep on your insurance company to defend you if something does happen, and go about living your life.

[Jrr85]

This is just a guess based on nothing in particular, but perhaps the thinking goes that a person is unlikely to put up a big fight if they go after the full amount of your insurance, but once they start going after your assets you're likely to put up a bigger fight.

Not exactly what I was thinking. When you take out, say, a $1 million umbrella policy, the insurance company agrees to be liable for the first million of any judgment rendered against you (with specific exemptions, typically). The insurance company doesn't want to pay out that million. They want to take your money and keep it. They employ good lawyers who will fight to keep the money and make it very difficult for anyone with a frivolous lawsuit. If you are clearly liable for a judgment (and possibly even if it's not clear) they will probably push to settle out of court, and the opposing lawyers will usually be eager to avoid court as well. It's not cheap for either side, and there's no guarantees. Court is typically a long, drawn-out process, especially when millions are on the line, and it's usually advantageous for the opposing lawyers to milk your insurance company for as much as they can get out of court and move on to the the next client, even if that's not what's best for the client.

Anyway, I'm not an expert, but that's how it was explained to me when I asked the same question. Any lawyers/insurers care to chime in on this one?

Edit to add: patchyfacialhair chimed in just as I was posting. Thanks for your insights, I was hoping to hear from an insurance agent!

It may be different in different jurisdictions, but the original amount sought is typically unrelated to insurance.  They take what they could theoretically get a verdict for for each element of damages, and then they tack on an additional amount to each element give themselves leverage/room to negotiate.  How big that additional amount is depends on the attorney. 

If they have an idea of how much insurance is available, if anything they will adjust their damages amount to ensure that they are asking above policy limits.  This creates a potential conflict where once you're past deductibles, the insured just cares about settling within policy limits, while the insurance company of course would rather just fight once the settlement gets to a certain percentage of policy limits (and the limit may be reduced for costs of defense, so their incentive to settle really goes away).  If the plaintiff's lawyer is lucky, he will end up with a defendant insured that actually asks for an independent attorney, who is then basically ethically obligated to encourage settlement at any number up to policy limits if he thinks there is actually a risk of a verdict going above policy limits. 

[ltt]

Call me naïve, but people are not going to just turn over their assets to someone, no matter how much or how little they have.  People, even with assets, still have to live.  You can sue someone all you want, but collecting is a whole different matter.

[onlykelsey]

IRAs and 401-ks are exempt assets when it comes to lawsuits.  Anyone with assets should increase liability, or get an umbrella policy for at least a million.
Lawyers look for deep pockets.

This is not true.  Retirement assets are not exempt in all states, especially if they aren't covered by ERISA (ie IRAs).  You need to look at state law.

[franklin w. dixon]

You could also get framed for a murder, or struck by a meteor, or lose all your assets when they're seized by the provisional government of Greater Cascadia under Executive Order 1 of First Commissar Biff Tannen

[Dezrah]

I have a relative who is a plaintiff's attorney (personal injury, auto accident, workplace accident, etc.).  Inevitably, all they care about is policy limits.  Mostly it's just very rare that the liable party is independently wealthy.  Even if they are, it's an enormous expense and hassle to actually seize and liquidate real property.  Insurance settlement is a comparatively smooth, expedient process.  Negotiating within the insurance limits makes all parties more likely to settle and move on.  Asking for more basically guarantees you'll be going to trial and nobody likes that.

That's not to say they won't come after you if you're wealthy.  They told me about a case where they had a client with substantial and ongoing medical bills.  It was very clear the other party was at fault.  The guy tried to settle by claiming he only had some low amount of insurance (or maybe even none at all), except he sent this on letterhead from a prestigious wealth management and legal firm.  Maybe he was trying to impress or intimidate them, but all it did was clue them into the fact he was worth tens-of-millions.  He was hardly derelict by the time they settled.  I have no idea if it was any more or less than they would have gotten if there had been more appropriate insurance limits.

It's unlikely a firm would come after your $300k in stocks and property, however.  That's not an amount that would be worth the hassle.  Eventually though they will start to care, but again, they'll probably leave you alone if there is adequate insurance limits instead.

Bottom line: get a reasonable amount of insurance, keep on your insurance company to defend you if something does happen, and go about living your life.

I would like to amend this.  My relative stated that it would be common for a plaintiff to pursue non-protected assets in the $300k range.  You're especially a target if you own properties besides your personal residence.

Their advice is to get umbrella insurance.  If an incident happens you DO NOT need another lawyer beyond the one the insurance company provides for you.  You should however, make it explicitly clear to that lawyer that you WANT to settle within your policy limits.  If this is a reasonable amount to settle for, that lawyer is obligated to follow your instructions even if they'd like to save the insurance company more money. 

Most plaintiffs will settle for the "reasonable" amount.  If they do not follow your instructions and the plaintiff wins a judgement beyond the policy limit, you now have the right to sue your insurance for not following instructions.  It's likely the plaintiff will actually work with you at that point to help you successfully sue for the amount over the limit. 

Now if you have a policy limit of only $50k and a reasonable settlement is closer to $400k, your insurance won't be able to help you for that additional $350k, so you would be on the hook for that.

[Jrr85]

If an incident happens you DO NOT need another lawyer beyond the one the insurance company provides for you.  You should however, make it explicitly clear to that lawyer that you WANT to settle within your policy limits.  If this is a reasonable amount to settle for, that lawyer is obligated to follow your instructions even if they'd like to save the insurance company more money. 

Most plaintiffs will settle for the "reasonable" amount.  If they do not follow your instructions and the plaintiff wins a judgement beyond the policy limit, you now have the right to sue your insurance for not following instructions.  It's likely the plaintiff will actually work with you at that point to help you successfully sue for the amount over the limit. 

This is probably going to be jurisdiction specific.  In some jurisdictions, the insurance lawyer is required to notify you that there is a potential conflict between the insured and insurance company's interests.  The insured then has to request that the insurance company provides separate counsel that only represents the insureds interest.

And I'm not sure you will be able to sue the insurance company for not following instructions.  You should be able to sue an attorney that breaches his obligations to the insured.   

[AlwaysLearningToSave]

IRAs and 401-ks are exempt assets when it comes to lawsuits.  Anyone with assets should increase liability, or get an umbrella policy for at least a million.
Lawyers look for deep pockets.

This is not true.  Retirement assets are not exempt in all states, especially if they aren't covered by ERISA (ie IRAs).  You need to look at state law.

It's mostly true.  Assets held in a 401(k), 403(b), 457 plan, or an IRA are exempt assets in bankruptcy proceedings.  There is a $1,000,000 limit to the exemption for IRAs, so a creditor can potentially reach IRA assets greater than $1,000,000 (as adjusted by inflation index).  Assets held in a qualified retirement plan (i.e. 401(k) or 403(b)) are exempt with no limitation on the amount of the exemption.  Here is a good presentation from the National Institute of Pension Administrators that goes over the basics in the first few slides http://c.ymcdn.com/sites/www.nipa.org/resource/resmgr/2013nafe_presentations/naegele_2s.pdf (note that it is a few years old and a secondary source, so take what it says with a grain of salt).  See also 11 USC 522(d)(12) and (n).  https://www.law.cornell.edu/uscode/text/11/522

OnlyKelsey is correct, though, to point out that whether a creditor can access an IRA in garnishment proceedings is determined by state law, so a creditor may be able to reach those assets if the debtor doesn't go through bankruptcy. 

I think this bankruptcy protection is an underappreciated benefit of retirement plans.  A Mustachian whose 'stache is held mostly in real estate or other taxable accounts has significantly less protection from creditors than one whose 'stache is held primarily in retirement accounts.  You should take this into account when choosing liability/umbrella insurance coverage and limits.  Edit to add: Someone with a sizeable real estate portfolio should also consider using a limited liability company (or companies) to hold their real estate. 

As others have mentioned, the policy limits are a powerful practical tool when it comes to negotiating settlements.  But there is no reason why a plaintiff could not sue you for more than the policy limits and pursue your assets.  Often the benefits of pursuing additional assets don't justify the costs of doing so, but this is a practical limitation, not a legal one. 

[electriceagle]

The whole "cover yourself with liability limits that are the amount of your assets/net worth" is an ineffective way that agents are trained to discuss liability limits on Day 1 of "insurance agent training." Its meant to get customers thinking about limits higher than state minimums, which, believe it or not, is the most common coverage selected.

It makes sense to have liability limits that are significantly larger than your siezable assets. By siezable assets, I mean assets that are not exempt from bankruptcy.

Suppose you have a net worth of $800k. $500k is in retirement accounts, $200k is in home equity (in a state with strong homestead exemptions, and 100k is in non-retirement investments.

If you have an umbrella of $1M (an order of magnitude more than your seizable assets), an opposing lawyer is likely to settle for your limits rather than battling in court to try to get the other $100k. If your liability limit is only $100k, they might find it worthwhile to fight to get to $200k.