An Overlooked Risk to Wealth: Personal Liability

Investors spend a lot of time thinking about market risk (volatility, interest rates, and economic cycles). Liability risk tends to get far less attention, even though it can have a more immediate and lasting impact on wealth.

Market losses tend to play out over time and often recover. Liability risk doesn’t work that way. It can show up all at once — without warning — and it’s enforceable. Wealth built over decades can be put at risk in a single moment.

Standard homeowners and auto policies include liability protection, often capped at $500,000. That sounds like a lot until you compare it to the size of real claims. Serious accidents can produce seven-figure judgments, particularly when medical costs and lost income are factored in.¹ A meaningful percentage of personal injury awards now exceed $1 million. Larger jury awards have also increased in recent years. This creates a real gap between typical coverage and the size of a serious claim.

Umbrella insurance is excess liability coverage that sits on top of your underlying policies (auto, home, etc.). The umbrella policy kicks in after the underlying coverage limits are exhausted. In effect, it is designed to bridge the gap between standard policy limits and the potential scale of real-world claims. Umbrella coverage typically starts at $1 million and increases in $1 million increments, protecting both your assets and future income if you are found legally liable.

Many significant liability claims arise from ordinary activities, such as driving a car, hosting guests, maintaining property, or other everyday activities. Common scenarios include:

• Serious auto accidents
• Slip-and-fall injuries
• Dog bites

For many families, additional exposure can come from factors such as teenage drivers, swimming pools, domestic employees, or rental properties. In some cases, even personal activities such as social media use can create liability exposure.

As wealth and complexity increase, so can exposure to liability risk, making appropriate protection an important consideration for many households. How much umbrella coverage is enough?

Many people size umbrella coverage based on net worth while accounting for assets that may already be protected from creditors, including qualified employer plans, such as 401(k)s. But that may not be enough. In some cases, liability judgments can extend beyond existing assets and impact future income through wage garnishment, which is something to factor in when deciding on coverage.

For individuals with more complex financial situations — multiple properties, business interests, or higher public visibility — higher levels of coverage may be appropriate. Umbrella policies can often be layered to provide $5 million, $10 million, or more in protection.

The right amount of coverage depends on your financial circumstances and your specific risks. It should be evaluated as part of an overall financial plan. Policy structure can vary, including how legal defense costs are treated, which may affect the amount of protection available.

Of course, umbrella coverage doesn’t cover everything. Common exclusions include intentional acts, criminal activity, and damage to your own property.

Umbrella insurance is just one component of a broader risk management strategy and can work alongside other planning considerations, such as:

• Asset titling
• LLC entities for rental property
• Trust planning
• Maintaining adequate underlying insurance limits

Umbrella insurance does not create wealth, but it can help preserve it. As part of a financial plan, it helps ensure that an unexpected liability event doesn’t undo years of progress.

Few planning decisions offer millions of dollars of protection for such a modest cost. Speak with your Forum advisor about how to insure your property and your balance sheet with proper umbrella coverage.