A New York suburban homeowner recently discovered why reading fine print on insurance policies is crucial: He hired an independent contractor to work on his roof. The contractor, unfortunately, took a tumble through a skylight window and is threatening to sue the homeowner. Fortunately, the homeowner has a personal-liability policy that would kick in if a settlement against him exceeded what's covered in his basic homeowner's policy.
Welcome to the fine-print world of insurance: Tell your local insurance man that you have a peppy dog, rambunctious children, a neighbor down the block who occasionally grumbles at you - or a big tree that looks like it might be leaning slightly over the back fence - and he'll probably steer you toward an "umbrella" policy.
"It is supplemental insurance, purchased in addition to an underlying policy," such as an auto, homeowner's, or renter's policy, says Steve Goldstein, an expert at the Insurance Information Institute in New York.
Liability insurance covers legal damages, up to the policy amount, related to violations of another person's rights. These infractions, called torts, can be unintentional or intentional.
Generally, some liability coverage is included in auto or homeowner's insurance. But if you were hit with a really big damage claim, or one not covered in the underlying policies, the umbrella policy adds crucial coverage.
Civil lawsuits can include a host of issues including civil rights and even pollution (do you have a septic tank?) as well as accidents, says George Rejda, a professor of insurance at the University of Nebraska, Lincoln. A claimant might seek to grab your house and bank accounts or garnish your future paychecks.
At least 7 million Americans have umbrella liability policies. "The number is growing," Mr. Rejda says, as lawsuits resulting in massive judgments against individuals have become commonplace.
Umbrella policies are sold by most property/liability insurers, such as State Farm, Travelers, and Allstate. Since the insurance is based on the risk in a community, prices will vary. Coverage can usually be taken out in increments of $1 million, up to $10 million. Typically, it costs $200 to $250 for $1 million of coverage. The cost per million declines as coverage goes up.
A policy should cover all your assets, and possibly twice that to be safe, some financial advisers suggest. Anyone with a very high salary, substantial assets, or a position of authority may need more than $1 million of coverage, Rejda says.
Most policies require that certain minimum liability amounts be maintained on your underlying auto and home policies. If those limits are not met, then the umbrella policy may pay only the amount that the underlying policy would pay had the basic limit been met. Often it makes sense to buy liability, auto, and home coverage from the same company to avoid potential squabbles among insurance firms.
And what if you lack an underlying policy? Say you don't have auto insurance and you borrow a friend's car and then get into an accident, causing a big legal judgment. Without an auto policy, any liability insurance you carry usually won't cover you.
Umbrella liability policies will not pay for a judgment levied on a criminal act - even though the case is a civil one. What constitutes a criminal act is sometimes determined after a case has been initiated.
In the recent civil trial of O.J. Simpson for the deaths of his ex-wife and her friend Ronald Goldman, the compensatory and punitive damages are not covered by liability insurance, Mr. Goldstein says. But Mr. Simpson's legal fees were paid through a special agreement with his insurance carriers. President Clinton's insurance carriers have already paid him money for his legal defense against Paula Jones's sexual-harassment suit.