An insurance policy for stormy times

CHICAGO — Most Americans have auto insurance, health insurance, dental insurance, homeowners or renters insurance, life insurance, maybe disability insurance.

Enough insurance already, right? Why shell out for umbrella liability insurance, especially in an economic crunch when every little payment stings more than usual?

It may make sense, especially if you have significant assets. Experts call this umbrella a savvy, inexpensive investment against a high-cost lawsuit that could result from anything from a car wreck to your job to a neighbor's fall on your front steps.

Umbrella liability insurance is so dubbed because it acts like an umbrella, poised above a buyer's auto and homeowners liability policies to provide extra protection. It kicks in when the liability limit is reached on the underlying coverage, paying for judgments against you as well as attorneys' fees, all up to a stated limit.

Say you have $300,000 in liability insurance on your homeowners and auto policies and disaster strikes: A tree on your property falls and crushes a neighbor's home or you or your teenager rear-end a car, severely injuring or even killing someone.

Relatively affordable

If you are sued and a settlement or court judgment finds you liable for $500,000 or $1 million or more, the umbrella takes care of the difference.

As insurance tabs go, this one isn't steep. A typical $1 million personal umbrella liability policy might cost $150 to $200 annually, with each additional $1 million in coverage going for $50 to $75 more.

"It's not necessarily for everybody, but it's not a bad investment," said Sally Greenberg, executive director of the National Consumers League. "It does provide the consumer with some peace of mind that they wouldn't have otherwise."

Experts differ on who exactly needs it.

Etti Baranoff, associate professor of insurance and finance at Virginia Commonwealth University, considers it a basic building block for a sound financial plan.

"I think it's for everybody — at least anybody who owns any kind of property and has any money in the bank," said Baranoff, a former state insurance regulator in Texas.

The Insurance Information Institute calls it essential for almost anyone.

"Umbrella policies used to be viewed as something needed only by the wealthy," said Loretta Worters, spokeswoman for the New York-based industry group. "But with changing economics and the fact we have become such a litigious society, it makes sense for all homeowners to buy some umbrella coverage."

Greenberg and some other experts, though, say it's only critical for those with substantial net worth — perhaps $500,000 or more — or those in professions that might make them targets of lawsuits, such as physicians, lawyers, financial planners or teachers.

"If you don't have much in the way of assets, there's not much reason to have it," said Gary Lanzen, a director of the Society of Financial Service Professionals and vice president of Brooks & Stafford in Cleveland. "An individual with a $200,000 home and $100,000 in investments or less probably doesn't need it."

$270,000 average payout

While the odds of a huge judgment against any particular individual are very low, the amount could be devastating. The Pennsylvania research firm Jury Verdict Research says the average verdict in U.S. personal-injury cases from 2000-06 was $928,151 and the average award from personal-negligence lawsuits exceeded $1.4 million.

At State Farm Insurance, the nation's largest insurer, the average total payout in cases where the umbrella came into play last year was $270,000.

While the majority of claims filed under umbrella liability policies are from car accidents, most umbrellas also protect against lawsuit awards for libel, slander, defamation of character and other claims.