What Happens When Your Liability Insurance Limits Aren’t Enough?

Most of us buy insurance hoping we’ll never have to use it. We select liability limits on our auto, homeowners or business insurance policies, pay the premium and may not give those limits much thought again.

But what happens when a serious liability claim exceeds the amount of insurance available?

That’s where conversations about umbrella insurance and excess liability insurance often begin.

These coverages are designed to provide additional liability protection, but understanding whether additional protection makes sense starts with something more basic: understanding where liability can come from and how much financial exposure you may have.

What Does It Mean to Be Liable?

Liability generally involves an allegation that you are legally responsible for someone else’s injury or property damage.

The automobile accident is probably the example most people immediately understand.

Imagine causing a serious accident involving several vehicles and multiple injuries. The resulting claim could involve medical expenses, lost income, property damage and other damages.

But automobile accidents are only one source of potential liability.

At home, questions of liability could arise after someone is injured on your property, an incident involving a pet, or an event involving a member of your household.

For a business, liability exposures can come from customers and visitors, employees, vehicles, products, completed work, property conditions and many other aspects of everyday operations.

The important consideration isn’t whether one of these situations automatically makes you legally responsible. Liability depends on the facts and circumstances surrounding an individual event.

The point is that significant liability claims can arise from fairly ordinary situations.

Liability Isn’t Always About Something You Did

When we think about liability, we tend to think about an action.

Someone caused an automobile accident. Someone damaged another person’s property. An employee did something that resulted in an injury.

But liability allegations can also involve something you didn’t do.

Consider deferred maintenance.

Perhaps a loose handrail wasn’t repaired, a deteriorating step wasn’t addressed or a known property condition was allowed to remain. If someone is subsequently injured, questions could arise about whether reasonable steps should have been taken beforehand.

Businesses face similar questions. An allegation could involve something an employee did, an accident involving a company vehicle or a condition at a business location. But it could also involve something the business allegedly failed to address.

Whether someone is ultimately legally responsible depends on the individual circumstances.

The larger lesson is that liability exposure can arise from both actions and inactions.

What Happens If a Claim Exceeds Your Liability Limit?

Your homeowners, automobile and business insurance policies typically have limits specifying how much liability coverage is available, subject to the terms and conditions of the individual policy.

A serious loss raises an important question:

What happens if the damages are greater than the applicable insurance limit?

That’s a question worth considering before a significant claim occurs.

For some individuals, families and businesses, purchasing additional liability protection may be one way to address that concern.

Two terms you may encounter are umbrella liability insurance and excess liability insurance.

What Is Excess Liability Insurance?

At its simplest, excess liability insurance provides additional liability limits above certain underlying insurance.

Think of the underlying policy as the first layer of protection and the excess policy as another layer above it.

The actual coverage depends on the policies involved, so it’s important not to assume that every excess policy operates in exactly the same way.

The important concept for a consumer is straightforward:

Excess insurance can provide additional limits when the applicable underlying liability insurance is not enough.

What Is Umbrella Insurance?

Umbrella insurance also provides an additional layer of liability protection above specified underlying insurance policies.

You may hear the terms umbrella and excess liability used interchangeably in everyday conversation, but they aren’t necessarily identical.

Depending on the policy, an umbrella may operate differently from a policy that simply provides excess limits. Coverage, exclusions, underlying insurance requirements and other provisions can vary considerably by insurance company and policy.

Rather than focusing solely on what the policy is called, it’s important to understand what protection you’re purchasing and how it relates to your underlying insurance.

Isn’t Umbrella Insurance Just for Wealthy People?

That’s a common perception, but net worth isn’t the only consideration when evaluating liability exposure.

Consider your everyday activities and responsibilities.

Do you drive regularly? Are there multiple drivers in your household? Do you have a young or inexperienced driver? Do people frequently visit your property? Do you own a dog, rental property, pool or other property that may create additional exposure?

And liability isn’t necessarily limited to the value of what you own today. Depending on the circumstances and applicable law, a significant judgment can potentially have broader financial implications.

The better question may therefore be:

How much liability exposure am I comfortable retaining compared with the amount of insurance protection I have?

There isn’t one answer that applies to every household.

Business Owners Should Think About Liability Limits Too

The same basic concept applies to businesses, although commercial insurance can involve very different policies and exposures.

A growing business may add employees, vehicles, locations, customers, contracts or new services. Each operational change can potentially change its liability exposure.

Just as we’ve discussed with other types of business insurance, growth isn’t measured only by revenue. Changes in how a business operates can change its risk.

Business owners may encounter terms such as commercial umbrella insurance and commercial excess liability insurance when evaluating additional liability limits.

The appropriate structure depends on the business, its underlying insurance policies and the exposures involved.

For a business owner, the important question isn’t simply, “Do I have an umbrella?”

It’s:

“Do my liability limits still make sense for the business I operate today?”

Higher Limits, Excess or Umbrella?

There may be more than one way to address concerns about liability limits.

Depending on the circumstances, a conversation with an insurance professional might include reviewing the liability limits on existing policies, considering higher underlying limits, or discussing excess or umbrella coverage.

The right approach isn’t necessarily the same for every individual or business.

That’s why it’s helpful to start with your exposures rather than a particular insurance product.

Consider:

• Who drives your vehicles?

• Do you have a youthful driver?

• What property do you own?

• Who regularly visits that property?

• Have your household circumstances changed?

• Do you own rental or other properties?

• Do you have exposures that weren’t present when your insurance was originally purchased?

• If you own a business, how have its operations changed?

• What liability limits do you currently carry?

• How comfortable are you with the potential financial consequences of a claim exceeding those limits?

These questions don’t tell you how much insurance to purchase. They help start a more informed conversation.

Liability Protection Is Worth Revisiting

Life changes. Businesses change. Risks change.

The liability limits selected years ago may never have been reconsidered even though you’ve purchased a larger home, added drivers, acquired property, started a business or significantly changed your financial circumstances.

Likewise, a business can evolve considerably while continuing to renew essentially the same insurance program year after year.

You don’t need to wait for a major life event—or a serious claim—to review your liability protection.

Understanding the limits you currently have, considering the exposures you’ve accumulated and discussing whether additional protection makes sense can be a valuable part of an insurance review.

The goal isn’t to assume everyone needs an umbrella or excess liability policy.

It’s to ask a more important question:

If something serious happened, would the liability protection I have today still make sense for the life or business I have today?

Insurance Considerations

This resource is intended to highlight insurance and risk-management issues individuals and businesses may want to consider. It is not intended to determine whether a particular claim is covered or recommend a specific amount or type of insurance. Coverage, limits, exclusions and policy terms vary by insurance company, policy and individual circumstances. Speak with your insurance professional about your specific situation.