Setting Liability Limits

How much liability coverage is enough?

Only a psychic would know.

A person only needs liability coverage if they are sued.  The limits only need to equal the claimant’s demands.  A psychic, with a clear vision of the future, is the only person qualified to recommend liability limits.

The Issues to Consider

Client, uncertain when picking liability limits, often want their agent to tell them how much is enough.  It is easier for them if someone else makes the decision.  An agent who falls into this can be held responsible if the limits they recommend are not adequate.

Instead, an agent should discuss the issues involved and leave the ultimate decision to the insured.  In choosing liability limits, there are four issues to consider:

·         Assets

·         Exposures

·         Cost

·         Aversion to Risk

Let us look at these issues individually.

Assets

The questions to ask is “What do you have to lose?”

·         With the 50+ clients ask “How would you feel about turning your retirement savings to a stranger?”

·         With the 30 something parents ask “What if you were never able to put another dollar for your children’s education?”

·         With the young professional, facing a promising future, ask “How would you feel supporting someone else’s family for the next 20 years?”

An uncovered liability exposure can mean scalin down a life-style or mortgaging a future insured must ask “What do I have to lose?” and then consider both current assets and future assets.

Exposures

The question to ask here is “How likely is it to happen to you?”  Some people have many exposures to loss.  Exposures can include all of the following:

·         Tangible Exposures

Swimming pool, saddle horse, rental property, etc.  For many families, teenagers are the greatest liability exposure.

·         Activity Level

The suburban wife, with a hectic social calendar and extensive volunteer work, has greater exposure than her next door neighbor who spends her time reading romances and raising geraniums.

·         Positional Exposures

The professional, the person with a high profile in the community, and the celebrity have increased exposure simply because of their relative position in the community

·         Court climate

The individual living and working in California has a greater exposure than his those in a Midwestern state with a conservative court climate.

When considering exposures, the question to consider is “How likely is it to happen to me considering my unique set of circumstances?”

Cost

Cost is always a factor in the purchase of insurance.  For most people, the cost of increased liability limits is affordable and price should not be the primary focus in the decision.  Those who repeatedly get cost as an objection, should reevaluate how the benefits of it are being explained.

Aversion to Risk

How a person feels about risk greatly influences the amount of liability that is purchased.  In this society, we all live with the risk of being sued.  In choosing liability limits, an individual picks how much of this risk is to be transferred to the insurance industry.  It is an individual who is greatly influenced by how the individual feels about living with risk.

Mr. Big is an entrepreneur who has started three companies from scratch; the first one sold for $11 million and he will never work again.  He possess extensive assets and faces significant exposures, and cost is not a factor.  Unfortunately, Mr. Big feels increased limits are simply another incentive for the attorneys to sue for more.  He purchases $500,000 in limits on his primary policies and absolutely rejects the thought of a Personal Umbrella Policy.  “Let them take it all; I will just go out and earn it all again.”  He feels comfortable living with a high level of risk.

The thirty-five year old engineer is married with three children and a wife does not work outside the home.  After reading a magazine article about umbrella liability, he calls his agent:  “I realize we do not have significant assets; it has not been priority with us.  We have no exotic exposures and probably never will have.  Cost is a consideration; we will have to work the increased expense into an already tight budget.  However, when I think of the disruption it would cause in our family if we were sued for more than our liability limits, it is worth the additional expense.  Could you please order an umbrella liability for my family?  It will really put me at ease.”

When an individual or family is selecting liability limits, all four factors – assets, exposure, cost, and risk aversion – should be considered.

The Agent’s Responsibility

The agent who writes the insurance for Mr. Big approaches him every year, recommending increased liability limits.  The agent insuring the thirty-five year old engineer never mentioned the concept.

Many agents selectively discuss increased limits and offer umbrella coverage only to people with visible assets and exotic exposures.  Other agents feel they have a moral responsibility to inform all clients of the existence of increased limits, discussing the increase and then letting the individual client decide if they would like to apply for the increased coverage.