Covering For Threats by Paul Ferraresi

One risk area that is often overlooked involves liability risk. And something that you may not even think twice about – such as that backyard trampoline – could pose major financial risks.

Consider the case of a couple will call Rick and Sue Smith. They have a net worth of $1.75 million – $275,000 in home equity and $1.475 million in investable accounts.

While playing on that backyard trampoline, one of their friend’s children is severely injured. The child’s parents sue Rick and Sue for 2 million dollars in medical damages and negligence and they collect. The Smiths have $100,000 in homeowners liability coverage and a $1 million umbrella policy to cover losses over the policy limit.

Because their insurance covers only $1.1 million of the $2 million losses – not to mention hefty legal fees of $500,000 over the course of the lengthy case- the Smiths must come up with $1.4 million! If you’re assuming the couple will have to deplete their $1.475 million investment accounts, you’re right.

The solution would have been for the Smiths to have had a larger umbrella policy that also covered legal defense cost outside of the policy limit. A $5 million umbrella policy of that type would have covered the entire judgment and the Smiths legal bills – and left their savings, investment accounts and children’s college portfolios untouched. And while such a policy would have cost more than their original $1 million umbrella coverage, it probably would have cost just a few hundred dollars incremental annually.

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