It's the question that nobody seems to want to answer: "How much excess liability coverage do I need?"
Perhaps the biggest challenge facing wealthy individuals and families in determining the appropriate amount of excess liability coverage they need is that it's hard to find reliable sources of clear recommendations. Many will compare notes with friends, family and neighbors. However, what makes sense for some – even similarly situated – individuals may not make sense for others based on your lifestyle, size of family, wealth, etc.
To complicate matters, when seeking professional advice, it can be surprisingly difficult to get various professionals to commit to a recommendation.
Attorneys may suggest that carrying too much excess liability coverage makes the insured a target of litigious victims – although insurance companies generally say this is not the case.
Insurance companies themselves won't typically advise their insureds as to appropriate amounts of umbrella coverage, telling them instead to "speak to your agent."
Accountants will similarly advise clients to speak to their insurance agents or attorneys.
And the agents, for their part, will often say they don't have enough information to give their clients correct advice.
In other words, everyone is kicking the can and pointing to other professionals as the appropriate source of guidance. We believe there is a better way.
Collecting Data – The Courts
Individuals – even professionals like attorneys and insurance agents – may not be the best positioned to answer questions about hypothetical high-liability events. While such events certainly occur and represent real risk, they are not so common that every professional will have enough experience with them to provide wholistic and reliable advice.
To get a better answer to this question, we looked for aggregated data from three primary sources: courts; attorneys and insurers. When a personal injury or property damage claim is litigated, a plaintiff can get paid from either a court award – which is public information – or an out-of-court settlement, which is private.
We conducted an analytical review of 538 court awards or settlements valued over $5 million for the past five years in California, Florida, New York and Texas, and here is what we found:
317 verdicts in favor of plaintiff with an average award ranging between $23 and $41 million
87 settlements in favor of plaintiff with an average award ranging between $8 and $16.5 million
This converts to 75% of all these cases resulting in plaintiff victories
The number one cause of these claims: vehicle related, which could mean automobiles, snowmobiles, boats, ATVs, etc.
What Lawyers Look For
Many personal injury cases are taken on by attorneys operating on a contingency fee basis. You've probably seen the ads: "We don't get paid unless you get paid." This means lawyers aren't going to take just any case. In fact, there's a trifecta that must exist for a lawyer to take the case:
Liability of the defendant must exist regardless of percentage of fault assessed
Damage/bodily Injury must exist. Bodily injury represents the potential for highest awards
Deep pockets must exist
Insurance Company Perspective
Obviously, insurance companies themselves have great insight into the size and number of claims they face. We spoke to claims executives from the five leading insurers of the wealthy, and they provided insight into claims that settled out of court – i.e., those in which the awards aren't public information. Based on their input, a typical year brings on average, per company:
25+ cases over $1 million
8-12 cases over $5 million
2-3 cases over $10 million
The largest payouts of these four insurers ranged between $15 and $50 million over the past few years. However, the verdict value is rising faster than most previously predicted. Some factors impacting this growth in verdict value is what's known as "social inflation" driven by resentment factors. These include drugs, alcohol and/or texting and driving as a contributing cause of an accident, for example.
Personal Impacts: Things Can Get Scary
It's difficult for wealthy individuals and their families to get credible information even when talking to professionals, like their insurance agents, accountants or attorneys. It's important for them to take a practical and realistic approach to determining the level of coverage that is appropriate for them.
For example, suppose a family engages in a lot of outdoor activities like snowmobiling, boating and other watersports. And suppose that family's teenage children all have friends who also participate. While the family may have the utmost confidence in their children and the decisions and actions they may take while using these vehicles, what about their children's friends? What if something happens? What if that something involves other people on other vehicles? It is important for families to discuss these sorts of realistic risks with their professional advisors.
An individual's or family's risk exposure can expand exponentially based not on their net worth, but on the damage caused, both to personal property and to people. If you would like to discuss your potential exposure and available coverage options, contact NSI.
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