In the Money: Protect yourself with personal umbrella liabil

No matter how careful you are, someday you or a member of your family might be responsible for an accident. You probably already have some liability coverage attached to your auto, homeowner's or renter's insurance policies, but the limits may not be sufficient if a large judgment is made against you. For this reason you should consider purchasing a personal umbrella liability policy to supplement your other coverage.

As its name suggests, an umbrella policy provides an extra layer of protection in addition to the limits of your primary liability insurance. For example, let's say you have been found responsible for a $1 million injury claim from an accident at your home. Without an umbrella policy, if your homeowner's policy limit is only $300,000, you would be responsible for the remainder of the claim. In order to satisfy the judgment, you might be forced to liquidate assets, borrow the funds or declare bankruptcy. If you maintain a $1 million umbrella liability policy, however, it would cover the remaining $700,000.

Unfortunately, not enough people purchase umbrella policies. Although the cost of a personal umbrella policy is surprisingly reasonable (typical annual premiums for umbrella policies are only a few hundred dollars per year for a million dollars of coverage), only around 25 percent of homeowners have them.

You don't need to be wealthy to be the target of a claim. If you drive a nice car, live in a decent neighborhood and dress well, you will be perceived to have deep pockets. The more money it's assumed you have, the more likely it will be that an aggrieved party will file a claim against you.

If you drive a lot, entertain frequently or have teenaged drivers in your household, you are at an even greater risk. Nowadays, multi-million dollar lawsuits are commonplace, and a large judgment could wipe you out. Even if you are not found to be negligent, the cost of defending yourself can run into tens of thousands of dollars.

A typical policy provides protection for property damage or injuries caused by you or members of your household for which you are held to be legally responsible. The incident can have occurred on or off your property, and can also include claims for libel or slander. Umbrella policies typically cover your legal defense costs as well.

If you operate a business out of your home, you will need to purchase a separate policy or a special rider on your homeowner's policy that specifically addresses business-related risks. Although the types of incidents covered by umbrella liability policies are broader than those insured under auto or homeowner's policies, personal umbrella policies typically do not cover business or professional activities, intentionally inflicted damage, war-related losses or damage to your own property.

Most people assume they only need enough insurance to protect their assets, but it may not be sufficient to simply purchase enough umbrella insurance to match your net worth. Combined with defense costs, a claim could easily exceed the value of all your assets, and without adequate coverage there is a very real possibility that your future earnings could also be attached to satisfy a judgment.

Coverage is easiest to obtain and the most cost-efficient when your auto and home are insured by the same company. Your insurer will also require that the liability limits of the underlying policies meet certain minimums. Your specific risk factors, the location of your home, the breed of your pets and even your credit rating will determine the premium. Your property and casualty agent should be able to provide you with a detailed quote.

Elaine Morgillo is a certified financial planner and president of Morgillo Financial Management Inc. She has offices in Portsmouth and North Andover, Mass., and can be reached at emorgillo@morgillofinancial.com