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
Clients, 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 the trap 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+ client ask "How would you feel about turning your retirement savings over to a stranger?"
- With the 30 something parent ask "What if you were never able to put another dollar away for your children’s education?"
- With the young professional, facing a promising future, ask "How would you feel about supporting someone else’s family for the next 20 years?"
An uncovered liability exposure can mean scaling down a life-style or mortgaging a future. The insured must ask "What do I have to lose?" and then consider both current assets and potential assets.
EXPOSURES
The question to ask here is "How likely is it to happen to you?" Some people have greater exposures to loss. Exposures can include all of the following:
Tangible Exposures
Swimming pool, saddle horse, rental property, etc. For many families, teenage children are the greatest liability exposure.
Activity Level
The suburban wife, with a hectic social calendar and extensive volunteer work, has a greater exposure than her next door neighbor who spends her time reading Harlequin 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 brother 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. The agent who repeatedly gets cost as an objection, should reevaluate how the benefits of the coverage are being explained.
AVERSION TO RISK
How a person feels about risk greatly influences the amount of liability that is purchased. In our society, we all live with the risk of being sued. In choosing liability limits, an individual must decide how much of this risk is to be transferred to the insurance industry. It is an individual decision greatly influenced by how the individual feels about living with risk.
Mr. Big is an entrepreneur who has started three companies from scratch; the last one sold for $11 million and he will never work again. He possess extensive assets, faces significant exposures, and cost is not a factor. Unfortunately, Mr. Big feels that 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 young children and a wife who 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 never 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 policy for my family? It will really put me at ease."
When an individual or family is selecting liability limits, all four factors - assets, exposures, 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 mentions the concept.
Many agents selectively discuss increased limits and offer umbrella coverage only to those clients with visible assets and exotic exposures. Other agents feel they have a moral and professional responsibility to inform all clients of the existence of increased limits, discussing the importance and then letting the individual client decide if they would like to apply for the increased limits.
PRACTICAL POINTERS:
- When discussing limits with a client, never make recommendations. Be careful about discussing what the average person carries, as that may be considered a recommendation.
- Use agency minimum standards with great care. Some courts have construed them to be recommendations.
- Offer increased liability to everyone. Because there is always a possibility the insured will not qualify for the additional coverage, word your offering carefully: "Increased limits may be available, if you are interested."
- Learn to explain this important coverage in ways that will lead clients to appreciate the benefits and consider additional limits.
This article is excerpted from the book Writing A Personal Umbrella, written by Phyllis Van Wyhe, CPCU, CIC.
