What Is Personal Liability Insurance? (And How Much to Own)

by Neal Frankle, CFP ®

Personal liability insurance protects your assets by paying claims and damages in case you injure other people or property. It’s very different from life insurance protection.

The good news is that if you have automobile, renters or homeowner’s insurance, you already have some liability coverage.

Usually, the liability coverage that comes along with these policies is very limited. That’s why you should look into an umbrella policy (which is another name for personal liability insurance).

Umbrella policies provide extra coverage from $1 million and up. These policies pay when your basic coverage stops paying. In other words, the insurance company that sold you the umbrella policy only has to pay claims if those claims exceed your basic coverage.

Let’s assume you are sued by someone who slipped in your gazebo. They sue and get a judgment against you for (evil laugh) ONE MILLION DOLLARS. Fortunately, you’re smart. You have the right coverage, and you don’t have to worry about losing all the money you’ve saved for retirement.

You have a homeowner’s policy that covers this liability, but only up to $500,000 (for this example). In this case, the umbrella policy covers you for the $500,000 the basic policy doesn’t.

This is the reason why umbrella policies are so darn cheap – they only pay after the basic coverage has tapped out. That’s because the odds of being sued are small and the odds of being sued for an amount above your basic coverage is even smaller. Again, this explains the cheap price, and the cheap price is one reason why you should have such a policy.

Besides being cheap, the nice thing about these policies is that they are portable. Wherever you are, you have the coverage. Just about the only limitation is that it doesn’t cover business liability even if you run the business out of your home.

But if you do run a business out of your home, you might be able to buy riders and/or additional coverage based on your personal liability coverage, which is much cheaper than buying business liability insurance. I’ll be writing about business coverage tomorrow.

Do you need an umbrella policy to cover your personal liability risks?

Maybe.

If you have young children, for example, you might need a policy because they have lots of friends. These little tikes might get into some mischief and hurt themselves at your home. If so, you’re at risk of being sued.

Do you have people over often? Do you drive like a maniac or a Parisian? Do you have firearms on your premises? Do you have gardeners and housekeepers on the grounds? All these are reasons why you might want to own an umbrella policy.

The way I see it, personal liability insurance is so cheap, it makes sense to have this coverage. Do you own an umbrella policy? If not, why not?

 

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{ 31 comments… read them below or add one }

Aric May 19, 2014 at 7:53 AM

I do random maintenance for people that own rental property like plumbing, painting, occasionally replacing light switches. The people that I work for have said that they own umbrella policies on their property to cover stuff like this, but should I carry some kind of insurance too?

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Neal Frankle, CFP ® May 19, 2014 at 11:13 PM

Aric, I think that would be very smart. What happens if you do a repair and then, someone claims you did faulty work and they are injured as a result. This post might help

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Jessica September 17, 2013 at 5:31 AM

I’ve worked for a cleaning company for about 2 years. The boss is now asking everyone to get their own liability insurence or they will be fired. She payed for it before, but doesn’t have the money now. Is this even legal for her to ask this?

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Neal Frankle September 19, 2013 at 3:43 AM

Are you an employee or a contractor?

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drscoot June 28, 2013 at 12:41 PM

I have a piece of property with on older mobile home and garage on it. I would like insurance in case somebody gets hurt on my property but am not worried about the structures. What type of policy do I need?

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Bryan Henderson August 3, 2013 at 8:50 PM

I’m in the same situation, and from looking around I am pretty sure that nobody sells personal liability insurance by itself; it’s always bundled at least with property insurance (homeowner’s or renter’s insurance).

Umbrella insurance is just one kind of personal liability insurance. For example, primary personal liability insurance comes with homeowner’s insurance. Umbrella insurance is special in that it is always in addition to some other personal liability insurance. I’ve heard it called “additional personal liability insurance” instead of “umbrella insurance” because of that. It typicaly covers not only liability that exceeds the limits of the primary insurance, but also liability for things that are usually excluded from the primary insurance, like where you owe someone money because you slandered him.

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Pravin April 16, 2013 at 6:31 PM

My friend bump into somebody while turning around during shopping in supermarket.That other girl was behind her and she didn’t realize somebody behind her. She was wearing flat flip flop and doesn’t step onto her.
Other girl reported as an accident to store and video shows that its not my friend’s fault.But Store sent her a letter stating that does she own any homeowner insurance.My friend is renting and she doesn’t have insurance.
Please let me know that my friend need Personnel liability insurance and if needed, Can he still buy Personnel liability insurance?

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Lynell March 21, 2013 at 6:41 AM

I’m a retired Law Enforcement Officer, and I am authorized to carry my firearms in the State of IL. What type of coverage can I get to protect me in the event I shoot someone?
Thanks,

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Neal Frankle March 23, 2013 at 11:48 PM

That’s pretty specific. I honestly can’t even think of a way to even check on that. What have you looked into so far?

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Debbie February 16, 2013 at 5:04 PM

We own a mobile home in Florida. Our primary residence is in Michigan. Our insurance company in Michigan cannot sell policies out of state. How can we get liability insurance on our mobile home? Thank you.

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Neal Frankle February 17, 2013 at 8:56 AM

I would call a local agent. Have you tried this?

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Kristin February 7, 2013 at 6:38 AM

very helpful. My parents handled the “what if they sue me” issue by burying all their assets (even the house) in trusts and partnerships. My father passed away last year and this tangled web of financial instruments has been a nightmare. It’s been over a year and the estate has still not settled and all the complications have caused family discord. So I am going to use personal liability insurance as an alternative.

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Neal Frankle February 7, 2013 at 9:52 PM

Kristin, I am so sorry that your parents made things so difficult for you. I think they lost perspective along the way. I wonder if the ever consulted with a CPA or attorney. Did they have a high-risk situation?

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Bruce February 4, 2013 at 4:35 PM

I run a home remodeling company. What should I be looking for in a solid plan. I have one now but I want to switch.

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Nancy February 2, 2013 at 2:42 PM

Neal,
I have been hired by our Homeowners Association for the security position. This does not require any type of security license in this state. They want me to get at least $300,000 in comphrehensive General Liability Insurance. I have personal liability on my homeowners insurance, will that cover me? I do not have a business.

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Neal Frankle February 3, 2013 at 10:58 AM

Nancy, I doubt it. This is confusing. If they hire you as an employee they must provide the insurance. If they hire you as a contractor – you are in business for yourself and you can purchase the business insurance.

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T June 12, 2013 at 4:45 PM

I have the same problem. Employer does not provide insurance and does not specifically indemnify me. I have to simply ASSUME someone who rather go after my employer than me. I cannot find anyone who will write a General Liability policy unless you have a home or business.

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NORA December 10, 2012 at 7:25 PM

Hi. I am a freelance producer / production assistant for photo shoots. Today in the office I heard that one of the other freelance production assistants had damaged a car of someone else with the rented Van. The van was rented by the company who has hired her. The other vehicle was from another team member. Now the production company who has hired her wants her to pay part of the $900 damage she has made to the car. She only gets $150 for her day of work. So I was wondering if there is a personal liability insurance that covers you, as a freelance worker, who has to deal with valuable property of others all the time. Is there an insurance for that? I mean there has to be something as it makes no sense to go to work when you run the risk of braking something worth your yearly income any minute. What are the pretective measure you can take on that subject?

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Neal Frankle December 11, 2012 at 1:37 PM

Nora, First, I’d suggest that you speak with a good insurance agent. But having said that, even the personal liability policy will have a deductible. Your friend could get coverage from her auto insurance possibly (even though it’s not her car), an umbrella policy or a personal liability policy. The complication is that this is really a business liability policy. In any event, there will still be the issue of a deductible.

I would also check the contract. I am certain that these contracts spell out who is responsible for what. Last, since the car was rented, the damage should be paid by the party renting the van – and that’s not your friend. So I would:
a. ask to see the contract for the employment
b. ask to see the contract for the rental.

The only problem is this. Your friend could be right – but then, he or she may never get a call back from the company that hired them. All this has to be weighed. I hope this helps! Let me know what comes of it please.

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Tom December 10, 2012 at 12:14 PM

Neal:
Would personal liability insurance provide coverage in the absence of medical payments and UMBI add-ons to my auto insurance? My employee sponsored medical plan should cover my personal injury expenses and my family, but would this umbrella policy cover my passengers? Between my wife and I we pay almost $650 for these two add-ons to our auto policy and it seems unnecessary especially if we consider an umbrella policy as you describe.

Thanks,

Tom

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Neal Frankle December 11, 2012 at 1:41 PM

Tom, You have a personal liability policy AND an umbrella policy? I think you have to tread very carefully here and read the contracts. I would also confirm any conclusions you come to with your insurance agent just to be certain. Again, I hope this helps. When it comes to insurance, please look at your own contracts and speak to the agent. Never take general advice and apply it to your insurance situation. Too much is at stake.

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Dave November 2, 2012 at 11:47 AM

Neal:
I am unable to buy home owners Ins. In my area,I own the house with no Mgt.
Is there a Liability product for my situation?

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Neal Frankle November 3, 2012 at 9:35 AM

Dave….explain why you can’t buy home owner insurance?

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Paula September 29, 2012 at 11:43 PM

I live in an apartment complex and my lease is due to be renewed. The management will not offer an new lease unless I show proof I have at least $50,000 personal liability insurance. I don’t have even $5,000 in assets; I have had no problems in the three years I’ve lived here. Should I be concerned or is it reasonable to just get insurance? Thank you, Paula

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Neal Frankle September 30, 2012 at 12:23 AM

Paula, That’s strange because the landlord is supposed to carry liability coverage. Keep in mind that this insurance is not for your assets but it’s in case someone get’s hurt while in your home. I don’t think it’s wacky crazy but it’s something I’ve never heard of. Still, the coverage is cheap so maybe you can look into getting it. My guess is that the landlord has a policy with a $50k deductible. You might want to just make sure that this is the case but either way, you are probably going to have to get the insurance or move. Does this help?

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Paula September 30, 2012 at 5:49 PM

Neal, Thank you for your response. I will look into the insurance, but will probably move anyway. I’m impressed you are so quick with your replies. Thanks again. Paula

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Beverly March 8, 2012 at 10:53 AM

I am a retired federal employee who will be conducting home studies on families interested in adopting or fostering children. I do not make decisions as to whether they are accepted as adoptive or foster parents. I interview the families, inspect the home for such things as carbon monoxide and fire detectors, fences, steps, etc. I write a narrative and submit it to the State Agency. I am required to have liability insurance and cannot seem to find an agency that will write a policy for me. Can you assist me finding someone who will write a policy ($1,000,000.00?

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Neal Frankle March 8, 2012 at 8:07 PM

Beverly, I would contact the State insurance department to get some ideas but I am not sure they are going to be all that helpful. If that doesn’t solve the problem, you are just going to have to keep knocking on doors. Another idea is to call some other people who are in your business. If they are kind, they will tell you which carrier to contact.

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Neal December 28, 2010 at 10:12 AM

@Krantcents — yes…policy limits are determined by your assets.

@TFB As a writer, especially in the PF world, you have some leeway as I understand it. The Investment Advisors Act of 1940 excludes publications of general interest from fiduciary standards that Advisors have as I understand it. That being said:
a. consult an attorney
b. never slam people…just ideas.

You have two concerns; one is that people take your advice, misapply it and then sue you for the results. That should be covered by your disclaimer and by the point I made above.

The other concern is if you bash someone — or someone feels bashed. I’m not sure that a homeowners policy would cover that. Just be nice :)

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krantcents December 28, 2010 at 9:03 AM

Interesting thought! Policy limits usually relate to the assets you are protecting. Right?

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TFB December 28, 2010 at 1:31 AM

Looking forward to your second part about business coverage. If I’m a blogger writing articles at home, what type of business coverage do I need? Add a rider to homeowners and umbrella policies to cover libel?

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