Liability Insurance – What are the risks?

Do your lifestyle choices increase your risk for a lawsuit? Sometimes mundane tasks, such as carpooling kids, serving on a board or hosting a charity event, can result in unanticipated risks. You have health insurance to cover your health, a homeowner’s insurance policy to cover your residence, and auto insurance policies to cover you while driving, but what about everything else?

There are several activities that increase your risk of a liability lawsuit. Some are obvious, such as owning and flying aircraft, but there are less obvious risks that heighten your chances of being sued. These include:

• Owning a rental property – tenants may attempt to sue you for injuries sustained on the property or accuse you of wrongful eviction.
• Hosting social or charity events – you are liable for what happens on your property, such as a guest getting injured on your property. However, you are also liable for a guest who consumes too much alcohol and injures property or another person after leaving your residence.
• Domestic staff – house cleaners, nannies, lawn maintenance teams, chefs and drivers who are employed by you put you at risk should they get injured on the job. Terminating employment for these employees could also result in a lawsuit.
• High-Profile jobs – being a public officer or holding a high-profile job increases the risk that someone will decide to sue you simply because they believe there are potential assets to be gained through a settlement.
• Carpooling kids or owning a trampoline – most policies have a low limit on the total amount they will cover for injuries sustained by these actives.

Not only are your personal assets potentially at risk, but so is your future income. In the event of a liability lawsuit, your first layer of protection is your homeowner’s insurance policy (if something happens on your property) or your auto insurance policy (if something happens while you are driving a vehicle). Still, the liability limits on those policies are usually low. In the event a lawsuit is filed against you, not only will you have legal fees to defend yourself, but your assets could be in jeopardy. For high earning individuals, your future income is also considered in a lawsuit. You may not have substantial assets at the time, but it is assumed you will amass assets over time, given your income. Future earnings can be garnished and awarded to a claimant in a lawsuit.

Investment asset protection varies by account type. Bank accounts and standard investment accounts are largely at risk. However, most employer-sponsored retirement plans and some Individual Retirement Accounts (IRAs) are protected. Federal ERISA laws extend complete protection to assets in employer-sponsored retirement plans, such as 401(k) and 403(b) accounts. Therefore, when you retire and roll your assets from an employer-sponsored plan to an IRA, it is often important to establish a separate IRA so the funding can be traced back to a qualified retirement plan. This can allow you to extend the protection provided by the employer-sponsored plan to your IRA. This is especially important if you live in a state that does not extend full liability protection to IRA and Roth IRA accounts.

• Oregon – IRAs and Roth IRAs are fully protected.
• Washington – IRAs and Roth IRAs are fully protected.
• California – IRAs are protected only to the extent a judge deems the assets “necessary to provide support of the judgement debtor when the debtor retires, taking all other resources into account.” Roth IRAs are not protected.
• Arizona – IRAs and Roth IRAs are protected except for amounts contributed within the prior 120 days.
• Hawaii – IRAs are protected except for contributions made in the previous 3 years. Roth IRAs are not protected.
• Idaho – IRAs are protected, but Roth IRAs are not protected.

Tangible or physical assets are always at risk. This includes your home (and the equity you have in it), vehicles, boats, aircraft, collections, jewelry, and other physical assets. Most homeowner’s insurance policies have extremely low limits for covering these items. If a judgement is rendered against you, these assets could be included in a settlement award.

The first line of defense is an umbrella liability insurance policy. This is coverage that, if properly secured, extends across all real estate, vehicles and personal property. It is sold in $1M increments and is affordable. Your umbrella policy should cover all your at-risk assets.

It’s also important to know whether your umbrella policy covers you when you are traveling— some policies do, while others do not. Any liability that results from your actions while on vacation could result in a lawsuit. It is important to know what activities are covered by your umbrella policy and what activities are not.

If you have questions about your current coverage, we recommend you meet with your property and casualty insurance specialist. Often, coverage is added over time if a new home or new vehicle is purchased, but there is not a comprehensive review of coverage and the potential risks your family faces. Many umbrella liability policies have blanket language that does not adequately cover the unique risks you may face.

The assets you have worked hard to purchase and the income you strive to maintain is important and should be protected. If you are interested in a comprehensive review of your coverage, your Advisor at Aldrich Wealth can help you find a consultant who can objectively review your coverage to ensure you have adequate protection.