Polly C. hurriedly placed the pink box of doughnuts on the back seat of her car, then got in and started the engine. She was in a rush to get to an important meeting at work, and the line in the doughnut shop had been longer than usual. In her haste, she put her car into drive instead of reverse, and pressed hard on the accelerator. Her car jumped the curb and crashed through the glass window of the shop. While no one was hurt, this accident significantly damaged the building and its contents, and it caused the shop owners to lose income while repairs were being made. The financial impact on Polly was devastating.
She assumed the liability coverage provided by her auto insurance policy would be enough to protect her—but she never imagined this scenario. The shop owners’ attorney argued that the damages to his clients’ business were worth more than Polly’s insurance limits. This exposed Polly’s one major asset: her house, which she owned outright. After lengthy negotiations, Polly ended up having to take a line of credit on her home to pay for the damages.
William Godfrey, manager of a AAA claims examination team and a 39-year veteran of the insurance industry, says he’s seen a significant increase in scenarios like Polly’s over the past five years. It’s not uncommon these days for affected parties to seek “contribution,” as it’s called in insurance parlance, above and beyond auto or home insurance policy limits. Godfrey has worked with people whose insurance limits did not cover the cost of an expensive claim. To close the gap, people have had to borrow money or take out a loan.
So how do you protect yourself against this kind of worst-case scenario? Here are a few steps to take:
Survey your assets. Do you own property outright, or even have significant equity in a home? What about savings accounts, or retirement funds in IRAs? An attorney can go after all of these things in a property damage or personal injury lawsuit. Consider your income in this equation, too—courts can garnish your future earnings as part of a settlement. With your net worth in mind …
Talk to a financial adviser about protecting your assets. Determine if your liability limits are adequate. If not, consider raising them. People who have significant assets might want to look into an umbrella policy. Here’s why: If you cause significant property damage or seriously injure someone, or if someone is hurt on your property, your auto or home policy may cover the damages up to the policy limit. If that amount doesn’t cover the whole claim, increasing your liability limits or purchasing an umbrella policy can add an extra layer of protection for your assets. And, always …
Review your policies whenever you experience a major life change. Certain milestones can affect your insurance needs. Some of the more obvious ones are marriage, home ownership, and children. But other events, such as investing in an IRA, getting a big raise at work, or inheriting money can also have insurance implications. Take time to make sure you have the types of coverage and limits you want for yourself and your loved ones.
“An insurance policy is the first layer of defense in shielding your assets,” Godfrey says. “Know your limits and make sure they’re sufficient. You don’t want to leave this important task to chance and find out too late that you don’t have enough.”