Could One Lawsuit Wipe You Out Financially?

This past year, a family faced a real-life nightmare that no parent ever expects. Their 17-year-old son, driving after a party, lost control of the car and crashed into a nearby home. Thankfully, no one was seriously hurt but the fallout quickly became complicated.

The injured homeowner filed a lawsuit—not just against the teenage driver, but also against his parents, claiming they had “negligently entrusted” him to drive under unsafe circumstances. But when the family turned to their umbrella insurance for help, things didn’t go as planned because, as it turned out, the umbrella policy didn’t apply in this situation.
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Why? 

Even though the parents had a homeowners policy, an auto policy, and an umbrella policy, the court ruled there was “no duty to defend or indemnify” them under ANY of these policies. The homeowners policy had a motor-vehicle exclusion. The family had accidentally let their auto policy lapse prior to the accident. Because there was no valid underlying coverage, the umbrella policy couldn’t step in, either.

That ruling was an eye-opener for many—umbrella policies don’t fill gaps or override exclusions. They only provide an extra layer ON TOP of valid underlying liability insurance.

To back up a step, let me explain what umbrella insurance is.  It’s a high-limit liability policy that activates only after the limits of your standard homeowners or auto insurance are exhausted. Think of it as the protective “umbrella” that shields the rest of your financial life from a lawsuit that exceeds your primary insurance coverage.

Many people think only the wealthy need to have umbrella coverage, but that isn’t the case.  General trends indicate umbrella policies are being tapped more and more often to cover damages AND the pay-outs are rising.

So who needs to consider adding umbrella insurance to your other policies?  Here are a few examples:
· Parents of teen drivers – You face elevated risk from accidents caused by inexperienced drivers.
· Homeowners with equity – Without protection, your home and savings are fair game.
· Landlords and rental property owners – Slip-and-fall incidents and tenant injuries can be costly.
· Professionals and high earners – Higher income and visibility often make you a more tempting target in lawsuits.

To get umbrella coverage, you usually must carry:
· A minimum auto liability of around $250,000 per person / $500,000 per accident
· At least $300,000 in homeowners liability.

These underlying policies must be active AND current.  If they lapse or don’t meet requirements, your umbrella is worthless.

How much umbrella coverage is enough?  Here’s how to think about it:
1.  Estimate your net worth—including home equity, savings, and investments.
2. Consider your future earnings potential—a lawsuit can target that, too.
3. Aim for coverage that at least matches your total exposure. Many start at $1 million, while higher-net-worth households might opt for $2–5 million—or more.

As a reminder, an umbrella policy isn’t a catch-all.  It's only as strong as your coverage beneath it.

As an independent insurance agent in Georgia and South Carolina, I can help you with both knowledge about umbrella policies and choosing the right level of protection. Call me at 706-726-1446.