GF591 Unit 9 Umbrella and Liability Coverage Review Example

Count What a Judgment Could Reach: A Unit 9 Liability Coverage Review for a Household With a New Driver

[Student Name]

Purdue University Global

GF591: Individual Insurance Planning

Unit 9 Liability Coverage Review

[Instructor Name]

[Date]

The household, its assets, the scenarios and the premiums are composite and illustrative; the legal summaries are general and not legal advice; the sources cited are real.

What Could Be Lost

The first table lists assets that a creditor holding a judgment could generally reach, before exemptions that vary by state.

1. Home equity: $278,000, before any homestead exemption, which ranges widely from state to state.

2. Brokerage account: $180,000.

3. Rental condo: $240,000, owned outright.

4. Cash reserve: $64,000.

5. 529 plans: $102,000, whose protection from creditors depends on state law.

Total exposed assets: $864,000.

Retirement accounts appear separately. In bankruptcy, retirement funds in tax-qualified plans are generally protected. Outside bankruptcy, the answer depends on the plan. Plans covered by ERISA carry an anti-alienation rule that the Supreme Court has held keeps them out of a bankruptcy estate (Patterson v. Shumate, 1992). Her solo 401(k) covers only the owner, so it is not an ERISA plan, and its protection outside bankruptcy depends on state law. His 403(b) is a governmental plan of a state university and is likewise governed by state law. Inherited retirement accounts are treated differently again: the Supreme Court held that an inherited IRA is not protected as retirement funds in bankruptcy (Clark v. Rameker, 2014).

Future earnings matter too. A judgment that exceeds assets can be collected through wage garnishment for years, and her earnings are high.

What Could Cause It

Scenario 1: the new driver. Next spring the 15-year-old gets a license. Suppose she strikes a pedestrian in a crosswalk, causing a spinal injury. Medical costs, lost earnings and pain and suffering could plausibly reach $750,000. The current auto policy pays $100,000 for one injured person. The remaining $650,000 would fall on the parents.

Scenario 2: the condo stairs. A tenant's guest falls on the condo's exterior stairs, which the owners are responsible for maintaining. A broken hip and a long recovery for an older guest could produce a claim of $400,000. The landlord policy carries $100,000 of liability. The remaining $300,000 would fall on the owners.

In both scenarios the injured person's damages pass the current limits in the first paragraph of the claim, and the shortfall would come out of the $864,000 the household spent fifteen years building.

Why Now

Two changes make this review urgent rather than routine. The first is the license. New drivers in their first year are involved in crashes far more often than experienced drivers, and as the vehicle owners and the policyholders, the parents would be named in any suit. The second is the household's growth in wealth. When the couple bought their current auto policy, they had little beyond home equity and a modest retirement balance, and $100,000 of liability matched what a plaintiff could collect. Today the brokerage account, the paid-off condo and her earnings make the household an attractive defendant, and attorneys often look at what a defendant owns before deciding how hard to pursue a claim. Coverage that was adequate ten years ago now protects only a small fraction of what could be lost.

What Would Pay: The Coverage Stack

An umbrella policy pays only above underlying limits that the insurer requires. The proposed stack:

1. Auto liability: raised to $250,000 per person and $500,000 per accident on both cars, the umbrella insurer's minimum.

2. Homeowners liability: $300,000, unchanged.

3. Condo landlord liability: raised to $300,000.

4. Personal umbrella: $2,000,000 above all three.

Under this stack, Scenario 1 would be paid by auto liability up to $250,000 and the umbrella for the remaining $500,000. Scenario 2 would be paid by the landlord policy up to $300,000 and the umbrella for the remaining $100,000. Neither would reach the household's assets.

Exclusions

Two exclusions shape the plan. First, personal umbrellas exclude professional services and business pursuits. A malpractice claim against her as an endodontist would not be covered; her practice's professional liability policy remains a separate line and should be reviewed with the practice. Second, the condo must be listed on the umbrella's schedule of properties. A rental unit that is not scheduled may be excluded as a business activity (Rejda et al., 2020).

Cost Schedule

1. Umbrella, $2,000,000: about $585 a year.

2. Higher auto limits on two cars: about $190 a year.

3. Higher condo liability: about $45 a year.

4. Total: about $820 a year.

A third million would cost about $160 more. The review stops at $2,000,000 because that limit covers more than twice the exposed assets and the plausible scenarios with room to spare. The case for a third million would grow if the practice were sold and the proceeds held personally, which is listed as a review trigger.

Additional Steps

The teen's first year of driving should be monitored through the auto insurer's telematics program, which can also lower the premium. The condo's stairs and railings should be inspected and repaired, since reducing the chance of a fall is cheaper than paying for one.

References

Clark v. Rameker, 573 U.S. 122 (2014).

Patterson v. Shumate, 504 U.S. 753 (1992).

Rejda, G. E., McNamara, M. J., & Rabel, W. H. (2020). Principles of risk management and insurance (14th ed.). Pearson.