One of the most common questions from both personal and commercial lines clients is, "How much insurance do I need?" In this article, we'll take a look at some of the issues that must be considered in determining what liability limits are appropriate. This article uses both personal and commercial lines examples.

I just recently wrote coverage for a client who has posed a question to me as to "How much liability coverage is enough?" The client indicates that they've been told by their peers that they should have the proper amount to cover what they'd lose in net worth. Or two and a half times ones net worth. My client is looking for more substantiated criteria as to what are the averages for different catagories of claims, i.e., Boat/Yacht losses - Is there an industry average for liability claims for yacht losses? Property Losses - Avg. Homeowners liability claim experience, etc.

As the agent I understand that this is a very fluid area and there are many variables involved, and have explained this to the client, however, I was hoping that you may have some more insight on this matter, or you may be able to advise me where I could obtain additional information or further statistics regarding this issue. I look forward to hearing from you.

In determining "adequate" liability limits, "average" losses have very little to do with it. The average auto BI claim is less than the financial responsibility limits of most states. However, it's the BIG claims that help create the averages and those are the claims that should carry the most weight in any determination of limits. We ran this question by our faculty and got the answers below.

This is really scientific, but I would seriously suggest that an individual should have as much liability insurance as he/she can get. When you get into the millions, excess liability is so cheap that the cost is almost insignificant, the only problem is getting a company to write very high limits (over $10 million or so).

And if a person's personal net worth is even one times that number, he/she should also have a non-insurance asset protection plan, including things like exempt assets (homestead, cash-value life insurance, and annuities), jointly-owned property, and offshore trusts.

1. Not only is there no precise, scientific answer to this question, there is not even a reliable "rule of thumb."2. Two of the key issues are how high the potential award might be following a lawsuit, and the amount of time that compensation is owed to the plaintiff. In many states, judgments can last for many years, and can often result in garnishment of wages, loss of most tangible assets, both at the time of the judgment, but years into the future, when future assets are acquired (including inherited).3. From an E&O perspective, one of the most frequently recommended suggestions is to provide the insured with a "menu" of limits and coverages available from the agency's markets, and have the insured make the choice.4. In addition, another E&O recommendation is for the agency to avoid giving any sort of "legal" answer to legal questions such as this. In all likelihood, there is no correct or accurate answer anyway, and there is great risk for the agency to go out on a limb, and be not only wrong, but to possibly be accused of practicing law without a license. Your question asks about average claims. Liability insurance isn't purchased for average claims...most minimum auto liability limits are adequate for "average" claims. If the average automobile liability claim closes for $10,000 or $25,000, this amount will not become the amount of coverage sold. The limits decision needs to be redirected to catastrophic injuries. Watercraft mishaps are not widely understood. Examples of serious watercraft injuries are near drowning, carbon monoxide poisoning, hypothermia and burns. A near drowning may involve brain injury. Hypothermia may impair a person's ability to regulate body temperature, resulting in death following an extended period of hospitalization. Medical expenses related to severe burns are often seven figures prior to any claim for damages.

Burns are a common watercraft injury. A recent article in the New York Times states sixty-five percent of the beds for burn victims in the entire United States are located in major teaching hospitals. This speaks volumes about the complexity, difficulty and expense of treatment.

The answer to your clients should not be limited to the insured and insurance agent. A yacht owner, or any other wealthy client, has assets to protect. Similarly, they have attorneys to advise them on legal matters. The client should raise this question with their attorney. The attorney typically has better knowledge of: (a) the insureds assets, and (b) the legal environment in your area. It is not uncommon to hear an attorney advise a wealthy client to purchase $10,000,000 or $25,000,000 in personal limits.
In your query for statistics, let me suggest you look for claims experience in the top five percentile. Advise the insured to raise the question with their attorney. And offer several limits options for the insured to consider.

The answer is a question -- How much are you willing to absorb with your own funds?

On first-party policies, the amount is enough if it is sufficient to replace the property with new for old if you buy a RCV policy and the Actual Cash value of the property if you buy an ACV policy.

Liability is harder but should be based on what is sufficient to protect the personal assets of the insured. Limits that are too high tend to make plaintiff's greedy but there is no question that if there are assets to protect, the insured should carry enough coverage so that any catastrophic accident, like an auto accident that turns a young father into a quadrapalegic, which could take all coverage and all your personal assets. You want a big enough number that the claimant will accept your policy limits rather than try to collect the limits plus the personal assets. Only an insured can calculate that amount and the broker who says to an insured a particular number is "enough" should immediately make a report to his E&O insurer of a potential claim when the insured has a major loss and finds that the limits are not "enough." Be careful. Seldom a month passes that we don’t get such a question. The answer is always the same. When someone asks, How much liability coverage should I buy? The response is, A dollar more than you’ll be sued for. No one knows what enough is. How about the Rhode Island nightclub fire where 100+ people died? What about the senior citizen who plowed his car into a farmer’s market in California killing 11 people? Buying two or three times your net worth isn’t at a drop in the bucket. As an agent, you simply explain coverages and costs and let the insured make the selection. Then document it out the wazoo. How much liability insurance individuals need cannot be set by a formula. There are too many criteria and the answers are as different as the people, their value set, their goals, and their fears. However, if the individual has a personality type that seeks to analyze risk quantitatively and feels more comfortable with that approach, then I'd suggest they go with a limit equal or close to the net present value of current and future assets.

To illustrate my point though, consider the point of liability insurance, to make the other party go away. The more limit you give the company, the greater their ability to successfully buy off the injured party, getting the insured off the hook. If you're looking for statistics, check out www.juryverdictresearch.com. They have lots of statistics, though most of their information is available for sale. Want a good example of what can happen? Check out this article: Fire Rages on Nuclear Reservation
Wonder what the responsible party's PAP limits are (though she apparently died in the wreck, but her family can forget about the inheritance)? Think there'll be enough to cover the radiation poisoning claims of everyone west of the Mississippi?
Here's some more information from Chubb:

Personal Liability Limits Fail to Keep Pace With Growth in Household Assets and Litigation, Concludes Chubb Survey

WARREN, N.J.--(BUSINESS WIRE)--May 23, 2001 via NewsEdge Corporation -
Personal liability protection is not keeping pace with personal asset growth or litigation trends, leaving affluent individuals and their families exposed to the financial consequences of lawsuits, according to a survey by the Chubb Group of Insurance Companies (NYSE: CB).

The survey, completed by 266 U.S. households with annual incomes in excess of $100,000, found that 88% of the households saw an increase in their personal wealth during the past two years. Almost one-third (30%) reported increases greater than 50%. Despite the fact that nearly three-quarters (71%) of respondents said they regularly assess the adequacy of their insurance protection, nearly two-thirds (63%) admitted that their excess liability, or umbrella, limits have not kept pace with the growth in their assets.

Meanwhile, jury awards have continued to increase in size. According to Jury Verdict Research, the average award of $1,004,308 in 1999, the latest year for which data has been compiled, was 240% higher than in 1994, when it was $418,478. A growing number of awards (14%) were in excess of $1 million. In vehicular accident cases, the average award during this recent five-year period climbed from $75,127 to $315,653, while in personal negligence cases, the average award skyrocketed from $264,765 to $2,959,047. And these figures exclude defense costs, which can run well into the hundreds of thousands of dollars--even when the defendant wins in court.

"Despite advice from insurance agents, financial planners and noted personal finance columnists, consumers often don't purchase liability coverage beyond the limits of their homeowners policy," said Edward J. Fernandez, senior vice president and managing director with Chubb Personal Insurance. "For a relatively small premium, consumers and their families can be protected financially if they are sued when someone is injured on their property, in an automobile accident, or if they are accused of libel or slander."

"Frighteningly, what you--or even your child--say on the Internet can leave you exposed to significant liability," added Fernandez. For example, Fernandez noted that a couple recently incurred $750,000 in settlement and legal expenses when a jury held them responsible for defamatory remarks about teachers their 14-year-old son posted on a password-protected Web page.

Eighty-six percent (86%) of respondents to Chubb's survey are concerned about the legal liability they face in today's environment. Sixty-two percent (62%) believe that personal excess liability coverage provides protection against legal liability. Yet about 25% of the respondents do not purchase the coverage because they don't see the need for it, thinking that homeowners insurance adequately covers their exposures. Nearly one-third (30%) carry less than $1million in liability coverage, while 36% have $2 million or more in coverage.

Those who receive advice from an insurance agent or broker are more likely than those who don't to carry personal excess liability insurance. Those who adjust their excess liability levels at the same pace as their assets growth tend to serve on the board of a charity or homeowners association and engage in multiple forms of asset protection, such as portfolio diversification, financial planning and life insurance purchasing, among other attributes.

"Consumers may not be purchasing any or higher amounts of excess liability insurance due to a lack of awareness regarding the product," said Fernandez. "This situation provides a significant opportunity for agents and brokers to recommend more and higher limits to adequately cover their customers' exposure to risk."

A copy of the survey results is available on the Internet at http://www.chubb.com/news/surveyresults.html