I have been meaning to write an article / blog about umbrella insurance for quite some time now. Howard Yegendorf beat me to it and did a great job of it. He was kind enough to allow me to use his material and act as a guest blogger for Rhodes & Williams Insurance Brokers.
Nightmare Scenario #1: You are driving your car, not paying attention momentarily, and you go through a red light colliding with another vehicle going through the green. The accident is clearly your fault. The other driver suffers catastrophic injuries. He makes a good living and his injuries will prevent him from ever being gainfully employed again. He is 35 years old and your negligence will cause him to suffer a lifelong loss of income. He sues you. His own insurance company will pay for most of the care that he requires for the rest of his life. However, there are limits on that policy and there is not enough money in that policy to cover his cost of care for the rest of his life. After a trial in the Ontario Superior Court of Justice he is awarded a judgment against you in the sum of $4,000,000.00. The judgment is made up of his claims for general damages for pain and suffering and loss of enjoyment of life; his lifelong loss of income; his lifelong cost of care; his wife and children's claims under the Family Law Act.
You have an automobile policy with liability limits of $2,000,000.00. Your insurer is obliged to pay the other driver that $2,000,000.00 on his $4,000,000.00 judgment against you. The judgment remains unsatisfied in the sum of $2,000,000.00 and is a personal judgment against you.
The other driver can use all collection remedies at his disposal in order to execute upon the balance owing under the judgment. He can garnish your wages; seize any real estate you own including your home; he can seize all manner of personal property that you own, e.g., bank accounts, stocks and bonds, R.R.S.P.s, automobiles, etc.
Nightmare Scenario #2: You are driving your car in a prudent fashion, travelling through an intersection on a green light when you are struck by another vehicle that has run the red light. Similar to the other driver in Nightmare Scenario #1, you are catastrophically injured, will never again be gainfully employed and will require various types of care for the rest of your life. You are a good income earner with a decent long-term disability policy. But even with your long term disability payments and the accident benefit payments provided by your own automobile insurer, your various claims in the law suit against the other driver amount to an additional $4,000,000.00. The other driver only has $2,000,000.00 in insurance limits, just as you did in Scenario #1. The other driver, however, has no assets of any value and has just been laid off his job. The most you can collect on your judgment is the $2,000,000.00 of insurance that he has, leaving you with a $2,000,000.00 shortfall and a real concern as to how you will be cared for for the rest of your life.
UNLESS, you have properly insured yourself with a substantial umbrella policy on top of the primary limits of $2,000,000.00 of your automobile insurance. If, for example, you had a $3,000,000.00 umbrella policy, then the full $4,000,000.00 judgment rendered against you in Nightmare Scenario #1 would be paid. Your primary automobile insurer would pay the first $2,000,000.00. That primary policy having been exhausted, your umbrella insurer would then pay the next $2,000,000.00 and fully satisfy the other driver's $4,000,000.00 judgment. You would be fully insured for the event and your assets and income would be fully protected.
In Nightmare Scenario #2, the other, negligent, driver would be considered "underinsured" because your claim far exceeds his liability limits. If you had a $3,000,000.00 umbrella policy you could then sue your own insurer for the shortfall you suffered in being able to collect the full $4,000,000.00 judgment against the negligent driver. This claim would be made under the underinsured provisions of your own automobile policy.
Since you and the other driver in Nightmare Scenario #2 both have liability limits of $2,000,000.00, you could not proceed against your own insurer for the shortfall since you cannot "stack" the policies. It is only when you have more liability limits than the underinsured driver that you can access your own policy.
In my law practice I rarely see people with automobile insurance policies having more than $2,000,000.00 in liability limits. I am dumbfounded by that because the umbrella policy is relatively cheap. I personally insure a house, a cottage, two cars and a motorcycle, all with $2,000,000.00 in primary liability insurance. I have an umbrella policy of $3,000,000.00 over all 5 policies which costs a total of $325.00 a year. The $3,000,000.00 umbrella policies for the two cars that I insure each cost $60.00 a year.
My philosophy is that you do not buy insurance for the minor claim. You buy insurance for the catastrophic claim; the type of claim that can leave you in dire financial straits; the situations covered in both Scenarios #1 and #2 above. So if I can offer any advice in this article it is speak to your broker about putting an umbrella policy in place. Although not every insurance company offers them, these policies are without question available.
None of us expect a catastrophic event to occur in our lives. They are indeed very rare and that is the reason why umbrella policies are relatively inexpensive. The primary insurance that we have will cover the vast majority of claims that occur and umbrella policies are rarely called upon. However, these catastrophic events occur in our community every day; I see them all the time in my practice. So we can either "whistle past the graveyard" and hope that it doesn't happen to us or protect ourselves in the unfortunate event that it does.
Howard Yegendorf is a partner in the law firms of Howard Yegendorf & Associates LLP and BrazeauSeller.LLP. He practices personal injury law. He is certified by the Law Society of Upper Canada as a specialist in civil litigation and is also a Chartered Insurance Professional.