Protecting your equity from lawsuit damages

Southern California has become a land of paper millionaires, thanks to extraordinary housing appreciation. Nowadays, there’s more to lose if someone sues.

Homeowner’s and auto insurance policies cover only so much. A major tragedy or catastrophic accident threatens a financial nightmare. What’s at stake? The biggest asset of most homeowners -- the house.

“We live in a very litigious society,” said Tully Lehman, of the Insurance Information Network of California.

“If you are ever sued, your standard homeowner’s policy will cover you for up to policy limits -- paying for judgments against you and attorneys’ fees” but not beyond, Lehman said. “As a result, you may want to have an extra layer of liability coverage.”

To protect their homes, owners increasingly are buying personal umbrella policies. Recommended by financial planners as well as insurance agents, this type of policy typically kicks in after the liability limits of homeowner’s or auto insurance are maxed out.

“An umbrella sits over everything you own,” explained Torrance-based Frank Fuoco, an agent with Farmers Insurance Group of Los Angeles. “Like an umbrella keeps you from the rain,” an umbrella policy protects your assets and keeps lawsuits from exhausting them. One-quarter of his 4,000 clients have umbrella policies. Nationally, 23% carry umbrella policies, according to a 2003 Fireman’s Fund study.

The costs of umbrella policies vary. Sam Sorich, president of the Assn. of California Insurance Cos., estimates the cost at about $200 to $300 annually per million dollars of coverage. That’s on top of the cost of homeowner’s or renter’s insurance, plus car insurance.

Factors include what other coverage the homeowner already has and what risk factors -- youthful drivers being one -- are in play. Fuoco quoted the minimum umbrella policy providing $1 million worth of coverage at an annual cost of $332. That would be for a homeowner with two cars and no drivers under 21. With a youthful driver, it goes up to $450 a year.

Is the coverage really necessary?

“I carry it myself,” said real estate author Robert Irwin. “It’s the cheapest way you are going to get the most coverage.

“The umbrella policy is basically a liability policy. The whole idea is: If somebody trips and falls, if you have a swimming pool as I do, if somebody gets injured -- God forbid they drown,” he added, you are protected.

For Karen Kaseno, principal of the Kaseno CPA Firm, APC in San Diego, who has held an umbrella policy for 10 years, it’s “absolutely essential .... It protects our business, our home -- it covers you for virtually anything. I wouldn’t be caught without it.”

Insurance agents recommend purchasing enough coverage to protect your home, possessions, stock portfolio and other substantial assets. That’s for regular folks. Celebrities, Fuoco said, often carry coverage of $10 million to $20 million.

“In California, homes are so expensive and so hard to come by. You definitely don’t want to risk having your home be put up as collateral for a jury award,” said Lisa Wang, a State Farm agent who works out of Torrance. In California, about one in five State Farm homeowner policyholders carries umbrella insurance.

“Even if you don’t own a home,” Wang added, “your wages can be garnered.”

Debra Lucky learned that lesson vicariously, while listening to someone’s story in traffic school. “She had just bought a new condo. She got in a traffic accident. She didn’t know about umbrella insurance. They sued her, and she ended up losing her condo.”

After hearing that story, Lucky asked her agent about extra protection.

“I drive a lot, and I always have driven a lot,” said Lucky, who is in sales and marketing. “And your chances of getting in an accident are higher than someone who goes to and from the office” and drives 10 miles.

The umbrella policy supplements her auto insurance and covers her home in San Diego.

“Nowadays people tend to sue you at the drop of a hat. It’s really just peace of mind,” she said. “In case anything does happen, I’m covered.”

There are any number of reasons to consider the coverage.

“Garage sales,” said Rich Halberg, an Allstate spokesman. “When people have garage sales, they don’t realize how much liability they’re taking on when you’re inviting people onto your property.”

Added Lehman of the Insurance Information Network: “If a dog bites you, you could have some medical expenses as a result of that, and possibly a lawsuit. You have pools or trampolines, which are other examples that have higher risks.”

Not every homeowner needs the additional coverage, but Whittier-based Allstate agent Randy Navarro proposes this formula: “Are you ... one of these wonderful California citizens who bought your house for X, and now it’s worth X to the 10th power?” Translation: That California Craftsman that cost $200,000 two decades ago is worth $2 million today.

“You would want to cover that,” he said.

“You would want to make sure if someone was hurt on your property that they didn’t get into your equity.”