Growth is a common theme in most of our lives. Whether it’s our career, our marriage, or our finances, we strive for progress and improvement. This is both healthy and positive.
However, sometimes it’s important to shift our focus away from growth and towards protecting what we’ve already achieved. This is a form of risk management and can be thought about it several different ways.
When it comes to protecting wealth, risk management often centers on investing and ensuring that your portfolio is allocated in such a way that you aren’t exposed to more risk than you have the ability, willingness, or need to take.
However, thoughtful risk management should consider many other exposures to risk as well.
Often, this means having the proper insurance. Other times, it means avoiding unnecessary risks altogether (e.g. allowing your 16-year old son or daughter to take the car out for a joy ride at 2am).
In a lot of cases, properly managing risk focuses on the specific decisions you make on a daily basis (e.g. not drinking and driving).
A key area of risk that in my experience is far too often overlooked or severely underestimated, is that of personal liability.
What is Personal Liability Risk?
You can be held personally liable for many different reasons. Typically this stems from injuring someone or damaging the property of others. The most common examples of this are an auto accident or an accident that takes place in your home. However, personal liability can arise from just about any incident that takes place in which you are found to be at fault.
Examples of Personal Liability Risk
- Collision with another vehicle causing personal injury and/or property damage
- Hitting a pedestrian
- Accident causing non-vehicle damage to private or public property
- Contractor injures himself while working in your home
- Neighbor slips and falls in your backyard
- A tree on your property falls and damages the house next door
- You leave a negative review about a business and are sued for libel
- You get into a public battle on Facebook that turns ugly and results in a lawsuit
It’s also important to remember that physical injury and property damage are not the only examples of personal liability. Did you know that you can also be held responsible for the things that you say or write?
If you are found guilty of slander or libel, you could be on the hook for damages to the injured party’s reputation or brand. This particular risk has grown exponentially in recent years thanks to blogging, social media, and other forms of digital communication.
What is the Financial Risk?
Judgements awarded in personal injury cases regularly run up in to the hundreds of thousands of dollars. Depending on the facts and circumstances, it’s not uncommon to see awards in the millions. This is enough to put most of us in a really challenging financial position (to say the least).
However, it’s critical to remember that the financial risks of personal liability exist even if you are not ultimately found liable by a judge or jury. The reason is simple: In order to be found innocent, you first have to provide for your own defense. And as we all know lawyers are not cheap!
The cost of adequate defense in a personal liability case can easily amount to tens of thousands or even hundreds of thousands of dollars. As a result, even if you are never found to be at fault, you can still be put at severe financial risk while you work to clear your name.
How Does Personal Liability Risk Impact You?
Although it varies by state, you can generally expect that in the event that you are held personally liable for an incident, all of your non-retirement account assets are likely at risk of being used to pay damages.
Worse, it’s possible that a judge could garnish your wages in order to compensate the injured party. Although it may surprise you, it’s true. It is not at all unheard of for the party found liable to be on the hook for a sizeable percentage of their future income for a certain period of time.
How do We Protect Ourselves from Personal Liability?
The best way to protect yourself from personal liability risk is through proper insurance. Specifically, your auto and homeowners/renters insurance policies are designed to provide coverage from the most common incidents that could arise where you might be at fault.
Far too many drivers carry the absolute minimum liability insurance required by the state on their auto policies. Likewise, many homeowners and renters elect liability limits that are simply inadequate relative to their true needs.
Furthermore, most people would be well-served by supplementing their auto and homeowners/renters policy with an umbrella or excess liability insurance policy.
So how do you determine how much liability protection you actually need? Answering that question requires a thorough review of one’s specific facts and circumstances. However, such a review should at a minimum consider:
- Your “at-risk assets” (those that are not protected by bankruptcy or creditor laws)
- Your current and expected future income
- Whether you have young or inexperienced drivers in your home
- Whether your risk of personal liability is higher or lower than average given your lifestyle and occupation
If you don’t have a risk management plan in place or haven’t reviewed your liability insurance coverage recently, I highly recommend that you take the time to do it. If you work with a financial planner, this is a topic they should be speaking with you about. Your wealth and income depend on it!