NEW YORK (CNNfn) - Your dog bites the mailman, gashes his leg and puts him in the hospital for three days. A can of paint falls from your roof and ruins your neighbor's exotic flower garden. Your car skids on an icy road and smashes into the neighbor's garage.
In another age, these incidents may have been referred to as accidents, the consequence of human fallibility.
But in the ambulance-chasing, litigation-ridden 1990s, they are often fodder for prospective lawsuits.
Millions of lawsuits are filed in the United States each year, at an estimated cost of about $150 billion, or 2.5 percent of the Gross National Product, according to Citizens Against Lawsuit Abuse, a non-profit organization striving to limit the number of frivolous lawsuits. The chances of one of these lawsuits being directed at you grows each year.
"The biggest misperception people have is that they aren't going to be sued or that a lawsuit won't have merit and will be settled for a small amount," Don Griffin, a director at the National Association of Independent Insurers, said. "But that's not typical in this day and age."
The liability insurance provided by most property and auto policies almost always pays for accidental injuries to another person or to another person's property. But that coverage is usually limited to between $100,000 and $300,000.
Umbrella insurance picks up where standard policies leave off, extending and, or, broadening liability coverage.
The umbrella's protection
An umbrella may increase liability limits, most commonly to about $1 million, on current property or auto policies. Umbrellas can also extend protection to situations in which you would not normally be covered, such as libel, slander, defamation of character, false arrest, or invasion of privacy.
Umbrella insurance is designed to be a supplement, so most insurers require you to maintain specific coverage amounts on your property or car policies. You may even be required to increase the liability amounts on your current coverage to qualify for the umbrella.
The cost of umbrella insurance is relatively low, about $200 a year for a $1 million policy.
Not everyone needs umbrella coverage.
If your assets are minimal and you do not fall into a high-risk category, the basic coverage offered by your property or car insurer may be sufficient.
But be careful. What you consider harmless may be more dangerous than you think.
"You could be the best driver in the entire world. But if there is a 10 car pile-up and you're number 5, you're going to get sued no matter what," said Jeanne Salvatore, vice president for consumer affairs at the Insurance Information Institute.
In fact, automobile accidents are at the root about two-thirds of all state tort cases, according to a 1995 Department of Justice study.
Other seemingly innocuous factors, such as dogs or swimming pools, could greatly increase your chances of being hit with a liability claim.
Dog bites, for example, make up one-third of all homeowners' claims, a figure that translates into an estimated annual pay-out of $1 billion, according to the Insurance Information Institute.
Bear in mind that liability coverage does more than protect you from lawsuits.
"Liability insurance is not just for getting sued," said Madelyn Flannagan, director of research and information at the Independent Insurance Agents of America "It's goodwill insurance. It's to protect you from financial loss if someone gets injured in your home (or auto)."
A good friend who slips and falls on your icy driveway, for example, may not want to sue, but will want her medical bills covered. Liability insurance will take care of those costs without putting you in the red.
Safeguarding your image
Aside from concrete risks, the way you are perceived could play a big role in determining your chances of getting slapped with a lawsuit.
If the extent of your assets is public knowledge -- or even if you simply are believed to be wealthy, people may be less forgiving and more likely to file suit. Doctors and lawyers, for example, are often seen as big earners.
Anybody who is in the public eye is also a likely litigation target, no matter what profession he or she is in.
"It could be the smallest pond in the entire world, but if you are a big fish in that pond, you will be perceived as having deep pockets," Salvatore said.
If you fall into either of these categories, an umbrella policy may be worth your while.
Looking at litigation costs
The potential costs of a lawsuit can be great.
According to a national sampling, the mean compensatory award exceeds $700,000 and has grown every year since 1991.
About 40 percent of compensatory judgments exceed $100,000 and more than 10 percent are above $1 million. These figures do not include punitive awards or legal fees.
Liability insurance covers all judgments (up to a pre-determined amount) and legal expenses. In most cases, the insurer will provide a lawyer to defend your case.
Coverage for "that legal defense is what is so important. You could have done nothing wrong but that doesn't mean you aren't going to be accused," said Salvatore.
Because it is in the insurer's interest to keep costs down, it is at their discretion whether to settle the case or proceed with a defense. However, the cost of your defense will not be deducted from your liability limit. Those funds are reserved for settlement or judgment payments.
Reading the fine print
When choosing an umbrella policy, you should be clear about what the policy will and won't cover.
If you run a home-based business, for example, you will most likely need a business liability policy in addition to any personal coverage you have. That's because a personal liability policy will not cover any injuries incurred while someone is on your property for the purposes of conducting business.
Business liability insurance differs from professional liability coverage, which protects a worker in the event of a malpractice suit.
If you engage in any high-risk activities, such as race-car driving or sky-diving, you will want to disclose that information to your insurer. Coverage for related accidents or property damage will likely require additional premiums.
Above all, make sure your liability limit matches or exceed your total worth.
"If you're involved in an accident and you're at fault
$500,000 may not be enough," said Griffin. "Do you really want to lose your house because you failed to spend an extra couple of hundred bucks?"
-- by staff writer Nicole Jacoby