This is a simple question about how liability insurance works. In general, my question is:
Does liability insurance protect your assets up to the amount of liability insurance you buy, or does it just add a buffer amount, after which your assets are at risk?
For example, let’s say you have $500,000 of assets and you buy $1,000,000 of liability insurance. You get a claim against you for $1,300,000. Does this mean:
The million dollar policy protects your assets, and the payout to the claim is $1,000,000, or
The million dollar policy pays out $1,000,000, and you are responsible for the additional $300,000, reducing your assets to $200,000.
Yes, the insurer has an obligation to try to resolve it within policy limits, if they can’t, they usually have an obligation to defend.
(sometimes, the cost of defense erodes the policy limits, so if they spend $200,000 defending you, you have $200,000 less in insurance to pay the plaintiff)
Your personal assets may be at risk if you get a judgment against you in excess of your policy limits, as has been stated.
However, to complicate matters, if the insurance company had a reasonable opportunity to settle the case for an amount within the policy limits and didn’t do so, you may have some sort of claim against the insurance company depending on what jurisdiction you’re in. In that case, the company might pay the whole amount of the judgment anyway just so they don’t end up in a lawsuit with you. Or they may negotiate with the plaintiff and pay an amount in excess of the limit but lower than the judgment. I’ve seen this happen from time to time.
A surprising number of people who really should know better* tend to confuse the legal distinction between the extent of insurance and the extent of liability.
As a general rule (and there are certainly exceptions) the two concepts are unrelated.
If you think through your option #1 it could not possibly be correct. It would mean that one could unilaterally control one’s level of liability to third parties simply by the level of liability insurance one takes out. Assuming that the claim for $1,300,000 is valid, how could it possibly be just for me to not be liable to pay the claimant (even though I have the assets to do so) simply because of the terms a contract I entered into with someone else (the insurance company)?
*Businessmen who draft their own contracts, sadly some commercial lawyers who draft contracts, juries, and with the very greatest of respect, some judges, IME)
Eh? Defense costs are not deducted from the policy limit under any liability policy I’m familiar with. That may be the case for homeowners’ policies, though.
No, not typically homeowners policies, but dp,r commercial General Liability policies, and some E&O policies. They’re called “eroding” or “cannibalizing” policies. I had one in a case we were trying to settle just last week. Defendant had a million dollar policy, but only about $825,000 left because of defense costs. It’s a strange thing, but real.
I’ve never heard about it being illegal. (except perhaps for homeowners and auto polices, that are heavily regulated) It’s not a daily thing, but I run across one in litigation at least several times a year, nationwide.
Let me offer a suggestion about how this mistaken belief arose: There are many times when A has a reasonable claim with which to sue B, but B has limited or no money, and so A will drop the case unless B has adequate insurance. There are at least three reasons why A would drop the case: (1) Even though A is entitled to the money, and it is possible that if A wins, the court might even grant A a portion of B’s welfare check for years to come, until the debt it paid, many people would find it in their hearts to just “let it go” rather than subject B to such unusual poverty. (2) Even if A wants to insist on his rights and his needs, without a reasonable expectation of actually getting the money, it may not be worth the effort. (3) Even if A feels that it is worth the effort, he might not find a lawyer who feels that it is worth the effort.
For these reasons, and maybe others, many people have an attitude that if the other party is not insured, then don’t sue.
Another problem is that (particularly in complex commercial contracts) people - including sadly some lawyers IME - mistake “having liability insurance” with “having liability”.
I see contracts where it is stated that Party A must take out liability insurance. Then something goes wrong and Party B says “Hey, Party A, you’ve got to pay for this!” and Party A says “nope, we haven’t done anything wrong” and Party B says “But, but… under the contract you had to take out liability insurance”. Uh, no, that just means if Party A is liable their insurance will answer, not that Party A is liable.
Just to nitpick, but any garnishee-type settlement usually allows the person paying to keep a reasonable amount for living expenses. I suspect that exceeds the typical welfare cheque, so someone suing would get nothing.
I have heard of this called the “Kamikaze Defence” or “go ahead and sue, if you win you won’t even recover lawyer costs”.
I imagine that much the same principles apply over here in the UK. However, in my limited experience, liability is limited but for a considerable amount.
For example my travel insurance covers personal liability as follows* “The most we will pay for all claims arising from any one event is £2,000,000 for each insured person. We will also pay any extra costs and expenses that you have to pay as long as we agree, in writing, beforehand.”*
On medical expenses it says* “The most we will pay for each insured person is £10,000,000 if your trip is outside of your home country or £5,000 if your trip is within your home country”*
ALAE Included in Limits
ALAE pro-rata
ALAE Outside of Limits
[ALAE means Allocated Loss Adjustment Expense, the bulk of which = lawyers’ fees]
So for example say you have a policyholder liable for $1.5 million, with a $1 million policy limit, on a claim which incurred $500,000 in legal expense. With ALAE Included in Limits, the policyholder pays the full $500k. With ALAE Outside of Limits, the insurance carrier pays the full $500k. With ALAE pro-rata, the carrier pays two-thirds of the $500k and the policyholder one-third.
Estimating the cost differences associated with these three types of policies keeps actuaries employed.