Personal Liability in the Homeowner’s Insurance Policy

Owning or renting a residence has a certain amount of risk associated with it. Anyone who visits your residence can become a plaintiff in a lawsuit against you if they are injured at your residence. Also, resident employees such as Nanny’s or Caregivers may present a certain amount of risk as well. Oh but our Nanny or Aunt Jane would never bring a suit against us, oh really? What if Aunt Jane breaks a hip after falling down your stairs because the carpet covering them happens to be loose? Would she get advice from an attorney to sue your insurance company? Of course she would. This is why personal liability protection is built into the homeowner’s and renter’s insurance policy.

When a personal injury lawsuit is brought against a homeowner, it is not for just the cost of medical care. In most cases the remedy sought is for medical bills both current and future, pain and suffering, and lost wages. This can in many cases, amount to tens of thousands of dollars. Without the proper coverage offered by your insurance policy, the cost of legal fees alone can be financially devastating. All standard homeowner’s insurance policies offer some personal liability coverage. Most companies offer $100,000 in coverage included in the standard policy. For an additional premium, usually about only $25 per year, the limit can be increased to $300,000. Most insurance companies have a $300,000 maximum on this coverage but there are several that will go as high as $500,000.

What limit is best to purchase?

Consider first what the liability protection is for. If you or a resident family member is named in a lawsuit for personal injury, what is the value of your assets that can be at risk? For many people that may be a low amount. For others, the amount may be much larger if they own a considerable amount of assets. Also, the homeowner must take into consideration the cost of their defense. Good attorneys are expensive and a case may drag out for a year or more which can run legal expenses into the tens of thousands of dollars. The personal liability coverage in the homeowner’s policy includes a duty of the insurance company to defend the insured if a lawsuit is filed against them. If the insurance company’s legal team feels they have a winnable suit then they will most certainly defend you and force the plaintiff to pay all legal fees. If not, then chances are probable that a settlement will be made on your behalf.

What if I need more than $500,000 in coverage?

Many people do and that is why the insurance industry provided an umbrella policy. This policy is purchased in limits of $1,000,000 to $5,000,000. Its purpose is exactly what the name suggests. If your limit of personal liability on your homeowner’s policy or auto policy is breached, the umbrella kicks in to pick up the balance. Most umbrella policies require at least $300,000 in coverage from the underlying (homeowner’s and auto insurance) policy. You can think of this as a deductible for the umbrella policy and the homeowner’s or auto policy fills the gap. Anyone who has assets that amount to $300,000 or more should consider purchasing an umbrella. The cost is very reasonable and the peace of mind is priceless.

Directors & Officers Liability Insurance

Any board member or company officer serving at a for-profit or non-profit company is at risk of being accused of wrongful misconduct when they are acting on behalf of the organization they represent. Directors & Officers Insurance (D&O) is the vehicle used to transfer this risk to an insurance company.

Most of these policies cover alleged wrongful acts that have taken place either before or during the policy period. Many policies that are purchased may or may not include coverage for “past acts”, and for that reason the applicant must pay close attention to the “retroactive date” listed on the policy. Since coverage is provided on a “claims made” basis rather than “occurrence” basis like other liability policies, a claim may be filed based on an alleged wrongful act that may have occurred several years before the current policy was purchased. For this reason, changing insurance carriers will require the applicant to completely disclose much information regarding the history of the company.

While historically only directors and officers were covered under the D&O policy, today many policies are expanded to include upper level managers and non-executive employees. Also, the company itself can be afforded coverage. Claims can be brought by stakeholders, customers, consumer groups, competitors, suppliers and government regulatory groups.

Typical exclusions include fraud, illegal compensation, intentional acts, pending and prior litigation, accounting profits and ERISA claims. The D&O insurance policy will always exclude coverage that should be provided by another type of policy such as General Liability and Fiduciary Liability. Insurers may also exclude other items based on the claims history of the applicant.

The exact definition of a claim can vary among policies and insurers. In fact, some companies and policies do not define it at all. In most cases, a claim includes any type of written demand that accuses an alleged wrongful act by a director or officer acting in their capacity of such, and seeks monetary or non-monetary damages. It can also be expanded to cover investigative activities and subpoenas in actions that want to hold the individual liable.

Fortunately the D&O policy will reimburse the company for costs associated with legal defense, investigation, and negotiating a settlement of a covered claim. The reimbursement will include attorney’s fees, court costs and fees for expert testimony provided for depositions or during a trial. There will always be wording in the policy for “reasonable defense costs” to protect the insurer from paying for excessive expense costs. The carrier will also require advance notice of expense costs and demand that consent be given in advance.

What the insured will not be reimbursed for is typical in most policies. This includes civil and criminal punitive penalties, multiplied damages and amounts that are uninsurable under the law. Today however, carriers are modifying their contracts to allow coverage for punitive damages where allowed by law. Most D&O policies contain a provision that states that an insured is not permitted to settle a claim without the carrier’s written approval. This becomes a matter of relevance if the insured expects their carrier to participate and contribute to the settlement. Conversely, the carrier will not agree to settle a claim without the insured’s consent. However, if the carrier and the insured are at an impasse, the carrier can elect to invoke a clause referred to as the “hammer clause”. This clause limits the carrier’s liability to what the carrier and plaintiff have agreed to plus defense costs. If the claim ends up totaling more than it could have been settled for, the additional amount is not going to be covered.

Whole Again

Why is life insurance so important for families?

There may be no better motivation for purchasing life insurance than protecting family and loved ones. Most young married couples begin accumulating debt while building the family. Cars are purchased, a home is purchased, mouths to feed, clothes to buy and daycare bills consume the weekly paycheck. A life insurance purchase is also “event driven” in that things that happen around us cause us to think about what happens if I die with all the debt I’ve accumulated? The risk is real, no doubt about it. For this reason, we eventually look for a solution to this ever present need for our families. When a friend, business associate, or close family member dies early in life, those around him or her will witness the financial calamity that ensues. This event will be the trigger to pay closer attention to life insurance advertising and finally make the decision to take this “what If” seriously. Circumstances will need to be addressed:

loss of all or a portion of the family income
the mortgage payments
the car payments
savings for college education
funeral & burial expenses
final health care expenses
daily living expenses
taxes

All of these items will need to be considered when determining the amount of insurance needed to make the family whole again. Insurance experts use a “needs analysis” to determine the amount of insurance that is required to finance the existing and future needs of surviving loved ones. Seeking out a reputable and qualified agent is the first step in putting one’s mind at ease. The insurance professional has a duty to identify the needs and present an affordable solution based on the needs analysis. There are different types of insurance products that can be used to deliver the amount of cash needed, some are permanent and some are not. Purchasing a permanent insurance product for a very large risk can be too expensive for most families so other less-costly products must be mixed in to accommodate the family budget. Also, the life insurance plans need to be re-visited every couple of years so they can be modified to accommodate an increase or decrease in the “needs analysis” which remains fluid throughout one’s lifetime. The reputable and experienced agent understands that there is no “one size fits all” solution and will remain in contact with the client to offer solution for life’s changes.

What are the differences between the types of life insurance policies?

Term life

Although Term Life Insurance remains the most economical approach to the solution, it will not be the best solution for the need of the family. In most cases, the term policy will expire (the policy is out lived) and the insured will have to renew at a much higher rate. If the new rate is unaffordable changes will have to be made and underwriting steps will be ordered by the insurance company. The result can become a major problem if the health of the insured has deteriorated.

Variable (Universal) Life

Variable Life is a great product priced somewhat higher then Term Life, but if funded properly can become permanent. This product also builds cash value that can be accessed in the later years for a financial emergency or assist in funding a college education. The policy is flexible so the face amount can be changed as the need is reduced resulting in lowering the monthly premium. This product can be purchased on a fixed or variable basis depending on the needs of the policyholder. It also allows for child term riders (to cover the children) and additional insured (adding a second insured) at a lower rate than having multiple policies.

Whole life

Whole Life Insurance is used as the standard method for insuring final expense costs. Although priced somewhat higher than Term and Universal Life, the policy is guaranteed to stay in force for the life of the insured as long as the premium is paid. The agent using this product for final expense must also take into consideration the rising costs of funerals when recommending a face amount to purchase. Funerals are now expected to double in cost every 10 to 15 years.

The bad news is that there is always the ever present danger of financial devastation resulting from the death of the family earner(s). The good news is that there is an affordable way to make the family whole again by using the various types of life insurance to transfer the risk to a reputable and highly rated insurance company. Knowing this, do not hang up or give an agent grief when they are merely trying to help you identify the need for their product.

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