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Risk Management: Liability Protection

21 January, 2014

“What are the odds?”

This is one of the basic questions at the heart of every insurance discussion. In this case, the odds involve the likelihood of being sued. Here are some numbers provided by IFG Trust Services Inc., an international investment firm specializing in asset protection:

Americans have a 10 percent chance of being sued in any given year and a 33 percent chance of being sued in their lifetimes.

Do you like those odds? Litigation, even if eventually settled in your favor, can pose a significant disruption to your financial plans. Besides the potential for financial loss through judgments, pending or unresolved lawsuits can impede your ability to secure financing or enter into new business arrangements. Simply responding to legal actions – even frivolous ones that are dismissed – can incur tens of thousands in attorneys’ fees.

Considering the potential costs in both time and money, ensuring your liability insurance program provides adequate protection is an essential of risk management. While most homeowner and automobile insurance offers a measure of liability protection, a closer review of your circumstances may prompt a desire for broader coverage. 

In general, both home and auto insurance policies will assist in a legal defense – if you’re sued for an incident that’s covered by your policy. For example, if an injury on your property results in legal action, whether inside or outside your house, your home insurance will provide legal representation. Likewise, auto insurance will cover liability incidents that involve your vehicles. But there are many other places where litigation may arise. If you have assets to protect, such as a house, professional license, business, or savings, purchasing an umbrella policy can provide liability coverage above and beyond your home and car insurance.

An umbrella policy, typically, is integrated with existing homeowner or automobile insurance. The umbrella coverage may be issued as a separate policy, or added as a rider to one of the existing property insurance policies. Tying the two coverages together usually results in a discounted premium.

Other Forms of Liability Protection

In addition to a personal liability umbrella, some occupations also require malpractice or errors and omissions insurance. Besides insurance, individuals or businesses with substantial assets may also find some liability protection through legal documents and the careful positioning and titling of property, savings or other valuables.

-         Trusts, Limited Liability Corporations, and other business structures can also minimize or isolate potential financial losses from litigation.

-         Assets held inside qualified retirement plans or life insurance policies (as cash values) have some “safe harbor” provisions that may restrict their seizure by plaintiffs who receive a favorable judgment in court.

-         In some instances, changing the ownership of an asset (titling a home in a spouse’s name only) may also limit liability.  

The protections offered under these arrangements vary by state, so expert counsel is a must.

 “It won’t happen to me.” Really?

Even when faced with the numbers regarding their potential liability, many honest, law-abiding, conscientious citizens want to believe their situation is different. “Other than an accident that might occur in my car or on my property, who could sue me?” they say. This type of thinking is naïve.

Some people make their living exclusively through financial judgments; their occupation is “professional plaintiff.” And others make a living by coming up with creative reasons to press litigation. Do these people abuse the legal system? Maybe; sometimes. But in order to provide a measure of justice for everyone, the legal system has to allow plaintiffs the opportunity to air their grievances, even if they are eventually found to be without merit. And this means the innocent have to be prepared to incur some legal expenses (or buy insurance) to defend themselves. It’s a “cost of doing business” in theUnited States.

The organization Faces of Lawsuit Abuse (www.facesoflawsuitabuse.org) publishes the stories of individuals, companies and governments served with outrageous, mind-boggling lawsuits. Keeping in mind that most of these complaints have yet to be heard, and that many will be dismissed, it still makes for amazing reading. For example:

 -         There’s the fan of a National Football League team who sued because the team sent him too many text messages – after he had signed up for the service (“too many” was three additional texts). According to a November 11, 2012 FoxSports report, the plaintiff is seeking “$500 per excessive call for negligent violations and up to $1,500 per call for willful violations.”

-         A Michigan woman filed a $5 million class-action suit against a financing company for the leftover gas still in her repossessed car. The logic for asking for $5 million to recover approximately $29 in gasoline? An estimate of how many other cars had been repossessed in the past six years. The suit was dismissed.

In these stories, the damages are minimal or the case has been dismissed. And the defendants were large corporations with in-house legal counsel. But what if a small business owner encounters the same situation? Here’s the 14-year-long ordeal of a family-owned pest control business inGeorgia: 

In 1996, the owner was sued by an individual claiming he got sick due to pest control work done by the company. The owner investigated the claim, found that the individual had not been near the worksite, and decided to contest the claim.

The case went to trial. The jury found against the plaintiff and absolved the business from liability. The plaintiff refused to concede and appealed the verdict. Five years later, after a second trial, a jury came up with an identical verdict: the pest control business was not liable.

Yet the issue is still not resolved. The plaintiff is threatening to pursue a third trial – or will accept a $500,000 settlement.

Besides endless hours and numerous legal expenses associated with multiple trials, the uncertainty and emotional distress has made it hard for the business to plan for the future or contemplate expansion.

“You’re unable to do anything during that process,” the owner says. “It ties you down so much. It tears me up to this day, sitting there thinking that everything I built is on the line.”