So, you have found yourself in the lovely situation where someone has decided that you should pay for their new yacht or at least the cost of fixing their car. It could be that they hit your vehicle–it may mean a little bump, or maybe your dog had tried to chase the mailman one too many times. Whichever it is, congratulations! You are being sued. But before you pack up and head to some non-extradition place, let’s talk about your secret weapon–liability insurance.
What do I mean by liability insurance? You thought auto and home insurance was just about mending dents and dings, covering for hail or water damage? Or that these insurance firms were merely created to take your hard-earned money year after year? Well, now it’s time for a change in perspective. Liability insurance might be what saves you when trouble comes knocking!
Step 1: Don’t Panic (Yet)
First thing’s first. Remain composed. At least try to, anyway. Whether it’s a letter from an attorney or a “we need to talk” conversation with your insurance agent, remember that liability coverage exists for a reason. It’s meant to guard against the financial calamity that may result from someone else’s litigious intent. So, breathe in and breathe out deeply because panic is not only for those without any coverage, but also for unreasonably anxious people, like myself, even when having coverage.
Step 2: Notify Your Insurance Company—Stat!
The following action on this exciting journey is informing your insurer that yes, indeed: you officially you belong to a super fun lawsuit. Time is running out so don’t delay anymore. The sooner you tell them about it, the sooner they can begin preparing strategically on how they can fight back legally. You may be concerned why you’re being deemed at fault, when it doesn’t seem like your fault at all. That’s why there’s liability coverage on your motor vehicle or homeowner’s policy. Doesn’t matter if you were in the right or in the wrong, they’ll cover you either way.
Step 3: What Happens When You Call in the Big Guns
After informing the insurer, let them handle the situation. The good news is that most liability policies come with a duty to defend clause. This means that your insurer has an obligation to provide legal representation for you. Yes, you will get a lawyer without having to sell your car to cover the cost! Insurance companies unleash their attorneys who come flying down like eagles ready to rescue the day (or at least limit losses).
What if someone sued you just because they felt like you had malicious intent? Now worries; even if it’s a frivolous action, the insurance company still owes you its defense. This is because under many policies they are obligated to defend you against any liability claim, even though some may sound ridiculous.
Part 4: The Settlement Shuffle
Let’s discuss settlements. Insurance firms love settlements. Why? This is because it’s often cheaper for them to pay off the claimant than go to court. Besides, who can blame them? Lawsuits are costly affairs that can take years to resolve and are even not guarantee a win. So don’t be surprised if your insurance company suggests that you settle even though you know that you are innocent.
But wait, there’s more: You don’t have to worry about where that settlement money comes from. Your liability insurance covers it all. Thus, the plaintiff gets paid, the lawyers make a killing out of their cases and life goes on for you without ever filing for bankruptcy after a court loss. It’s a real win-win situation.
Step 5: But What If I Lose?
It is, however, expected that you consider your insurance company’s legal team. Make sure they have a good team in good legal standing before proceeding. When there’s a judgment against after losing the lawsuit, the amount owed will likely be handled by your liability coverage up to the policy limit (for example, most homeowner’s policies provide $300,000 in coverage for this type of thing).
Remember this: When faced with a $500,000 judgment, these basic policies with lower limits won’t seem so attractive. The topmost insurers would have recommended getting an insurance policy with high enough caps on one’s assets (home included). You may even ask your insurer about investing in a personal liability umbrella policy whose limits are $1,000,000, minimum.
However, if you turn a deaf ear to these suggestions and decide to opt for cheaper options, well, perhaps it’s time to start counting the coins in your piggy bank, because once your limit has been exhausted, anything above that becomes your responsibility. Yes, you heard me right—YOUR responsibility. Say you have $300,000 on your policy, but you’re sued for $500,000, that difference of $200,000 is the amount you would have to pay out of pocket. Therefore, you want to make sure your limits are adequate even for the worst case scenario.
Step 6: The Aftermath
So that’s it for the lawsuit, the dust has settled and you’re still here. Maybe your insurance rates went up a bit, or maybe they didn’t because your underwriter is one of the good ones who didn’t completely hose you for making a claim. But all in all, you made it out alive. What now?
Take some time to study your insurance policy. Really do this! Because while you might have dodged a bullet this go-round, there’s no telling when you might be in trouble again next time around. Reach out to an agent about raising liability limits or possibly adding on an umbrella policy as well as other options for added protection against possible financial risks. And please remember that there is no such thing as overvaluing good coverage.
Just in case, you ever find yourself in a difficult position, always know this: you are being covered by liability insurance. There is every possibility that your insurer will rise to the occasion and deal with that lawsuit like a pro, or at least help you to avoid financial disaster.
