PROFESSIONAL LIABILITY INSURANCE
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Ours is a litigious age, and despite the pieties we hear about limiting lawsuits, Americans sue each other for almost every reason under the sun. Unfortunately, because U.S. citizens continue to sue one another in record numbers, extended personal liability insurance (often called umbrella liability insurance) is essential for most individuals and families. You probably assume your homeowner’s or renter’s policy and/or automobile policy give you an adequate level of protection against lawsuits. In fact, with awards increasingly topping the $1 million mark, even the $300,000 liability limit that a deluxe homeowner’s policy offers could be sadly inadequate when facing a major personal injury lawsuit.
If you are a self-employed professional or small business owner, your personal liability insurance won’t protect you from liability arising out of your professional or business activities. Indeed, your homeowner’s policy probably doesn’t even protect the equipment in your home office, if you maintain one.
For most people, therefore, the best protection against the threat of lawsuit is to purchase an umbrella liability insurance policy. You could get sued because of your business activities, so you may also need professional liability insurance in addition to your umbrella policy. Remember, neither policy is a substitute for the other. This section explains both the danger that lawsuits could pose for your financial well-being and how umbrella liability and professional liability insurance work to protect you from that danger.
In order to understand the risks that a lawsuit could pose, it is important to have at least a basic knowledge of how the U.S. legal system treats civil suits. Personal and professional suits are almost always brought under the jurisdiction of what is called tort law. Quite simply, a tort is any wrongful act (other than breach of contract) that injures an individual or damages his or her property. If you commit a tort, even if your action was involuntary, you may be liable for damages. For better or worse, personal injury torts now include such items as “psychological trauma,” and while many legitimately injured individuals do use the courts to win fair recompense, the current system of tort law does stack the deck against the accused.
The tort for which you stand the greatest chance of being sued is negligence. To determine whether an accused is guilty of negligence, the court must determine whether the individual had a duty to act in a particular manner, and if so, whether he or she deviated from the standard of duty (that is, behave negligently). Even if it is found that the person bringing the suit behaved negligently, you — the accused — may still be liable for damages on the basis of comparative negligence. In other words, the court might find that your negligence was greater than that of the plaintiff, and make an award accordingly. If this sounds scary, that’s because it is. There are plenty of lawyers floating around who are more than happy to represent plaintiffs in their lawsuits against you and other average citizens. If you look at your Yellow Pages, the advertisements on local TV, and the ads in your newspaper, you’ll realize that there are hordes of personal injury lawyers out there.
If you are in an accident for which several persons are deemed liable, you might be held responsible for the plaintiff’s injuries under the rule of “joint and several liability” — even if you were only slightly at fault. Joint and several liability would come into play should your fellow defendants lack the means to pay the settlement. For instance, they might all declare bankruptcy. If you were the only person with the means to pay (perhaps you have a large retirement nest egg or college fund), even though your role in causing the plaintiff’s injury might be a minor one, you could be asked to pay the entire award yourself. Another factor tipping the scales of justice in favor of the plaintiff is the “collateral source rule,” which excludes from the courtroom discussion of other awards that the plaintiff may have received for his or her injury. Under this rule, a plaintiff could win a large personal-injury award even though disability insurance already covered all that person’s medical expenses and income loss resulting from the accident. In some jurisdictions, the plaintiff could thus make a double recovery. Unfortunately, there are some people who make handsome livings out of suing others for all measure of supposed “negligences.”
Two other points need to be raised to emphasize the importance of protecting yourself from a lawsuit. First, if you lack sufficient resources to pay the damages that are assessed, the courts may award the “injured” a portion of your future earnings to satisfy the judgment. Also, be mindful of the high cost of defending yourself from a lawsuit. Even if you “win,” you could end up financially devastated just from paying legal fees. So the scales of justice are really stacked against the average person. While the plaintiff’s lawyer works on a contingency fee basis, the attorneys defending you will demand to paid up front for every hour (or fraction of an hour) that they work on your case.
Now that you understand how calamitous being on the losing end of a lawsuit can be, you should consider how best to protect yourself and your family. There is no need to fear getting out of bed in the morning because a lawsuit may lurk behind every tree; indeed, unless you are accustomed to behaving recklessly, you probably don’t even have to worry about modifying your lifestyle. Instead, simply invest in a good umbrella liability policy and, if necessary, a professional liability insurance policy.
Umbrella insurance is designed to supplement the liability coverage included in your homeowner’s or renter’s and automobile insurance policies. Stand-alone policies may also be available. Fortunately, while — as we have seen — it is very important to have this coverage, an umbrella policy can be obtained at a reasonable cost. Typically, premiums range from $150 to $300 per year for $1 million to $2 million in protection. Naturally, the premium will vary depending on your personal circumstances — the size of your family, number of homes you own, and so on.
Don’t be surprised if the company that issues your umbrella liability insurance (most often the company that handles your homeowner’s and automobile policies) requires you to boost the liability limits on your homeowner’s (or renter’s) and automobile policies. Umbrella insurance is designed to take over when the underlying homeowner’s and automobile policy liability limits have been exceeded. So in addition to the umbrella insurance premium, you may also have to pay somewhat increased homeowner’s and auto insurance premiums to boost those policies’ underlying liability coverage.
A good umbrella policy will protect yourself, family members living in your home, children attending school away form home, and even pets. In addition, the policy should cover legal defense costs, which are crucially important since even the successful defense of a lawsuit can be financially ruinous. Some policies even provide world-wide coverage, although coverage restricted to the United States and Canada is the norm.
When evaluating a policy, keep an eye on the fine print. Policies won’t cover intentional injury or damages unless they resulted from self-defense on the part of the policyholder. Nor do they cover damage to the policyholder’s property, which is the proper province of homeowner’s and automobile insurance. Liabilities willingly assumed are also not covered.
You may be concerned about potential liability in the murky area of volunteer work. You may find that volunteer work is excluded from both umbrella insurance policies and professional liability policies. This situation got so bad a few years ago that some lawyers were advising people to stop doing volunteer work because of the potential liability. But reason has prevailed in many states, where laws have been enacted that protect most — but not all — areas of volunteer work from lawsuit. Still, it is better to be safe than sorry. Ask the organization for which you do volunteer work and/or your attorney about any potential liability. In some instances, you — or preferably, the organization for which you are working — may need to obtain liability insurance protection.
Professional liability insurance isn’t something only doctors and lawyers need. This coverage — also called errors and omissions insurance — is used by a diverse array of professionals, including veterinarians, medical technicians, nurses, accountants, architects, insurance and real estate agents, and engineers. Find out about your exposure to professional liability by speaking to your employer or trade association. How much will premiums cost? Be prepared for a shock, particularly if you’re a physician. But the shock of paying a stiff premium for professional liability insurance is nowhere near the shock of having to cope with a lawsuit arising out of your professional activities.
Determining what kind of insurance you need — and where to obtain it at reasonable cost — can be perplexing. But as in all areas of insurance, a little detective work on your part is time well spent. First, check with your insurance agent or an insurance agent who specializes in insuring small businesses. Also, check with your professional or trade association(s) about liability insurance. You may be able to purchase it through the association, which can refer you to companies that insure members of your profession. Another source of information might be professional colleagues or people who own businesses similar to yours.
If you are a self-employed professional or small business owner, you may well need liability insurance that covers both your office and your professional activities. Why both? Say you are a lawyer, a client comes in for a consultation, and he is somehow physically injured in your office. Your professional liability insurance won’t protect you.
If you serve as a trustee or director, you should determine whether you are already covered by director’s and officer’s liability insurance. This insurance — usually purchased by corporations and larger nonprofit organizations — protects directors and officers against suits for wrongful acts such as breach of duty, neglect, error, misstatement, or omission. If you are not protected, you should consider purchasing a professional liability insurance policy on your own — or resigning your post. Insurance is also available for individuals who have other fiduciary responsibilities such as guardianships or executorships.