17 Will Insurance Cover My Loss?

William was glad that he’d consulted an attorney after his motor-vehicle accident. William’s no-fault auto insurer had quickly assured William that it would pay for his vehicle repair and the medical expenses William incurred for his serious accident injuries. The no-fault insurer also paid William for part of his work loss, for the three months he was unable to work due to the accident. But when William consulted an attorney, he learned that the no-fault insurer also owed him for replacement service expenses. And William also learned that he had a third-party no-fault tort-threshold claim against the other driver whose fault had caused the accident. William would far rather have avoided the accident. But to make a decent financial recovery for all his pain and loss at least helped make up for it.

Insurance

Insurance can be a big part of litigation. You may, for instance, suffer a loss under circumstances where someone else is to blame for it, and you have a negligence or other liability claim against them to make them pay for the loss. Your own insurance may cover the loss so that you don’t need to sue the party responsible for it. Yet your insurer may elect to file a lawsuit once the insurer pays for your loss, but that’s up to your insurer and not your problem. On the other hand, if you have no insurance coverage of your own or your insurance pays for only part of your loss, you may decide to proceed with your claim against the responsible party. That party, though, may have their own liability insurance to pay you for the loss. Thus, your own insurance or the responsible party’s liability insurance may cover your loss, with or without the necessity of a lawsuit. Look around for insurance if you suffer a loss. Insurance may dictate whether you sue and, if so, whom you sue, on what legal claim, and for what loss. 

Indemnity

Insurance policies indemnify insureds for losses. Indemnity is a fancy word referring to payment, coverage, or reimbursement for loss. A health insurance policy indemnifies or pays for healthcare costs. A vehicle insurance policy indemnifies or pays for vehicle accident repairs and for liability owed to another party due to loss from careless vehicle operation. A homeowner’s policy pays for accidental home damage and may include a liability coverage to pay for harms to guests from defects on the premises. Wherever you see an insurance policy, it is generally indemnifying or covering for the risk of a certain kind of loss, either a loss to the insured party or a loss caused by the insured party. Some insurance policies, like a homeowner’s policy or commercial-general-liability policy, cover both kinds of losses, to the insured party and caused by the insured party. Pay attention to insurance coverage relative to your lawsuit, if your lawsuit involves some kind of unintentional, accidental loss.

Defense

Liability insurance policies generally have a second valuable feature beyond paying for losses. Liability insurance policies also bind the insurer to pay for the cost of defending claims for losses. That obligation means that the insurer will choose, retain, and pay attorneys and court costs to defend the insured against a claim for a covered loss. A liability insurer’s defense obligation makes sense. If the insurer is going to pay for the loss, the insurer would also want to choose and pay its own attorney to defend against the claim and thereby minimize the insurer’s loss payment. The insurer wants to retain skilled and experienced defense attorneys to minimize the insurer’s payment and maximize its profits. To the insured party, the insurer’s obligation to pay the defense attorney and court costs can be just as valuable in some cases as the insurer’s obligation to pay for the loss. Defense attorneys and court costs can be expensive. If you face a lawsuit alleging a loss for which you have liability insurance, notify your liability insurer promptly so that your insurer will both pay for the loss and defend the lawsuit demanding that payment. 

Health

Health insurance may well play a role in your lawsuit, if your lawsuit involves any medical expense. While health insurance is not liability insurance, health insurance can play a role in liability lawsuits over personal injuries in which the injured person had insured medical expenses. In that case, the health insurer will pay the injured person’s medical expenses, reducing the injured person’s damages in the liability lawsuit. Depending on your state’s law, the defendant in the liability lawsuit may either get credit for the health insurer’s payment, reducing the defendant’s damages obligation, or the defendant may have to pay for the medical expense so that the injured person can reimburse the health insurer as the policy would very likely provide. Rely on your attorney to help sort out how these payments work in your state. Just know that your health insurance can affect your recovery in a liability lawsuit for medical expense due to your personal injury. 

Vehicle

Vehicle insurance will almost surely play a role in your lawsuit, if it has anything to do with a vehicle accident. All states mandate that vehicle owners maintain insurance on vehicles operated on the public highways. Vehicle insurance can be both a liability insurance paying for loss you or other insureds under your policy cause to others by negligent operation of an insured vehicle and to pay for your own vehicle or other covered loss. Motor-vehicle-insurance laws vary widely from state to state, with several states having no-fault insurance laws that modify the common law of negligence. Vehicle-insurance policies also vary widely, with some policies covering vehicle repair (collision coverage) but other policies not covering vehicle repair. Some policies also include special underinsured-motorist (UDIM) and uninsured motorist (UM) coverage. Consult a qualified attorney for how the vehicle-insurance laws of your state work and to learn your full rights under your specific policy. If you have a motor-vehicle accident for which you have insurance coverage, expect it to pay for some or all of your accident losses while also paying for some or all of the losses you cause to others due to your negligent operation of a motor vehicle. Your vehicle insurer may pay not only for the loss you cause but also for the attorney to defend you.

Homeowners

Homeowners insurance may play a role in your lawsuit, if it involves an accident or other loss in or around a residence. Homeowners insurance is another form of insurance that can both cover your home loss from fire, flood, wind, or other accidental damage, while also covering your liability to a guest or other person injured by a defect on your land or in your premises. A guest’s trip and fall over a torn carpet, slip and fall on icy steps, or fall down stairs with a missing handrail that the building code requires could all be liability examples, depending on your state’s negligence law. Your homeowner’s insurance may even cover your liability to another for defamation or other peculiar claims falling under what homeowner’s policies call advertising injury. If you face a liability claim, notify your homeowner’s insurance of the claim in case it falls under your policy’s coverage. You may end up with both indemnity and defense of the lawsuit against you, sparing you of any out-of-pocket costs.

Malpractice

If you face a lawsuit alleging your professional negligence, or if you sue a professional for careless service, malpractice insurance is likely to play a role in your lawsuit. Malpractice insurance is liability insurance covering professionals like physicians, nurses, dentists, lawyers, engineers, and accountants. If the professional causes an injury or loss through the professional’s service, the malpractice insurer will both retain a defense attorney and indemnify the loss. The professional may end up paying nothing, not for defense and not for the loss. Insurance policies tend to give the insurer the choice whether to settle the lawsuit and, if so, for how much, although law requires the insurer to exercise that discretion in good faith. The insured is only along for the ride. But in the case of malpractice insurance, especially in the medical field, a settlement may affect the professional’s license or reputation. Some malpractice policies thus give the professional a veto over the settlement decision. Nonetheless, expect a malpractice insurer to call the shots in your lawsuit involving professional performance. 

Bonds

If your lawsuit involves construction defects and the liability of contractors, you may find that bonding plays a role. In the construction trades and some other fields, bonds take the place of liability insurance. The project owner retaining the contractor will require the contractor to obtain a bond to cover any defect or failure in the work. Bonds differ from liability insurance in that the surety company does not pay to defend the claim. Instead, the surety investigates the claim and pays it if valid. The surety then recovers from the bonded contractor the amount it paid, including its investigation costs. A bond is thus more like a letter of credit than insurance. A bond neither indemnifies the contractor nor defends the contractor. A bond instead pays the owner while the surety issuing the bond collects or attempts to collect from the contractor. Expect bonds and their sureties to play a role in your litigation if arising out of construction work. Bonds may apply in other situations, such as to errors or misconduct by notary publics. 

Commercial

If your litigation involves negligence claims against a business, you may find a commercial-general-liability (CGL) policy playing a role. Businesses purchase CGL policies to insure the business premises against fire, flood, and other accidental loss. A CGL policy may also pay for business-interruption loss from accidents and occurrences. CGL policies can also cover products liability for injuries from products that the business makes and sells and pay slip-and-fall, trip-and-fall, and other negligence liability to business visitors. The CGL insurer will also select the defense attorney and pay for defense of the lawsuit, not just to indemnify the loss. Expect a CGL insurer to be involved in the defense and settlement of your lawsuit involving a business entity’s negligence. 

Directors

If your lawsuit involves the actions of directors or officers of a business or nonprofit, particularly their misfeasance or malfeasance, then directors-and-officers (D&O) insurance may cover the loss and pay for defense of the organization and the accused directors and officers. Corporate and nonprofit entities rely on boards to govern their operations. The board members, often serving as volunteers or for nominal compensation, may be founders, owners, donors, or representatives of key partners, suppliers, or fields. The board members, also called directors or trustees, plainly don’t want any personal liability arising out of their corporate decisions, especially when serving as volunteers. Corporate and nonprofit entities also rely on a president, vice-presidents, and a corporate secretary and treasurer to lead the organization in carrying out board directives. D&O insurance pays for the defense of, and indemnifies, these officers and directors. Expect D&O insurance to play a role in your corporate-governance lawsuit.

Government

If your lawsuit involves the liability of government agencies, officials, or employees, liability insurance may play a role. Government agencies and officials may well have immunity from most but not all liability. Government agencies pay settlements in civil lawsuits, for injuries arising out of building defects, sidewalk defects, roadway defects, and constitutional violations including police excessive force. Government units often have substantial taxpayer funding and other resources out of which to pay for that liability. Commissions, councils, and other governing bodies will budget for liability and approve settlements out of those funds. But some governmental units purchase liability insurance to supplement or replace those funds. And other governmental units participate with other units in liability pools that insurers administer. Thus, expect some insurance company or similar liability pool to play a role in your lawsuit involving government liability. 

Limits

Insurance policies have limits, and those limits can play a role in lawsuits for larger amounts approaching and exceeding those limits. An insurance limit is the maximum amount the insurer must pay in the event of an individual loss. If the loss exceeds the limit, the insured retains liability for the excess loss. Liability insurance, in other words, doesn’t pay for all the loss, only the loss up to the purchased limit. When, for instance, you buy your motor-vehicle insurance, you choose how high of a liability limit to buy. State laws permit motor-vehicle liability limits as low as $15,000 or $25,000, although some states require higher limits such as $50,000. But you may purchase limits of $100,000, $250,000, $500,000, $1 million, or even more with an umbrella policy. Policies also have cumulative limits arising out of a single occurrence, often double the individual limit but sometimes the same as the individual limit. You may, for instance, have purchased vehicle insurance with 50/100 limits, meaning up to $50,000 per individual and $100,000 cumulatively among all individuals per accident. If your lawsuit involves a substantial loss, beware how insurance policy limits may affect the recovery and leave personal liability remaining after payment of the limits. 

Deductibles

Insurance policies also typically have deductibles. A deductible is the usually small amount that the insured must pay before the insurer’s obligation to pay kicks in. Motor-vehicle insurance, for instance, may have a deductible of $500 or $1,000, depending on state law. Other insurance policies, like homeowners insurance, may have significantly higher deductibles. Deductibles, though, generally apply only to the insured’s own loss, not to the liability coverage. If, for instance, you face a lawsuit alleging your liability covered under your homeowner’s policy, your homeowner’s insurer would indemnify you for all the loss without you first having to pay a deductible. If, on the other hand, you made your own claim on your homeowner’s insurance for your home’s damage, you’d first have to pay the deductible before your homeowner’s insurer stepped up to pay the rest of the loss. 

Subrogation

You may find an insurance company claiming a lien on a recovery in your lawsuit or even seeking to intervene in the lawsuit, if the claims involve insured losses. Insurance policies generally grant the insurer a right to stand in the shoes of the insured, or to subrogate, to assert the insured’s tort claims, to recover amounts that the insurer pays to the insured. If, for instance, a careless driver crashes a motor vehicle into your residence, your homeowner’s insurance would likely pay for your home’s repair. You wouldn’t have to sue the careless motor-vehicle driver. Your homeowner’s insurer, though, may well sue the careless driver to make the driver’s vehicle insurer reimburse the homeowner’s insurer for the amounts it paid for your home’s repair. If, on the other hand, you went ahead and sued the careless driver because the crash also damaged personal property that your homeowner’s insurer did not cover, then your homeowner’s insurer might claim a lien on whatever you recovered for the home-repair loss or might instead intervene in your lawsuit to recover the full home-repair cost. Expect subrogation rights to affect your lawsuit involving losses for which insurance paid at least in part. 

Reflection

What insurance coverages have paid or are obligated to pay for all or any part of the losses alleged in your lawsuit? Who has the insurance coverage, you, your opposing party, or both? Have you or your opposing party promptly notified all insurers to give them the opportunity and obligation to indemnify and defend? Are any insurers claiming liens or seeking to intervene to protect subrogation rights? Do you have the obligation under your insurance policy to notify your insurer that you are pursuing recovery rights out of which the insurer may have a right of reimbursement? Do the losses alleged in your lawsuit approach or exceed the limits of the involved liability insurance policies? If so, consult your attorney regarding the potential impact of that excess liability. If the insurer retained and is paying for your attorney, then consult independent counsel. 

Key Points

• Insurance coverage may affect rights relating to your lawsuit.

• Liability insurance indemnifies against having to pay another party.

• Liability insurance also requires the insurer to pay defense costs.

• Health insurers may claim reimbursement out of expense recoveries.

• Vehicle insurers may owe both repair and liability coverage.

• Homeowners insurance may cover personal liability to another.

• Malpractice insurance covers professional negligence liability.

• Bonds pay for work failures, but sureties recover from the contractor.

• Commercial general policies pay for negligence and products liability.

• Directors and officers may have insurance coverage for misfeasance.

• Liability insurance has limits beyond which the insured must pay.

• Liability insurance does not generally have a deductible to pay.

• Liability insurers retain subrogation rights to recover their payments.

Read Chapter 18.