Is liability insurance enough to protect my assets?
UPDATED: June 15, 2012
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Insurance can be a very useful tool for asset protection. It is designed to transfer the risk of loss away from the insured person and to the insurance company in exchange for a relatively inexpensive fee - the premium. The purpose of insurance is to manage your risks with asset protection as a secondary role.
If you are at risk of being sued, you should purchase as much insurance as fiscally practical. The goal is to create a scenario where a plaintiff and his or her attorney are very likely to accept the limits of the insurance coverage in settlement of a claim, even if the plaintiff’s potential recovery is greater than the limits. The focus should be on the insurance company rather than on the defendant. At the very least, every company should have a general liability policy and every household should have umbrella coverage in addition to homeowner and auto liability policies.
Why Insurance Alone Isn't Enough
Insurance, however, is not a perfect answer. One problem is that it may not be enough no matter how much you get. An unforeseen accident may result in a multi-million dollar award. Such awards have become more commonplace in recent years.
If you have large assets, you may want to get an umbrella policy with $5 million in coverage, but even that may not be enough protection. Don’t misunderstand; insurance should never be overlooked as a means of protection. The many claims it does cover may save you a lot of money (and aggravation). Just be aware that total reliance on insurance may be foolhardy because it does not cover all possible liabilities or provide unlimited dollars to cover claims made against you. Read your policy—you are not covered for everything!
Legal violations such as environmental liabilities or civil rights violations, intentional acts such as slander, and other liabilities such as alimony may not be insured against. Insurance will not typically cover breach of contract claims or sexual harassment, employment discrimination, wrongful termination or fraud. There are also risks of your insurance company dropping you after you present even a minor claim, that coverage will be denied for some reason, or that your insurance company will not be solvent enough to cover all claims. The natural disasters in recent years caused several companies to close and others to cancel policies.
Despite these limitations, be aware, that a great benefit of insurance is that the duty of an insurance company to defend (pay for your legal defense) is much broader than its duty to indemnify (pay for a judgment against you). Legal fees alone can be very expensive. Keep plenty of insurance, but be ready for anything.