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Thursday
Jul062000

Will Insurance Make You a Target for Lawsuits?

In a recent LegalBrief, I discussed how important it is to make sure you have adequate insurance. Yesterday a client ask whether insurance will make them more of a target to plaintiff’s lawyers. This is a question that may interest other LegalBrief subscribers. Our discussion is set out below.

A group of professionals that have decided to merge their separate practices wrote on 7/4/00 2:09 PM:

OK Alan. Here is one that is still grating on me. We have been told over the years that the lawyers in general are going after the deep pockets (if we are part of a lawsuit) and that carriers of E & O are the first to get hit.

It is true that a lawsuit does not make economic sense unless there is 1) liability (someone did or is alleged to have done something wrong), 2) there are damages (some actual harm resulted from the wrong action) and there are financial resources to cover at least some or all of the damages. Those financial resources can be insurance or they can be personal assets such as a person's home, investments, bank accounts and income they may earn over the next 20 years.

Some lawyers have said DO NOT carry E & O insurance for that reason.

That is overly simplistic advise that fails to recognize the individual business person's situation. The appropriate question is, do you have assets you want to protect? Do you have equity in your home? Do you have investments? Are you worth more than what you owe? Do you have the ability to earn substantial income over the next 20 years? If you have assets, you can be a target in a lawsuit.

A judgment against an individual for business liability might be avoided in bankruptcy. However, would you want to start over at this point in your life?

Another question to ask is can you afford the cost of defending a lawsuit? Even if you have not done anything wrong, defense costs can go from $5,000 to $50,000 very quickly. In the event of a lawsuit, whether you are liable or not, the insurance company will pay for an attorney to defend you. Payment of defense costs is a very attractive benefit of E & O insurance.

When considering insurance, you need to consider the value of the assets you have to protect, your future earning potential, the risks inherent in your industry and potential defense costs and then weigh those factors against the cost of insurance.

I assume that our protection from each other does not change, whether we are insured or not. Is this true?

This is correct. The threshold question of liability does not change. Is the person named in the lawsuit alleged to have done anything wrong? If not, the mere fact they have insurance will not support a claim.

What if one or more, but not all, are insured, will those insured have a greater exposure?

No. Exposure risks are based on the risks inherent in the industry and the practices of the individual. In theory, a more cautious, more "prudent" person faces lower risks than the reckless person.

How protected from each other are we if we decide not to carry E & O and what would be the other down sides of not having E & O other than the obvious ... no "major medical?"

This question is actually three questions.

First, medical insurance is separate from E & O insurance. You might be able to purchase the two as part of a package, but they are separate coverages. It is possible to have medical insurance but not E & O insurance. Often times, those businesses with both coverages get medical insurance from one carrier and E & O insurance from another.

Second, business entities such as corporations and limited liability companies protect the principals from the negligent actions of others involved with the business, whether it is the act of another principal or an employee. What plaintiff's lawyers try to do, however, is find as many people as possible to allege to be negligent. If an hourly employee driving a motor vehicle during business hours for business purposes is at fault in a traffic accident and someone is injured, both the employee and the business would be liable. Could an owner that is actively involved in the business be named in a lawsuit? Maybe. It is not uncommon on these facts for plaintiff's lawyers to include claims such as claims for negligent supervision.

No protection is bullet proof. I describe the benefits of incorporating or organizing a LLC as being like digging a moat to protect your castle. It is a layer of protection. It may keep out most adversaries but, in certain situations, it can be defeated. Insurance is a second layer of protection.

If your organization ever does have a claim, insurance should cover it and the invading hoards will not even get to testing the limited liability of your business organization.

Third, you asked about the advantages of insurance. For one, it protects your business organization. Over time, you will promote and market the business. It will develop valuable goodwill. If you have a large, uninsured claim, you will collapse the business organization to try to protect the individual owners. In the process, you will lose all that you have built within the business organization.

For another, you will be protecting the individual that is the subject of the claim and the individual's house, investments, bank accounts and future earning potential. You also will be protecting each of the other individuals from claims that they were some how negligent from failing to prevent whatever harm is alleged to have occurred.

As mentioned above, payment of defense costs is another attractive benefit of E & O insurance. With so many nuisance suits these days, for many businesses, this is the most important benefit of insurance.

The primary advantage of insurance is the benefit of moving the risk of a large loss to the insurance company in exchange for a comparatively low premium. Although insurance may make a party more attractive to a plaintiff's attorney, there is no liability unless the party is proven to have somehow done something wrong. There is security, however, from knowing that the business you are building and the assets you are building for your family are protect from the costs and the risks of litigation.

Thanks Alan

You are welcome. I hope this helps your discussions.

The professionals then wrote on 7/5/00 8:59 PM:

Thanks Alan. I think I just needed one more smack against the side of my head... get the insurance. Sleep easier!

******
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