At Reed & Mansfield we believe that your first line of asset protection should be adequate liability insurance. In other words, if you get sued, make it the insurance company's problem, not yours.
We also sue on behalf of people who have been injured by other people's negligence so we know a bit about liability insurance.
In one of our cases a toddler living in an apartment "escaped" from his ground floor apartment during the night and fell into the apartment's swimming pool because the latching mechanism of the gate was broken. He was revived, but with permanent and severe brain damage. The apartment complex owner had a $6,000,000 liability policy limit. We sued and although the insurance company provided the owner with a defense lawyer, the apartment owner also hired her own attorney at her own expense to beat on the insurance company to settle within policy limits so that she would not be out of pocket. The insurance company knew that if they had a chance to settle for $6,000,000 or less and didn't and a jury awarded more, the apartment owner and her private attorney would sue the insurance company in bad faith to make them pay the full settlement. In this particular case we went to mediation and made a one time offer to settle for $5,750,000. The insurance company quickly agreed. What if we had not settled but had insisted on going to trial? In that case the insurance company would not have paid out any money until the trial was over or possibly until all appeals were exhausted, a process that could take years. The parents of the child wanted immediate money for top care of their child and since the $5,750,000 settlement would provide that the case settled.
Insurance will not cover every claim against you but the right insurance will protect you from most negligence claims not involving spending choices, deliberate bad behavior etc. (The decision to drink and drive can be considered an intentional bad act.)
The best general rule is to have insurance coverage limits substantially larger than your assets. We will explain below why this almost always works to protect against negligence claims. But, even lower limits of liability insurance often ultimately protect you in a lawsuit. For now, let's look at what insurance you can get.
Home Owner's Policy & Auto Coverage
Most people, of course, have a home owner's policy and auto coverage. Usually the home owner's policy protects you against lawsuits for negligence not involving commercial activities. Thus, for example, it might protect you if you ski into another skiier and injure him and he sues you because at the time of the collision, while you were skiing downhill you were yakking on your cell phone instead of watching where you were going. It would almost certainly cover you if you invited a guest over who slipped on marbles your young son left on the floor. Exactly what is covered depends on the particular policy.
But often the home owner's policy has a liability of $100,000 and the minimum auto coverage required in Nevada is only $25,000/$50,000 which is a limit of $25,000 for injury to any one person and a limit of $50,000 for injury in one accident. You should speak to your insurance agent about getting larger limits for your home and auto policies, you may find that increasing your limits will not raise your premiums as much as you may fear.
You should also consider obtaining an umbrella policy. Typically, the umbrella policy extends coverage on the home owner's policy and the auto coverage to a million dollars or more. The umbrella policy requires certain larger limits on the home owner's and auto policies. If you own a boat, the umbrella policy may cover the boat as well, be sure to check with your agent to make sure you have insurance on every kind of vehicle you operate.
If you own rental property the umbrella policy, for an extra premium, may cover lawsuits against you for negligence arising out of the rental property depending on how much rental property you have. If you have a lot of rental property you may need to buy a commercial policy.
Why Even "Inadequate Insurance Coverage" Sometimes Gives Complete Protection:
Suppose you have a $1,000,000 insurance policy and you are liable to a catastrophically injured Plaintiff. Let's say the Plaintiff's attorney figures the case has a value of $1,500,000 to $2,000,000. Your insurance company hires an attorney who also figues the case is easily worth more than the $1,000,000 insurance limit. At this point your insurance company offers the $1,000,000 to the Plaintiff and their attorney in exchange for a complete release of liability. Here's the choice facing the Plaintiff and their attorney:
- Agree to take the $1,000,000 and within a couple of weeks (or a few if the insurance company delays) get a big payday, or,
- Litigate in the hopes of getting a large judgment and then hope that they will actually be able to collect from you after they get a large judgment. Until they get the larger judgment you may legally be able to spend whatever money you have (although if you try to give money and assets away, or sell assets at below-market prices, such transactions could be deemed fraudulent conveyances, see Chapter 112 of the Nevada Revised Statutes). If the Plaintiff gets a judgment in excess of the $1,000,000 policy limit, the Plaintiff could possibly (with a lot of legal hassle) undo transfers of money you made in anticipation of the large judgment. But if you spent the money on a round the world trip, there may be the nothing the Plaintiff can do about that.
Our firm does a lot of personal injury work. In a situation such as the above it would be very rare for a client not to take the substantial bird in the hand.