June 8, 2024
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Linking Northern and Central NJ, Bronx, Manhattan, Westchester and CT

Risk Management: Liability Protection

“Whataretheodds?”

This is one of the ba­sic questions at the heart of every insurance discus­sion. In this case, the odds involve the like­lihood of being sued. Here are some num­bers provided by IFG Trust Services Inc., an international investment firm specializing in asset protection: Americans have a 10 percent chance of being sued in any given year and a 33 percent chance of being sued in their lifetimes.

Do you like those odds? Litigation, even if eventually settled in your favor, can pose a significant disruption to your financial plans. Besides the potential for financial loss through judgments, pending or unre­solved lawsuits can impede your ability to secure financing or enter into new busi­ness arrangements. Simply responding to legal actions—even frivolous ones that are dismissed—can incur tens of thousands in attorneys’ fees.

Considering the potential costs in both time and money, ensuring your liability in­surance program provides adequate pro­tection is an essential of risk management. While most homeowner and automobile insurance offers a measure of liability pro­tection, a closer review of your circum­stances may prompt a desire for broader coverage.

In general, both home and auto insur­ance policies will assist in a legal defense if you’re sued for an incident that’s covered by your policy. For example, if an injury on your property results in legal action, wheth­er inside or outside your house, your home insurance will provide legal representation. Likewise, auto insurance will cover liabili­ty incidents that involve your vehicles. But there are many other places where litiga­tion may arise. If you have assets to protect, such as a house, professional license, busi­ness, or savings, purchasing an umbrella policy can provide liability coverage above and beyond your home and car insurance.

An umbrella policy, typically, is integrat­ed with existing homeowner or automo­bile insurance. The umbrella coverage may be issued as a separate policy, or added as a rider to one of the existing property insur­ance policies. Tying the two coverages to­gether usually results in a discounted pre­mium.

Other Forms of Liability Protection

In addition to a personal liability um­brella, some occupations also require mal­practice or errors and omissions insurance. Besides insurance, individuals or business­es with substantial assets may also find some liability protection through legal doc­uments and the careful positioning and ti­tling of property, savings, or other valua­bles.

Trusts, Limited Liability Corporations, and other business structures can also min­imize or isolate potential financial losses from litigation.

Assets held inside qualified retirement plans or life insurance policies (as cash val­ues) have some “safe harbor” provisions that may restrict their seizure by plaintiffs who receive a favorable judgment in court.

In some instances, changing the owner­ship of an asset (titling a home in a spouse’s name only) may also limit liability. The protections offered under these arrange­ments vary by state, so expert counsel is a must.

“It won’t happen to me.” Really?

Even when faced with the numbers re­garding their potential liability, many hon­est, law-abiding, conscientious citizens want to believe their situation is different. “Other than an accident that might occur in my car or on my property, who could sue me?” they say. This type of thinking is na­ïve.

Some people make their living exclu­sively through financial judgments; their occupation is “professional plaintiff.” Oth­ers make a living by coming up with cre­ative reasons to press litigation. Do these people abuse the legal system? Maybe; sometimes. But in order to provide a meas­ure of justice for everyone, the legal system has to allow plaintiffs the opportunity to air their grievances, even if they are even­tually found to be without merit. And this means the innocent have to be prepared to incur some legal expenses (or buy insur­ance) to defend themselves. It’s a “cost of doing business” in the United States.

The organization Faces of Lawsuit Abuse (www.facesoflawsuitabuse.org) pub­lishes the stories of individuals, companies, and governments served with outrageous, mind-boggling lawsuits. Keeping in mind that most of these complaints have yet to be heard, and that many will be dismissed, it still makes for amazing reading. For ex­ample:

There’s the fan of a National Football League team who sued because the team sent him too many text messages after he had signed up for the service (“too many” was three additional texts). According to a November 11, 2012 FoxSports report, the plaintiff is seeking “$500 per excessive call for negligent violations and up to $1,500 per call for willful violations.”

A Michigan woman filed a $5 million class-action suit against a financing com­pany for the leftover gas still in her re­possessed car. The logic for asking for $5 million to recover approximately $29 in gasoline? An estimate of how many other cars had been repossessed in the past six years. The suit was dismissed.

In these stories, the damages are min­imal or the case has been dismissed. And the defendants were large corporations with in-house legal counsel. But what if a small business owner encounters the same situation? Here’s the 14-year-long ordeal of a family-owned pest control business in Georgia:

In 1996, the owner was sued by an indi­vidual claiming he got sick due to pest con­trol work done by the company. The owner investigated the claim, found that the indi­vidual had not been near the worksite, and decided to contest the claim.

The case went to trial. The jury found against the plaintiff and absolved the busi­ness from liability. The plaintiff refused to concede and appealed the verdict. Five years later, after a second trial, a jury came up with an identical verdict: the pest con­trol business was not liable.

Yet the issue is still not resolved. The plaintiff is threatening to pursue a third tri­al, or will accept a $500,000 settlement.

Besides endless hours and numerous le­gal expenses associated with multiple tri­als, the uncertainty and emotional distress has made it hard for the business to plan for the future or contemplate expansion. “You’re unable to do anything during that process,” the owner says. “It ties you down so much. It tears me up to this day, sitting there thinking that everything I built is on the line.”

Checklist:

Do you have comprehensive liability in­surance protection?

Do your legal documents insulate valua­ble assets from judgments?

Do your financial assets reside in safe harbors?

Elozor Preil is Managing Director at Wealth Adviso­ry Group and Registered Representative and Finan­cial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected]. See www.wa­groupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.

By Elozor M. Preil

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