Driving a car is the most hazardous everyday activity we engage in, not just from a safety point of view, but from the point of view of our financial health. More than any other activity, driving a car exposes us to the risk of ruinous lawsuits, even when we think we have enough personal liability coverage. We might not be sufficiently aware of the need for safety when driving a car, but we are even less aware of the need for protection from lawsuits, of the substantial awards against us which can ensue, and of the fearsome legal costs which accompany them. The fact is that many people who have personal liability protection barely have enough coverage to meet the legal fees involved in defending a serious lawsuit, let alone to meet a damages award.
That’s a question you should ask yourself now, before the person you might injure asks. Be sure about this, that if you cause personal injury through your own negligent driving then the person or people you injure will be asking exactly that question, and if they don’t then their attorneys certainly will.
The risk at all times is that you will be sued for more than the difference between your personal liability coverage and the legal costs in defending the lawsuit. For example, if your auto policy provides you with $100,000 in liability coverage, and the legal costs in defending the lawsuit amount to $80,000, then the insurance company will pay all of those legal costs. However, that leaves the insurance company liable for only $20,000 more in payments before reaching the limit which you chose of $100,000.
If a court of law orders compensation of $500,000 for medical expenses, lost wages and pain and suffering for the injuries which you caused through your negligence, where will the balance of $480,000 come from after the insurance company has made its final, $20,000 payment? From your own assets of course. Don’t have that level of assets? OK, whatever balance is owing after your assets have been sold can come from your future income, for however long it takes to pay the balance.
If that sounds like a nightmare scenario, it’s because it could really happen to you, just as it has really happened to many others. The problem is, the more assets you have, and the greater your income, the more suable you are. And the more suable you are, the greater the probability that someone will file a lawsuit against you if they think they have even half a case.
While most people with significant assets or income tend to be aware of how suable they are, far fewer people who do not have those assets or that income, but who nevertheless have prospects for significant future assets or income, will be much less aware, if at all. This includes people who are studying in law school or medical school, or those who are studying in any field which promises to pay high incomes to those who qualify, such as in finance.
If you are in the highly suable category, then you need to take extra measures to protect yourself against lawsuits, particularly through higher personal liability insurance limits, but also through coverage for the gaps which are commonly found in auto insurance policies today. However, insurance is not the only means at your disposal for managing your lawsuit risks.
Before you consider insurance as a way of dealing with risk, there are many non-insurance measures which you can and ought to adopt. These are best encapsulated within the discipline of risk management which uses strategies for avoiding, reducing and transferring risk. Clearly it is preferable to minimize your risks when driving a car and to reduce the frequency and extent of losses than it is to focus solely on dealing with matters after the event.
For example, you can significantly reduce your risk of having an accident by buying a car which is fitted with Electronic Stability Control (ESC). It has been found that the risk of having a fatal multiple-car crash is reduced by 20% in vehicles which are fitted with ESC, and for fatal single-car crashes the risk is reduced by 49% for ESC-fitted vehicles. Even more impressive is the risk reduction for fatal single-vehicle rollovers, which is reduced by 72% for cars and 75% for SUVs fitted with ESC. (Farmer, C.M., Effects of electronic stability control on fatal crash risk, Insurance Institute for Highway Safety, 2010).
Here is a checklist of non-insurance risk-reduction steps which you can take:
Make vehicle safety a priority for your car;
Practice safe driving techniques, such as not speeding or following too closely;
Take an online defensive driving course (and save 5% to 15% on your auto insurance);
Don’t drink and drive, or drug and drive;
Take frequent breaks on long road trips;
Have your car maintained regularly and properly by qualified technicians;
Always wear seat belts, and use child safety seats for little ones.
Even after taking reasonable measures to avoid or reduce your risks, you will still be exposed to substantial financial risks when driving a car. However, for the payment of a regular premium you can transfer many of these risks to an insurance company. The problem is, most people think that by taking out an auto insurance policy they will have adequate protection against lawsuits, whereas the amounts of personal liability coverage that many people choose under their policies is quite inadequate, even if they happen to be the maximum levels available. They are either unaware of how large lawsuits can be, or they are not properly advised.
One of the big uncertainties is that you don’t know who you might injure, but who you injure really matters. This is because personal injury lawsuits invariably include compensation for lost wages and pain and suffering, and the latter is influenced by the income level of the injured party. Negligently causing injuries to another driver who is a waitress is not the same thing as negligently causing injuries to another driver who is the chief executive of a large corporation. In taking steps to protect yourself against lawsuits, you need to consider worst-case scenarios, not best-case ones.
The first thing to do is to take out the maximum level of personal liability coverage your auto policy will permit, with that amount preferably being $500,000. If the maximum liability coverage under your existing policy falls a long way short of that then you need to consider getting a new policy. One of the advantages of having a high liability limit is that, even if a claim ends up being higher than your policy limit, the chances of your being sued are much less with a higher limit. This is because the injured party will be much more likely to settle for your policy limit if the difference between the policy limit and the claim is relatively small. Taking out a lawsuit is expensive and risky, and if the payback for that expense and risk is small then the chances of it being filed at all is low.
This is illustrated in figure 1, which shows a $600,000 claim against a person with possible liability limits under their auto insurance policy of $100,000, $300,000 and $500,000. The probability that the injured party will sue personally for the balance between the limit and the claim amount is very high where the policy limit is just $100,000, but the probability is low for a policy limit of $500,000. The costs and risks for a lawsuit of $100,000 would likely make it not worthwhile for the injured party to take the lawsuit at all. They would just likely just settle for the $500,000.
However, this doesn’t mean you should rely on your auto insurance policy alone. When you have arranged a suitably high limit, waste no time in taking out umbrella insurance, for two major reasons:
To top up your primary coverage by at least a further $1 million;
To considerably widen the scope of your coverage to cover all the gaps which your auto insurance policy will undoubtedly have.
Finally, if you do end up in a situation which might result in a claim against your personal liability insurance, be careful not to stand in your insurer’s stead and admit liability. That is for your insurer to do, if they think it’s warranted. Just be sure to notify your insurer of the potential claim without delay, even if you think it might not eventuate. After you’ve done that, it’s all over to your insurance company.