SILVER LAKE PUBLISHING

LOS ANGELES, CALIFORNIA

It’s All Your Fault!

A Lay Person’s Guide to Personal Liability

and Protecting Yourself in a Litigious World

Second edition, 2005

Copyright © 2001-2005 by Silver Lake
Publishing

Silver Lake Publishing

111 East Wishkah Street
Aberdeen, WA 98520

For a list of other publications or for more

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Library of Congress Catalogue Number:

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The Silver Lake Editors

It’s All Your Fault!
Includes index.
Pages: 291

ISBN: 1-56343-814-3
 ACKNOWLEDGMENTS
The Silver Lake Editors who have contributed to
this book are Kristin Loberg, Christina Schlank,
Megan Thorpe and James Walsh.

This is the seventh title in Silver Lake Publishing’s se-

ries of books dealing with risk and insurance issues
that face people living in the United States and other
developed countries. Throughout this book, we refer
to insurance policy forms and legal decisions from
the United States—but the spirit of the discussion
about risk and insurance can apply beyond the juris-
diction of the courts cited.

Many of the standard insurance policy forms refer-

enced in this book are developed by and remain the
property of the New York-based ISO Properties.
Standard policy forms produced by ISO are updated
and modified regularly. Our references—either di-
rect or indirect—to the forms are intended solely to
illustrate issues and disputes common to liability
insurance. Check with your insurance company or
an agent or broker if you need currently policy form
information.

Because this book is intended to make the concepts

and theories of insurance and liability law understand-
able to consumers, the Silver Lake Editors welcome
any feedback. Please call us at 1.360.532.5758 dur-
ing regular business hours, Pacific time. Or, if you
prefer, you can fax us at 1.360.532.5728. Finally,
you can visit our Web site at www.silverlakepub.com.

James Walsh, Publisher

Los Angeles, California
CONTENTS

CHAPTER 1
It’s All Your Fault! 1

CHAPTER 2
Important Definitions 27

CHAPTER 3
Owning a Home Is a Target
on Your Back 51

CHAPTER 4
Why Liability Is Such a
Big Deal When You Drive 87

CHAPTER 5
When You Reach Your Limit:
The Umbrella Policy 113

CHAPTER 6
When You’ve Got a Small
Business to Protect 155

CHAPTER 7
Oddball Liabilities: Slips,
Falls, Dog Bites & Family
Troubles 185
TABLE OF CONTENTS

CHAPTER 8
Defamation, Emotional
Distress & Intellectual Property
Claims 223

CHAPTER 9
Hold Harmless Agreements
& Bankruptcy 253

INDEX 285
 CHAPTER 1

CHAPTER 1
IT’S ALL YOUR
FAULT!

A book about personal liability in a litigious world

can do one of two things: It can rant about legal
excesses or it can offer practical tools for dealing
with problems. This book attempts the latter. It’s
about the hundreds of ways that you can be found
liable for some terrible situation. And it’s about
the dozens of ways you can protect yourself—le-
gally and financially—from the consequences of
rotten luck or wicked fate.

An example: You have friends over to watch the

Super Bowl. While the Chargers narrowly edge
out the Cardinals, something unexpected happens.
Your second cousin Jim—in his last year of divin-
ity school—has one too many cocktails, mumbles
something about pagan rituals and dashes out to
his ’67 Cougar before anyone can stop him. Ten
blocks from your house, he gets into a serious
accident. You may find yourself in court arguing
that the wreck wasn’t your fault.

And any number of people may sue you. You

may be liable for the damages your guest caused
after you allowed him to consume alcohol—and

1
IT’S ALL YOUR FAULT!

engage in various other activities—and then leave.

Why? Some states have laws that mandate a host’s
liability, much like a restaurateur’s or a bartender’s
liability.

If your inebriated cousin veers into a tree on his

way home, you could be responsible for his medi-
cal bills, vehicle repair costs, lost time from work—
and, in the worst case scenario, even damages to
the tree. If he goes through the windshield and
smashes his skull into paste, his widow Muffy can
sue you for everything from negligence (you
should have known better than to let a guy who’d
been through detox twice tend bar) to lack of con-
sortium (Muffy can’t have sex anymore with the
recently expired aspiring minister). And the owner
of the tree involved in the accident may claim that
this particular subspecies of banyan is something
he’s been cultivating for 30 years…and now all of
that effort has been lost because you let your cousin
have too many vodka negronis.

Your problems may not stop there. Imagine that

your drunken cousin’s car kept rolling down hill,
passed a stop sign (without stopping) and plowed
into the side of the Chrysler minivan that the
mayor’s idiot brother just bought for $5,000 over
MSRP. You may be liable for injuries to the idiot
brother—and the minivan he paid too much for.

Local lawyers will be licking their lips. Do you

have insurance coverage for this situation? Does
such insurance exist? That’s what this book is about.

Personal liability is the price that we all pay for

being part of a booming economy. It’s the price

2
 CHAPTER 1

that have-nots charge haves. It’s the mechanism

that class-action lawyers cling to. It’s an unpre-
dictable factor in any modestly successful person’s
life. And that modestly is true; you don’t have to
be rich to be taken in some liability beef. You just
have to have a few assets worth enough for some-
one else to notice.

If you work steadily and save wisely through a

long working life, legal or financial crises can still
wipe out the money you make. If you own a car,
you probably have some liability coverage under
you Personal Auto Policy; however, that cover-
age may not be enough to protect your house.
And you may have some liability coverage under
your homeowners insurance policy (that’s how
most people insure themselves against liability
claims). But this coverage is limited, too.

In most cases, if you are a middle-class…or

wealthier…person, you will need a personal um-
brella liability policy to cover the legalistic gar-
bage that infects daily living in the modern world.
(Of course, you shouldn’t have let your cousin
the alcoholic cleric drink and drive…but that’s an-
other story.)

A personal umbrella policy can come in handy if

you’re being sued for physical damages or non-
physical damages—like libel or slander—in a non-
business situation. An example: Your Chihuahua
Spike bites your neighbor Mike square on the
Achilles tendon. Mike sues you for medical bills
and pain and suffering. Or your Chihuahua Spike
writes a guest column in the local newspaper claim-
ing that Mike is a cocaine-addled embezzler who

3
IT’S ALL YOUR FAULT!

has forced the bank where he works into receiver-

ship. Then Spike goes to a nearby watering hole
and swears everything he wrote is true. But Mike
hasn’t touched drugs since college and his bank is
in fine shape. Mike sues you for libel and slander.

STEP RIGHT UP AND SUE

We live in a litigious society. Much of society now

believes that an injured party has the right to sue
anyone and everyone he or she can and collect as
much money as possible—whether or not the pay-
ment is justified by the actual damages incurred
or by the other party’s actual liability for the loss.

For example 1 :

• In early 2000, a surfer filed a lawsuit

against another surfer for taking his
wave. The case was ultimately dis-
missed because the court was unable
to put a price on the pain and suffer-
ing endured by watching someone else
ride a wave that was intended for you.
• A California woman sued her fiancé
for breaking their seven-week engage-
ment. The jilted bride was awarded
$178,000 in damages—$93,000 for pain
and suffering, $60,000 for loss of in-
come and $25,000 for psychiatric coun-
seling expenses. There’s no record of
what it gave her for the wedding
gown she had to convert into a cock-
tail dress.
1
Source of examples: Citizens Against Lawsuit Abuse (CALA), a
non-profit organization dedicated to ending lawsuit abuse.
(www.cala.com and www.calahouston.org)

4
 CHAPTER 1

• Another California woman driving a

car collided with a man on a snow-
mobile. The man died in the accident.
However, since his snowmobile had
suddenly cut in front of her, police
said the woman was free from liabil-
ity. But that wasn’t the end of the case.
The woman sued the man’s widow for
the psychological injuries she suffered
from watching the man die.
• Recently, a Canadian tourist sued the
Starbucks coffee chain for $1.5 mil-
lion, alleging that a highly personal
part of his anatomy was crushed when
it got caught between the toilet seat
and bowl at a Manhattan Starbucks
outlet. He was reportedly in a seated
position on the commode. When he
turned to retrieve the toilet paper, the
seat shifted, and as he leaned forward
again the toilet seat clamped his penis.
Among other damages, he is asking for
$500,000 for his wife who’s been de-
prived of his husbandly services. Imag-
ine owning a small business and hav-
ing to defend yourself when someone
like this decides to use your bathroom.
Even if you’re a reasonable, hard-working citizen,
life is a risk in this environment. What can you
do to protect yourself in the event that some ec-
centric judge decides that a ludicrous situation is
all your fault? Buy insurance.

But all the insurance in the world doesn’t protect

you from every loss. There are simply more claims
than there are coverages.

5
IT’S ALL YOUR FAULT!

S TA N D A R D INSURANCE

Personal umbrella policies play a vital role in pro-

tecting against liabilities by providing broad cov-
erage and high limits of coverage that most com-
monly sold personal liability coverages, known as
underlying policies, do not provide.

While homeowners or auto policies provide cov-

erage for their respective liability situations, often
the limits aren’t high enough to cover all the dam-
ages that could be awarded in even a moderately
severe case. In other words, if you have a $250,000
limit for auto bodily injury and a court enters a
judgment of $500,000 against you, you’re going
to have to come up with the rest yourself.

When a court hands down a liability judgment

that exhausts the limits of your homeowners or
auto policy, you are responsible for the balance.
This means you may have to sell your home, cash
out your IRAs or liquidate other assets in order
to make the payment on the judgment. And, if
your assets are exhausted and the judgment is still
not satisfied, you may even have to dip into your
future earnings to pay the remainder of the out-
standing judgment. One major liability case can
wipe out the assets that took a lifetime to create.

Unless you’re a minor, legally incompetent or in-

digent (with no assets at risk), you’re probably
not exempt from personal liability exposures.
Why? If you drive a car, you can never be abso-
lutely positive that you will never be involved in
an at-fault accident. If you’re a homeowner—or a
renter—you can never be certain that no visitor

6
 CHAPTER 1

will ever be injured on the premises. You can

never be sure that a personal liability claim will
never arise out of something you say or some-
thing you do.

The simple answer: You can’t be exempt.

Another reason to consider an umbrella liability

policy: An umbrella policy can lower your home,
car or boat insurance costs; an umbrella policy
typically is less expensive than getting additional
liability coverage on a homeowners, boatowners
or automobile policy.

THE MECHANICS OF COVERAGE

Umbrella liability policies serve two major func-

tions: They provide so-called “high limits of cov-
erage” that protect against catastrophic losses not
covered by standard insurance; and they provide
broader coverage than underlying policies.

These policies take pressure off of the auto,

homeowners and business insurance that most
people buy. In this sense, they are as important to
insurance companies as they are to consumers.

Umbrellas provide insurance on an excess basis,

above any underlying insurance or a self-insured
retention (the equivalent of a large deductible).
However, they are not standardized forms (like
homeowners or auto policies), which means they
can differ from one another in significant ways.

Most personal umbrella policies on the market

can be organized into two categories:

7
IT’S ALL YOUR FAULT!

• Following form excess policies. These

provide high limits over the exact
same perils, coverages and exclusions
found in the underlying policies over
which coverage is being provided.
• True umbrella policies. In addition to
high limits of liability coverage, these
policies provide broader coverage than
underlying coverages.
True umbrella coverage protects your present and
future income streams most effectively, particu-
larly because it provides three essential things:

• excess limits over underlying policies;

• broader coverage than underlying
policies; and
• defense costs in addition to the limit
of insurance, and defends a claim even
if it is groundless.
An umbrella policy usually defends a claim
whether there are grounds for the claim or not.
Just ask Bill Clinton, who was issued a pair of
umbrella policies for personal liability by two in-
surance companies—State Farm and Chubb
Corp.—that ended up covering most of the legal
fees he racked up in the Paula Jones case.

The June 9, 1997 issue of Newsweek reported that

State Farm and Chubb “have paid most of the
president’s legal fees in the case, already estimated
to be in excess of $1.5 million.” One small glitch:
The insurers refused to compensate Clinton’s at-
torney for the time he spent talking to reporters,

8
 CHAPTER 1

obviously preferring a quick settlement to a

drawn-out trial.

In April 1998, however, Clinton fought back, au-

thorizing his attorneys to explore whether he
could, by filing a lawsuit, force two insurers to
pay his legal bills from the Paula Jones case.

Such a move would have put Clinton in the po-

litically perilous position of suing an industry regu-
lated by the federal government. State Farm and
Chubb stopped financing Clinton’s defense when
the judge threw out some counts of Jones’s suit.
The companies, who had already picked up a sig-
nificant amount of Clinton’s legal tab, maintained
that his umbrella liability policies covered only
certain counts and that their obligation ended when
the judge dismissed those counts.

U.S. District Judge Susan Webber Wright ulti-

mately dismissed the entire lawsuit. But even af-
ter the suit was dismissed, Clinton’s lead attorney
and his colleagues worked behind the scenes to
persuade the insurers to restore coverage, arguing
that the companies’ obligation to defend Clinton
extended until the final dismissal of all charges,
which would not happen until appeals were ex-
hausted.

A Senate Republican then accused the White

House of stockpiling attorneys at taxpayer expense
to handle the president’s personal legal matters.
And, following this accusation, Clinton’s umbrella
liability coverage was under scrutiny by Wash-
ington-based Judicial Watch—a group which de-
scribed itself as a non-partisan legal organization

9
IT’S ALL YOUR FAULT!

but which was characterized as “conservative” by

various media outlets—which took measures into
their own hands and sued him on behalf of State
Farm policyholders in Illinois.

A derivative lawsuit—similar to a class-action suit,

with one plaintiff representing many—was previ-
ously filed in May 1997 by the group in the Dis-
trict of Columbia Superior Court on behalf of
Thomas Flocco, a State Farm policyholder from
Philadelphia who represented a group of policy-
holders, according to Judicial Watch (an aggres-
sively anti-Clinton group that supported the suit).

The suit demanded that Clinton repay the money

that State Farm had provided toward legal bills
for Paula Jones’s sexual harassment lawsuit. But
the suit was thrown out later that year when State
Farm and Chubb ceased making payments.

However, in December 1997, Judicial Watch

pointed out that the District of Columbia court:

sustained the underlying bases of the law-

suit, which involved allegations by State
Farm policyholders that the payments of
legal fees and costs (which will likely in-
crease premiums) for sexual harassment
and defamation claims were not covered
by the policy, that untimely notice (13
months after the suit was filed) preclude[d]
coverage, and that it [was] not the insur-
ance carrier’s role to defend a lawsuit
merely to delay its resolution, as Bob
Bennett, the president’s lawyer, plainly ad-
mitted was his strategy.

10
 CHAPTER 1

Judicial Watch is a political partisan. But—in this

case—it raised some legitimate liability issues.

Steve Vogel, a State Farm representative, insisted

that Clinton’s policy was not in effect when the
alleged sexual harassment occurred but during the
alleged defamation of character. Defamation is
covered by most umbrella policies.

“State Farm is defending on alleged defamation,

not alleged sexual harassment,” Vogel emphasized.
“When the Arkansas court dismissed the defama-
tion count, we believe that ended our participa-
tion in the defense.”

Clinton didn’t have to wait years to get the lump

sum, as regular citizens often do when they find
themselves battling over money with insurance
giants. Clinton even selected his own attorney,
Robert Bennett, at $495 an hour—a far cry from
the $225 most insurance companies are willing to
put up for legal defense. Bennett earned his fee by
calling the inquiry into the alleged insurance poli-
cies “inside-the-Beltway silliness.”

A CASE-BY-CASE BASIS

The decision to represent a policyholder is made

on a case-by-case basis. But most personal liability
policies do not cover sexual harassment claims.

According to State Farm spokeswoman Mary

Moore, State Farm was responsible for paying
Clinton’s legal fees under the single defamation
count. That meant State Farm spent $1 million to
defend a $75,000 claim. “The president is entitled

11
IT’S ALL YOUR FAULT!

to a defense just like any other citizen,” Moore

asserted. Somewhat unbelievably.

Of course most liability issues involve people

much less glamorous than the president. But, even
if it’s the regional human resources manager who’s
caught in a sexually harassing relationship with an
intern, he’s likely to call on every policy he can
for protection.

Under most states’ laws and standard umbrella

policies, there is no duty to provide a defense for
sexual harassment or civil rights violations—since
those offenses involve intentional misconduct.

Even granting State Farm’s argument, insurance

experts noted that the company still should not
have paid for the litigation of collateral issues, such
as the fight in the Supreme Court about the
president’s immunity to a civil action. Those funds
are only supposed to be used to stage a defense.

The decision to pony up for these issues, com-

bined with the decision to pay the bills of one of
the most expensive attorneys in the country, made
more than one insurance lawyer wonder: “Is State
Farm in control of the defense?”

Normally, it would be.

THE MECHANICS OF LIABILITY

For losses that are covered under primary insur-

ance, umbrella coverage applies only after the pri-
mary coverage has reached its limit. For losses that
are covered by the umbrella policy and not by

12
 CHAPTER 1

primary policies, the umbrella coverage applies

after a loss exceeds the deductible.

There are no standard umbrella policies. Early um-

brella policies were extremely broad and contained
few exclusions. However, insurance companies
soon realized that they would need to narrow the
coverage by creating more specific insuring agree-
ments and exclusions.

The intent: To provide affordable and compre-

hensive coverage for catastrophic losses, inciden-
tal exposures and modest insurance gaps, but not
to provide blanket all-risk coverage in multiple
areas with no primary insurance. For this reason,
insurance companies usually require you to main-
tain an adequate range of underlying coverages
before they sell you umbrella liability coverage.

When you break a law, you have committed a

crime. When you violate the rights of another
person, you have committed a tort. The person
committing a tort is known as the tortfeasor. It is
important to note that liability insurance applies
only to the financial consequences of torts; you
cannot buy liability insurance to protect against
the consequences of crimes.

If your cousin gets angry at his friend and inten-

tionally sets his car on fire, he has committed the
crime of arson—and liability insurance won’t cover
the damages. However, if he is having a barbecue
and accidentally starts a fire that burns his friend’s
car, liability insurance may cover the damages.

Most personal liability cases involve unintentional

torts. The basis for unintentional torts is usually

13
IT’S ALL YOUR FAULT!

negligence. In order for negligence to exist, the

following must be present:

• Duty to act. The duty to act in a rea-

sonably prudent manner toward an-
other (such as driving safely down the
street in a manner that avoids hitting
other cars or pedestrians).
• Breach of the duty to act. The
tortfeasor does not act in the prudent
manner described above.
• Occurrence of injury or damage. An-
other party actually must suffer an in-
jury or damage.
• Negligence is the proximate cause of
the injury or damage. The tortfeasor’s
breach of duty is actually what caused
the injury or damage.
If any one of the above elements is absent, negli-
gence does not exist. But if the required elements
are present, the injured party usually has a valid
claim for damages.

In any discussion of liability, it is important to

understand the term damages. When someone is
held liable for injury or property damage to an-
other, that person can be required to pay com-
pensation to the injured parties. For these types
of claims, two broad types of damages apply:

• Compensatory damages—which sim-

ply means compensation for the loss
incurred. These may include specific
damages (the documentable, actual ex-
penses incurred by the injured party,

14
 CHAPTER 1

such as medical bills, wages lost and

property replacement costs) and gen-
eral damages (monetary awards for
more subjective, less quantifiable as-
pects of the loss, such as pain and suf-
fering, or loss of consortium).
• Punitive damages—these are damages
that the court can compel the
tortfeasor to pay in addition to the
compensatory damages awarded. Pu-
nitive damages represent a fine, or
punishment, for outrageous, severe or
intentional conduct.

KEY LIABILITY POINTS

Vehicle-related liability is the greatest single source

of personal liability. The act of using a car gener-
ally causes you to be in the proximity of others,
while operating a several thousand pound machine
moving in and around other such machine opera-
tors. All in all, you—and others around you—are
more likely to be involved in an accident.

Vehicle liability can arise from property damage

to other people’s cars, injury to people occupying
other cars, injury to pedestrians and damage to
property other than cars (such as a fence).

Injuries and damages related to vehicle use also

may be caused or aggravated by many factors, such
as excessive speed, driver inexperience, disobedi-
ence of traffic laws (such as running a stop sign),
use of intoxicants (drugs or alcohol) or simple care-
lessness brought on by inattention.

15
IT’S ALL YOUR FAULT!

We’ll go into greater detail on vehicle liability is-

sues in Chapter 4.

The second largest source of personal liability is

residence-related liability. Whether you own or
rent your home, you may be personally liable for
injury or damage to others, including:

• trip and fall incidents due to ice and

snow, debris, etc.;
• accidents related to swimming pools
or other attractive nuisances, such as
jungle gyms and trampolines;
• property damage scenarios (for ex-
ample, a renter causing damage to the
premises by careless smoking);
• injuries sustained by, or injuries to
others caused by, domestic workers,
such as maids, gardeners, etc.; and
• injury caused by an overly protective
dog (if Spike bites your neighbor’s toy
poodle, you’ll pay the vet’s bills—and
a lawyer’s; and watch out if Spike bites
your neighbor’s kid, no matter how
much Junior was asking for it).
In most cases, a personal umbrella policy will not
cover business liability. However, some business
exposures may be covered by personal liability
policies. For example, an umbrella policy may
cover certain home office exposures.

So far, we’ve discussed unintentional torts. What

about intentional torts? Intentional torts can in-
volve infringement of property and privacy rights

16
 CHAPTER 1

(for example, trespassing). Property rights also can

be violated by nuisance-type activities that inter-
rupt a property owner’s ability to use the prop-
erty (for example, when you test the volume limit
on your new 2500-watt CD player while your
neighbor is trying to relax on a Sunday afternoon).
Other intentional torts involve personal injury,
which includes bodily injury and damage to repu-
tation through untrue statements, libel (in print)
or slander (spoken).

These are by no means the only examples of per-

sonal liability exposures. Your children, your pets,
your premises, your hobbies, your car and many
of your daily activities create exposures.

Take, for example, the 1999 federal appeals court

case Allstate Insurance Company v. Martin E.
Raynor, which considered a bizarre case of
homeowners liability. The case tackled the issue
of intent when it comes to the negligence of the
criminally insane.

David and Candy Johnson and Candy’s two

daughters, Cheryl and Kathryn Raynor, lived in
Longview—next door to Milton and Margie King.
Milton was a troubled man with a history of vio-
lence. In 1990, he was arrested and convicted for
assaulting his wife, police officers and others with
a .22 caliber handgun, which the police confiscated.

One week after being sentenced, Milton asked his

attorney to get his gun back from the police.

By July 2, 1992, Milton, who had completed all

conditions of his sentence, went to his attorney’s

17
IT’S ALL YOUR FAULT!

office and requested his handgun. His attorney

refused to give him the gun and instead gave it to
Margie.

The attorney also warned that, as a convicted felon,

Milton was not permitted to possess guns, and ad-
vised Margie not to take the gun into their home.
Despite the warning, Margie gave the gun to Milton.

On the morning of July 10, 1992, Milton told the

police that his neighbors had been illegally keep-
ing rabbits and dumping rabbit excrement near a
fence between the two properties.

Later that day, Candy Johnson, her daughters and

one of the girls’ friends, Shannon Connors, were
stacking wood on their side of the fence. As a re-
sult, the Kings began cursing over the fence at
them. Candy called 911.

A police officer stopped by, examined the wood-

pile and assured Candy that they had the right to
stack wood by the fence. The officer also spoke
with the Kings, who renewed their complaint re-
garding the rabbits. The officer noted that Milton
was “acting real strange, 10-22, the whole works.”

When Candy and the children resumed stacking

wood, Margie called 911 and the operator con-
tacted the police, who informed her that an of-
ficer had already been on the scene earlier. As in-
structed, she told Margie that this was a civil mat-
ter and that the police would not be taking action.

18
 CHAPTER 1

After ending her call with the operator, Margie

told Milton that the police would not be respond-
ing, which made him even angrier than he had
been before. Margie went back outside, had more
words with Candy and the children, stuck a stick
through the fence in an attempt to knock down
the wood pile and then went back inside her home.

Moments later, Margie saw Milton in their yard,

armed with the .22 caliber handgun and a .38 cali-
ber revolver. He was watching Candy and the chil-
dren. Margie told Milton not to do anything be-
cause “it wasn’t worth it,” and Milton went back
into the house, put the guns in a drawer in his
bedroom and lay down on the bed.

Margie then turned on a sprinkler, which sprayed

water over the fence. The children called Margie a
name and she turned down the water. Minutes
later, Margie heard some “pops,” went inside and
noticed that Milton was no longer in the house.

Milton had entered the Johnson property and

begun shooting. He shot Cheryl twice in the chest
and Candy once in the mouth. Shannon fled to
her home across the street.

Kathryn and Candy ran inside and called 911. Be-

cause she had been shot in the mouth, Candy had
trouble speaking and the operator could not un-
derstand the address. The operator then heard a
high-pitched scream and more gunshots in the
background. Milton shot Candy in the chest.

The operator told police that shots had been fired

at 2950 but that they did not yet know the street

19
IT’S ALL YOUR FAULT!

name. The officer who had been on the scene ear-

lier suggested that it might be 2915 Fir, which he
believed to be the Kings’ address and he immedi-
ately headed for 2915 Fir.

Meanwhile, Candy and Kathryn fled to the bath-

room, with Milton in pursuit. Candy wedged her
body against the door in an effort to keep him
out and Kathryn hid in the bathtub and watched
her mom die. Exhausted and unable to enter the
bathroom, Milton left and shot himself in the head.
Officers found Candy and Milton dead and Cheryl
bleeding in the yard; she died later that day.

Martin Raynor, Cheryl’s ex-husband, and David

Johnson filed an action for wrongful death and
personal injuries against the Kings, alleging negli-
gence.

The trial court ruled that the Kings’ homeowners

policy did not cover Milton’s criminal acts of
shooting to death Raynor’s ex-wife and daughter.

As provider of the Kings’ homeowners policy,

Allstate brought a declaratory judgment action,
seeking to avoid liability for the deaths of Candy
and Cheryl. Allstate alleged that the deaths and
injuries had been caused by Milton’s intentional
and criminal acts, not by either of the Kings’ neg-
ligence, and that the Kings’ policy did not pro-
vide coverage for his “intentional” and “criminal”
acts. The trial court granted summary judgment
to Allstate as to liability for the actions of both
Milton and Margie. Raynor and Johnson appealed.

Raynor argued that: 1) Allstate’s policy exclusions

for criminal or intentional acts did not apply when

20
 CHAPTER 1

the insured lacked the mental capacity to form

the requisite intent; 2) the “criminal acts” exclu-
sion did not apply when the insured had been nei-
ther convicted of, nor charged with, a crime aris-
ing from the incident for which coverage was
sought; 3) a material issue of fact remained as to
whether Margie King’s negligence was the “effi-
cient proximate cause” of the deaths of Martin
Raynor’s ex-wife and daughter; 4) the trial court
improperly denied coverage to Margie King based
on the policy’s “joint obligations” clause; and 5)
the “joint obligations” clause violated public policy.

Allstate responded that multiple provisions of the

policy precluded coverage because the homicides
were intentional, not accidental.

INTENTIONAL ACTS

According to the Kings’ Allstate homeowners

policy, coverage was excluded for any bodily in-
jury or property damage which could reasonably
be expected to result from “the intentional or
criminal acts of an insured person or which are in
fact intended by an insured person.”

Raynor argued that Milton’s mental disturbance,

falling short of criminal insanity, was such that
the shootings could not be termed intentional or
criminal acts for purposes of the policy’s exclu-
sion. The traditional rule had been that, when a
person is insane at the same time of his or her act,
a liability policy’s “intended or expected” exclu-
sion was ineffective. This remained true, even when
the policy would have precluded recovery had the
slayer been sane.

21
IT’S ALL YOUR FAULT!

The appeals court noted that when an insured per-

son “was not insane at the time he committed the
offenses, [he] is presumed to be sane and able to
form the general intent to commit the acts in ques-
tion.” There was no evidence that Milton was
criminally insane when he shot Candy and Cheryl.

As the court noted, the criminal insanity defense “is

available only to those persons who have lost con-
tact with reality so completely that they are beyond
any of the influences of the criminal law.”

There was no evidence that Milton met either of

the insanity tests. Raynor’s expert witness, Dr.
G. Christian Harris, said that he “would not go
so far as to say that [Milton] didn’t understand
the general nature of his acts” and that nothing in
the record indicated that Milton wouldn’t have a
basic idea of what was right and what was wrong.

Furthermore, there was no evidence suggesting

“delusional thinking, hallucinatory deficits that
would ordinarily be necessary to sustain a feeling
that the person was disturbed to the extent that
he couldn’t understand the wrongfulness of his
actions” or that Milton suffered from “a psychotic
illness that would remove him from understand-
ing the nature of his act or its wrongfulness.”

This lack of evidence meant that Raynor could

not avoid, on grounds of insanity, the policy’s
exclusion of coverage for Milton’s intentional or
criminal acts. Raynor then argued that this exclu-

22
 CHAPTER 1

sion applied only when a criminal conviction had

been obtained against the insured for the acts giv-
ing rise to the claim of liability.

He also argued that the definition of criminal acts

under the Kings’ policy was ambiguous because
other Allstate policies excluded coverage for:
criminal acts not resulting in criminal charges; and
acts committed while the insured lacked the ca-
pacity to form the intent to commit the act.

Allstate countered, stating that the criminal acts

exclusion unambiguously absolved Allstate from
all liability for any actions that could be construed
as criminal under any statute. The court agreed,
contending that coverage for Milton’s acts was pre-
cluded. These actions clearly violated criminal stat-
utes, and the average purchaser of insurance would
have understood such actions to be excluded crimi-
nal acts, the court ruled.

A C C I D E N TA L LOSS L I M I TAT I O N

Allstate also argued that, even if the intentional or

criminal acts exclusion did not apply, coverage
was still not available because the Kings’ policy
covered only “accidental loss” and this was clearly
not an accidental loss.

In response, Raynor argued that the acts were pre-

sumed accidental, unless Allstate could show that
they were deliberate.

Under the Kings’ policy, Allstate agreed to “pay

all sums arising from an accidental loss which an
insured person becomes legally obligated to pay

23
IT’S ALL YOUR FAULT!

as damages because of bodily injury or property

damage covered by this part of the policy.”

The appeals court cited an earlier federal court

ruling that stated:

An accident is never present when a delib-

erate act is performed unless some addi-
tional unexpected, independent and un-
foreseen happening occurs which produces
or brings about...injury or death.
Regardless of any mental instability Milton may
have been suffering, he clearly engaged in deliber-
ate acts when, after being told by his wife to come
back into their house, he shot his neighbors, chased
them into their home and continued firing.

Raynor could not reasonably claim that the man-

ner in which the neighbors were harmed was un-
expected, independent and unforeseen—when
Milton next turned the gun on himself, pulled
the trigger and fired a fatal shot.

Because Milton was not criminally insane, he was

presumed to have intended his acts. Consequently,
the shooting was no accident; and the policy pro-
vided no coverage for Milton’s actions.

JOINT O B L I G AT I O N S

Allstate also argued that the policy’s “joint obliga-

tions” clause precluded coverage for Margie’s acts,
even negligent acts, because Milton’s actions were
binding on her. Thus, Allstate denied coverage.
And the appeals court agreed.

24
 CHAPTER 1

The joint obligations clause provides:

The terms of this policy impose joint ob-

ligations on the person named on the dec-
larations page as the insured and that
person’s resident spouse. These persons are
defined as you or your. This means that
the responsibilities, acts and failures to act
of a person defined as you or your will be
binding upon another person defined as
you or your.
Most federal courts have found these exclusions
valid, permitting the excluded acts of one insured
person to absolve the insurer of liability for claims
against any insured person. In these cases uphold-
ing joint obligations clauses, the acts of an insured
had already been determined as exclusions under
the policy. Milton’s intentional, criminal acts were
excluded from liability coverage under the Kings’
policy. Accordingly, the appeals court held that
the joint obligations clause likewise applied.

The court concluded that coverage for Margie was

precluded because—as a matter of law—Milton’s
acts were intentional and criminal, and therefore
excluded from coverage.

CONCLUSION

Everyone from the President of the United States

to the widow of a murderous convicted felon can
face liability claims that breed lawsuits and insur-
ance disputes.

The cases and examples we’ve considered in this

chapter are just a taste of the complexities and con-

25
IT’S ALL YOUR FAULT!

fusion that define personal liability issues in the

modern, litigious world. In the chapters that fol-
low, we will examine specific kinds of risks and
the mechanics of how they work in greater detail.

In all, the purpose of this book is to give you—a

generally well-informed consumer who’s not a
lawyer or insurance expert—a working understand-
ing of the liability exposures you face in daily life.
This understanding should help you make in-
formed decisions about how to handle these li-
abilities, whether through insurance policies, per-
sonal and business choices or various legal tactics.

Our hope, ultimately, is that this information and

the better choices it allows will help reduce the
personal liability lawsuits that clog our court sys-
tems and cloud our collective judgment.

26
 CHAPTER 2

CHAPTER 2
IMPORTANT
DEFINITIONS

Before you can find the right kind of insurance to

protect you—and your assets—and file a claim for
coverage, you must first understand the language
of your policy. And because liability insurance is
complicated and different companies offer
slightly—or radically—different policies, it is im-
portant to understand how the language and basic
concepts pertain to your specific policy.

Of course, this is true whether your policy pro-

tects your boat, home, car or personal assets. This
chapter defines terms, describes coverage and ex-
clusions and addresses some of the conditions that
affect your personal liability coverage.

AGREEMENT

An insurance policy is an agreement between you

and your insurer. The agreement simply states that
your insurance company agrees to provide cover-
age in exchange for payment of the premium and
compliance with the provisions of the policy.

27
IMPORTANT DEFINITIONS

For example, the policy may state:

We will pay damages for “bodily injury”

or “property damage” for which any “in-
sured” becomes legally responsible because
of an auto accident. Damages include pre-
judgment interest awarded against the “in-
sured.” We will settle or defend, as we
consider appropriate, any claim or suit
asking for these damages. In addition to
our limit of liability, we will pay all de-
fense costs we incur. Our duty to settle or
defend ends when our limit of liability for
this coverage has been exhausted. We have
no duty to defend any suit or settle any
claim for “bodily injury” or “property
damage” not covered under this policy.

APPEALS

The insurance company is entitled to appeal any

judgment which could result in a claim payment
being made under an umbrella liability policy. This
is true even if you or the insurance company pro-
viding underlying insurance elects not to appeal
the judgment. If it appeals, the insurance company
pays all costs related to the appeal.

ASSIGNMENT

A transfer or making over to another of the whole

of any property, real or personal, in possession or
in action or of any estate or right therein. This
usually refers to intangible property such as rights
in a lease, mortgage, agreement of sale or a part-

28
 CHAPTER 2

nership. When dealing with insurance, this may

include certain rights in a policy.

In a lawsuit, one party (i.e. the person who caused

a said injury or loss) may assign its rights to liabil-
ity coverage over to the other party (i.e. the vic-
tim of the said injury or loss).

An example: You host a book club meeting in

your library, but you stack too many books on
top of one another in a high shelving unit. A friend
of a friend happens to get in the way when the
stack falls down; she suffers neck, back and head
injuries. When all is said and done, the court finds
you liable for $100,000 in damages. Of course,
you can’t possibly afford this judgment. So what
do you do?

You assign your claim of liability coverage (from

your insurance company) over to the victim. Thus,
she effectively obtains the right to go after, i.e.
sue, your insurance company for indemnification.

A U T O - R E L AT E D LIABILITY

In an umbrella policy, the definition of auto is

broader than it is in a standard auto policy. Un-
der an umbrella, the definition of auto includes a
motorcycle or moped (the typical definition found
in a standard auto policy does not; motorcycles
are covered only by attaching an endorsement).

BANKRUPTCY

If you become bankrupt, an umbrella policy still

applies on an excess basis over the applicable

29
IMPORTANT DEFINITIONS

deductibles. The umbrella does not become pri-

mary coverage due to a lack of underlying insur-
ance or your inability to pay the deductible.

B O D I LY INJURY

Bodily injury means bodily harm, sickness or dis-

ease and includes the costs of required care, loss of
services or death resulting from the injury. This
is one of the main kinds of loss that constitute a
civil liability.

If you are liable for the accidental injury or death

of another person, the typical underlying
homeowners policy provides coverage. So, if your
neighbor slips, falls and breaks both his legs on
the sheet of ice on the sidewalk in front of your
house, and then slides into the street where he is
run over by a passing SUV because you decided
to sleep in after a late night at The Tavern up the
street, chances are your homeowners policy pro-
vides liability coverage. However, in order to be
covered for events involving libel, slander, false
arrest and the like, you probably need a personal
umbrella policy. The personal umbrella policy cov-
ers you for liability arising out of these events.

BUSINESS ACTIVITIES

Business means any trade, profession or occupa-

tion. Business activity is any agreement, contract,
transaction or other interaction that advances your
occupation. These terms are important because,
in most cases, homeowners policies limit cover-
age for businesses and business activities—even if

30
 CHAPTER 2

you’re starting your own business from the com-

forts of home.

Business-related liability (e.g. your FedEx deliv-

ery person slipping and falling while in your liv-
ing room, which has been turned into a home-
based office for manufacturing this year’s hottest
Christmas toy) is a more complicated issue and
such activities are strictly limited.

Any significant business exposure should be cov-

ered under a separate policy, such as an in-house
business policy or a business owners package policy
(BOP).

CLAIMS-MADE POLICY

A claims-made policy responds to claims filed

during the policy period. This differs from an
occurrence policy, which pays for injury or dam-
age that happens during the policy period.

Several insurance companies issued occurrence

policies for asbestos manufacturers in the 1940s
and 1950s. Forty years later, these insurers are still
paying millions of dollars in claims and legal de-
fense costs for policies under which they collected
only a few thousand dollars in premiums. Because
the delay between the occurrence and filing of a
claim resulted in difficulty in developing premi-
ums adequate to anticipate claims that had been
incurred but not reported (IBNRs), insurance com-
panies developed claims-made coverage for risks

31
IMPORTANT DEFINITIONS

with a long delay—sometimes called long-tail ex-

posures.

Claims-made forms create a precise claim trigger

that prevents the stacking of limits. In contrast to
occurrence forms, the claims-made forms usually
have an additional section and a few necessary dif-
ferences in their conditions.

C O M P E N S AT O R Y DAMAGES

Compensatory damages are damages recoverable

or awarded for injury or loss sustained. In addi-
tion to actual loss or injury, these damages may
include amounts for expenses, loss of time, bodily
suffering and mental suffering, but not punitive
damages.

COVERAGE

The scope of protection provided by an insurance

policy is called coverage. The policy spells out
many agreements, but perhaps most important,
it specifies the type of losses for which the insured
will be reimbursed by the insurance company.
When the policy states that the insurance com-
pany will pay for a certain type of loss, then it is
common to say that the insured person has cover-
age for that loss.

DECLARATIONS PA G E

In this section—typically the first page of an in-

surance application—your insurance company
includes specific details relating to coverage. These
details include everything from policy limits and

32
 CHAPTER 2

premiums due to any specific additions or exclu-

sions based on your personal circumstances.

Any specific kinds of coverage added or dropped

from a standard policy are called endorsements.

Remember: There are no standard umbrella policies,

so it isn’t easy to generalize about them. Early um-
brella policies were extremely broad and contained
few exclusions. However, insurance companies soon
learned that they would need to narrow coverage
by creating more specific insuring agreements and
exclusions.

The Declarations includes the names of the people

covered by the policy, the dates it’s in effect and
the vehicles, boats, etc. covered.

A policy is in effect beginning on the effective date

listed in the Declarations. In some policies, this
may be a retroactive date. When coverage under a
policy stops, the policy has expired—thus, the date
on which the coverage ends is the expiration date.

DEDUCTIBLES

As with any insurance policy, the deductible is the

portion of an insured loss borne by you before
you recover anything from your insurance com-
pany.

The deductible amounts for various exposures are

shown in the Declarations. Deductibles are mini-

33
IMPORTANT DEFINITIONS

mum requirements for underlying insurance for

declared exposures. Deductibles apply even if the
underlying insurer becomes bankrupt or insolvent.

Under a personal liability policy, a deductible

amount of $1,000, or self-insured retention, applies
to each loss that arises out of a declared exposure,
which is covered by the umbrella but for some
reason is not covered by the underlying policy (a
good example is a loss occurring out of the under-
lying insurance coverage territory).

DUTY TO DEFEND

The insurance company has the right and the op-

tion to investigate and settle any lawsuit and claim.
In the same process, it also accepts a duty to de-
fend an insured person in any related lawsuit or
claim. But, once it pays the limit of its liability to
settle a suit or claim, it is no longer obligated to
provide any further defense.

ENDORSEMENTS

Most insurance policies are printed in great quan-

tities as standard forms. Since there are many varia-
tions in the protection needed by individual con-
sumers, a method for adding or deleting cover-
ages is necessary. Whenever a basic policy form is
changed in any way (to amend, limit or expand
coverages), this change is put into effect by an en-
dorsement—a page added to a standard policy.
Endorsements often involve premium changes. If
you add liquor liability to your standard BOP,
this is will end up costing you more each month
in premiums.

34
 CHAPTER 2

INDEMNIFICATION

Indemnities are securities against hurt, loss or dam-

age. Indemnification for hurt, loss or damage may
be payment in money or replacement of the prop-
erty. An home and fire insurance company in-
demnifies a policyholder, for example, when it
pays for restoring the victim’s house after a fire.
Indemnities for losses don’t always have to be for
material goods—they can be for things like bodily
injury and pain and suffering. In most cases, the
indemnity is monetary.

INSURED

In a liability policy, “you” and “your” refer to the

named insured listed on the Declarations Page and
the spouse if a resident of the same household.

However, an insured can also refer to any resi-

dents of your household who are:

• your relatives;
• other persons under the age of 21 and
in the care of you or your relatives;
• with respect to animals or watercraft
to which the policy applies, any per-
son or organization legally responsible
for these animals or watercraft that are
owned by you or any person included
above (except used in business or with-
out permission); and
• with respect to any vehicle to which
the policy applies, any persons while

35
IMPORTANT DEFINITIONS

engaged in your employ or that of any

person included above, or other per-
sons using the vehicle on an insured
location with the consent of you or
your spouse.
An example: This year’s dreaded family reunion
is at a summer cabin on a lake. Your sister’s kids
invite several of their friends to come along. Your
snotty-nosed niece tells her friend that she can ride
your mini-bike without your consent. Her friend,
attempting an Evil Kanevil-maneuver over a pic-
nic table, a line of trashcans and the twins, loses
control, hitting and injuring a visiting neighbor.
Because you didn’t give your niece’s friend per-
mission to use your bike, your niece is not an in-
sured if she is sued for the injury. You, however,
are still covered if you are sued as the owner of
the mini-bike.

The term “insured” is defined in different ways

for various situations and exposures.

If injuries and damages are related to the use of a

non-owned auto, the umbrella policy covers you
on an excess basis only if the use of that auto is
covered by the required underlying insurance.

An example: Your employer furnishes a car for

use in your sales work. As long as your employer’s
policy provides at least $300,000 of coverage for
your use of the company-owned car, your um-
brella policy provides additional coverage.

Family members are insured for their use of owned

autos, or autos furnished for their regular use, only

36
 CHAPTER 2

if their use of such autos is covered by the required

underlying insurance.

An example: Mr. and Mrs. Lewinsky have a per-

sonal umbrella policy and their daughter Monica
lives with them. Monica has her own car. The
umbrella policy covers Monica’s use of the car if
she has personal auto coverage with a limit of at
least $300,000.

With respect to an auto or covered watercraft in

your care, any other person using such items, or
any person or organization responsible for the acts
of someone using such items, is insured. So, if your
son lets his friend Dave drive the family speed-
boat, Dave is considered an insured person. Like-
wise, if Dave uses your boat to teach members of
his son’s Boy Scout troop to water ski, the Boy
Scout troop is considered an insured organization.

For animals owned by any family member, any

other person or organization responsible for the
animals is an insured person.

An example: While on vacation, you leave your

dog with a neighbor who has agreed to take care
of it. If the dog breaks loose and bites the two-
year-old across the street, the umbrella policy
covers the neighbor as an insured person if the
neighbor is sued for the injury.

INSURED L O C AT I O N

As is the case with the definition of insured, in-

sured location is a sweeping definition that includes
a variety of specified locations:

37
IMPORTANT DEFINITIONS

• the dwelling where you live, includ-

ing the grounds and other structures;
• other premises that you use as a resi-
dence that is named in the Declarations
or acquired during the policy period;
• any premises you use in connection
with one of the premises in 1 or 2
above;
• non-owned premises where you are
temporarily residing;
• vacant land owned or rented to you
(other than farm land);
• owned land on which a one- or two-
family residence is being built;
• cemetery plots; and
• premises occasionally rented to you
(and not used for business).
The first three definitions of insured location ap-
ply to the named insured (meaning the person
named on the Declarations and spouse), while the
others apply to an insured (anyone named in the
definition of insured, as reviewed above).

INTEREST (FINANCIAL)

Prejudgment interest means an additional amount

of damages awarded to a plaintiff to compensate
for the delay between the time of injury or dam-
age and the time a judgment is made. Because li-
ability claims may take months or years until an
award is made, this amount is designated to re-
place the amount of interest the plaintiff would

38
 CHAPTER 2

have earned had the damages been awarded at the

time of injury or damage.

Postjudgment interest applies when a decision is

made in favor of the plaintiff, but an appeal de-
lays payment of damages. Postjudgment interest
is money the plaintiff would have earned if the
judgment had been paid at the time of the first
judgment, before the appeal.

LIMIT OF LIABILITY

The liability limit on a policy is the maximum

amount the insurer pays for any one occurrence.
This limit is the same regardless of the number of
insureds, claims made or persons injured. In other
words, the limit is not increased simply because
there is more than one injured person or more
than one claim filed as a result of a single event.

Most insurers provide medical payments with a

per person limit, which is the maximum amount
payable to one person arising out of one occur-
rence. However, there is no limit on the number
of claims arising out of an occurrence, nor is there
an aggregate limit on the amount payable.

Should you and another family member both be

sued, the policy provides a defense for both. How-
ever, the limit of liability for all damages arising
out of one occurrence remains unchanged.

MINIMUM R E TA I N E D LIMIT

Umbrella coverage applies above a minimum re-

tained limit, which is the greater of the deductible

39
IMPORTANT DEFINITIONS

shown in the Declarations or the actual amount

of underlying insurance available to you.

For example: You’re required to have at least

$300,000 of underlying automobile insurance. If
you actually have $500,000 of automobile insur-
ance, the umbrella coverage for auto exposures
applies as excess over that amount.

OCCURRENCE

An occurrence is usually defined as an accident (in-

cluding continuous or repeated exposure to sub-
stantially the same general harmful conditions) in
bodily injury or property damage neither expected
nor intended by an insured. A situation must be
deemed an occurrence before insurance applies.

If water leaking from your outside pipes softens

the ground under your neighbor’s garage, even-
tually causing its partial collapse and irreparable
water damage to his precious collection of vintage
Chatty Cathy dolls, it is a single occurrence.

The definition of occurrence is typically included

in a policy in order to specifically clarify that cov-
erage is limited to damages arising out of an oc-
currence during the policy period.

Notice the way in which occurrence is defined in any

policy—before you sign on the dotted line. Insur-
ance companies that don’t want to pay claims will
sometimes make tortuous arguments that whatever
went wrong doesn’t qualify as an occurrence.

40
 CHAPTER 2

POLICY LIMITS

Your insurer’s total liability under your umbrella

policy for all damages and loss assessments result-
ing from any one occurrence are not more than
the limit of liability as shown in the Declarations.
The limit is the same regardless of the number of
insureds, claims made, loss assessments, persons
injured, vehicles involved in an accident or expo-
sures or premiums shown in the Declarations.

Should two or more insureds, such as you and

another family member, be sued, the policy pro-
vides a defense for each insured. However, the
limit of liability for all damages arising out of one
occurrence remains unchanged.

An insurance company is entitled to appeal any

judgment that could result in a claim payment
being made under the umbrella policy. This is true
even if you or your insurance company provid-
ing underlying insurance elects not to appeal the
judgment. If it appeals, the insurance company
pays all costs related to the appeal.

If you become bankrupt, your umbrella policy

still applies on an excess basis over the applicable
deductibles. The umbrella does not become pri-
mary coverage due to a lack of underlying insur-
ance or your inability to pay the deductible.

PROFESSIONAL LIABILITY

In many small businesses, the business owner pro-

vides advice or professional services for which
customers pay a fee. However, if these services

41
IMPORTANT DEFINITIONS

are in some way unsatisfactory, the customer may

sue the service provider for professional negligence.
Professional liability coverage protects you against
legal liability resulting from negligence, errors and
omissions, and other aspects of rendering or fail-
ing to render professional services.

Accountants, attorneys, doctors and financial plan-

ners—or anyone who provides professional ser-
vices—are increasingly finding this kind of insur-
ance very important, especially if they work out
of the home. In a broad sense, it’s a form of mal-
practice insurance. It does not, however, cover
fraudulent, dishonest or criminal acts.

PROPERTY DAMAGE

Property damage means injury to or destruction

of tangible property and includes loss of use of
the property. This is another of the main kinds of
loss that constitute a civil liability.

Keep in mind that property damage also includes

loss of use. If you accidentally set fire to your
neighbor’s home and it burns to the ground, he
might have to shack up somewhere else for a few
days or even weeks while the home is being re-
paired or rebuilt. The extra expenses he has to
pay as a result of the loss of use (rent, meals, trans-
portation, etc.) could be claimed in addition to
the actual damages to the home.

If you are liable for damage to the property of

others left in your care, custody or control, in-
cluding loss of the use of the property, your
homeowners policy probably won’t cover you.

42
 CHAPTER 2

Most homeowners policies exclude coverage for

damage to such property. However, a personal
umbrella does not exclude coverage for damage.

RESIDENCE EMPLOYEES AND

PREMISES

Residence employee means an employee of an in-

sured whose duties are related to the maintenance
or use of the residence premises, including house-
hold or domestic services; or someone who per-
forms similar duties—not related to a business—
elsewhere.

Residence premises means the dwelling, other struc-

tures and grounds, or that part of any other build-
ing where you—or any other named insureds—
reside, and which is identified as the residence pre-
mises in the Declarations.

It may be a single family home, part of a duplex

or triplex where you live, a condominium unit
or a rented apartment. (This differs from the defi-
nition of residence premises in homeowners
forms.) For one- to four-family dwellings, the
term includes other structures on the property
and the surrounding grounds.

For a condominium or cooperative unit-owner,

residence premises means the unit where you re-
side, and which is shown as the residence premises
in the Declarations.

RIGHT TO SUE

Since an insurance policy is a legal contract, an

insurance company may be sued if it fails to per-

43
IMPORTANT DEFINITIONS

form its contractual obligations. If it fails to de-

fend you or fulfill other obligations, you may sue.
If it fails to pay a valid claim after entry of a judg-
ment against you, the injured party may sue.

However, no one has a right to sue the insurance

company until after there has been complete com-
pliance with policy terms and your liability and
the amount of damages have been established by
final judgment or agreement. For example, you
have failed to give the insurance company notice
of a loss and legal papers related to the suit that
are required of you after a loss. You have no right
to sue the company if it fails to defend and inves-
tigate the claim.

Another example: An injured party files a suit for

damages directly against the insurance company,
but the motion is rejected by the court because
there are no legal grounds for action. There is no
contract between the claimant and the insurance
company, and the company has no obligation to
the claimant at this point.

A claimant has no right to sue the insurance com-

pany before two issues are fully resolved—liabil-
ity and the amount of damages. The insurance
company may voluntarily settle a loss by agree-
ment without going to court, but it has no obliga-
tion to do so or to step in and pay on your behalf
until damages have been awarded.

The claimant’s initial legal right of action is only

against you, not the insurance company. So no
one has a right to “join” (draw in) the insurance
company to any legal action against you.

44
 CHAPTER 2

A third example: A claimant files an initial suit

against both you and the insurance company, be-
cause it is known that you have insurance cover-
age. The motion is rejected because the only course
of action is against you. The insurance company
cannot be drawn into an action to determine li-
ability against you.

SEVERABILITY OF INSURANCE

Liability insurance, like any other form of insur-

ance, applies separately to each insured listed in
the Declarations. Severability of insurance means
that each insured, as defined in the policy Declara-
tions, has the same rights and obligations that
would exist had a separate policy been issued to
each insured. However, this severability does not
increase the limits of liability under the policy.

SUBROGATION

Simply explained, subrogation means that, once

the insurance company has paid for a loss sustained,
it has all the rights in or to that claim. An ex-
ample: Your neighbor loses control of his car and
crashes into your living room. Your insurance
company, after paying you, has the right to sue
your neighbor for the damages he caused. How-
ever, if before any loss occurs you waive in writ-
ing all rights of recovery against any person, then
the company no longer has the right of subroga-
tion. However, if you did not do this, and the
company does subrogate the loss, you must sign
and deliver all necessary papers and cooperate with
them in any reasonable way they might request
to collect from your neighbor.

45
IMPORTANT DEFINITIONS

Subrogation does not apply to medical payments

to others or damage to property of others.

So, if your coworker’s new Mustang was parked

out front when the crash occurred, your insur-
ance company can’t sue your neighbor for the cost
of the damage to the Mustang. And, if your co-
worker happened to be checking the air on his
tires when the crash occurred, sustaining a severe
head injury, your insurance company can’t sue
your neighbor for your coworker’s hospital costs
either.

In umbrella coverage disputes, subrogation isn’t a

technicality—it’s a big deal. The 1991 Minnesota
Appeals Court decision American Family Mutual
Insurance Co. v. Continental Insurance Co. illus-
trates this point.

Franklin Robbins was killed in 1989 when he fell

out of a friend’s car. Robbins’s estate sued the
driver, who had an auto policy with Continental,
and the owner, who had auto and umbrella poli-
cies with American Family.

In 1990, the trial court approved a settlement of

Robbins’s suit in exchange for a $200,000 payment
from American Family.

American Family then sued Continental to re-

cover $100,000 of the settlement. There was no
dispute that American Family was obligated to
pay $100,000 under its auto coverage.

The trial court ordered that the remaining $100,000

be paid by Continental under its auto coverage

46
 CHAPTER 2

rather than by American Family under its addi-

tional umbrella coverage. Continental appealed.

Both insurance companies assumed that Ameri-

can Family’s auto policy was first in line and there-
fore liable to pay up to its $100,000 limit. Each of
the remaining policies, Continental’s auto policy
and American Family’s umbrella policy, contained
an “other insurance” clause that made the other
policy second in line to pay the balance of the settle-
ment.

The appeals court wrote:

When it is clear that a loss cannot be ap-

portioned without violating the other in-
surance clause of at least one policy, the
deadlock must be broken by determining
which coverage was effected for the pri-
mary purpose of insuring the risk at is-
sue, and which coverage only incidentally
insured the risk.
Courts also consider whether the policy insuring
intent, as determined by the primary policy risks
and the function of each policy, indicate that one
policy preceded another. The existence of other
insurance exclusions can not change the character
and intent of the policies.

T E R M I N AT I O N A N D
NON-RENEWAL

If you want to cancel your policy, you must re-

turn it or mail a notice specifying the cancellation
date to insurance company. The insurance com-
pany may cancel the policy for nonpayment of

47
IMPORTANT DEFINITIONS

premium, or for any other reason during the first

60 days that coverage is in effect, by mailing a
notice of cancellation to you at least 10 days in
advance.

After the policy has been in effect for at least 60

days, or after it has been renewed, the insurance
company may cancel for any reason other than
nonpayment of premium by mailing a notice of
cancellation to you at least 10 days in advance.

An insurance company may elect not to renew

your policy. If the insurance company decides not
to renew the policy, it is required to give notice
of non-renewal at least 30 days in advance.

If the policy is canceled, any unearned premium

is refunded to you on a pro rata (proportional)
basis. For example, if the policy was issued for a
full year (365 days) and it is canceled 73 days prior
to the expiration date (20 percent of 365 days), 20
percent of the premium is returned to you.

TRANSFER OF INTEREST

You may not assign any rights or duties under

the policy to anyone else without the written con-
sent of the insurance company. However, if you
die, the insurance company covers your legal rep-
resentative, while acting within the scope of his or
her duties, for the remainder of the policy period.

UMBRELLA COVERAGE

The term umbrella is based on the fact that an

umbrella policy is a separate policy over and above
any other liability policies that you may have.

48
 CHAPTER 2

So, with respect to personal liability coverage, an

umbrella policy is designed to provide liability
insurance on an excess basis, over any other valid
and collectible insurance (underlying primary cov-
erages), as well additional liability coverages.

The practical application of this clause varies, de-

pending on the other insurance, since duplication
of coverage often ends up with both companies
contributing to payment of a loss.

U N D E R LY I N G POLICY

Underlying policy or underlying insurance means

any insurance policy that provides the initial or
primary liability insurance covering one or more
of the types of liability listed in the deductible
section of the Declarations Page.

Your auto policy and homeowners policy are under-

lying policies to your umbrella policy.

A consistent problem with umbrella coverage is

that policyholders try to use it as a cure-all to in-
surance problems. Umbrella coverage doesn’t pro-
tect your from every risk in the world—it’s ex-
cess insurance for whatever primary, or underly-
ing liability policies you have.

VICARIOUS LIABILITY

Vicarious liability is created by a minor or other

dependent for whom an insured person acts as

49
IMPORTANT DEFINITIONS

guardian. In most cases, the guardian can be held

liable for the minor’s behavior—even though the
guardian played no direct role in the loss.

CONCLUSION

More definitions will be provided throughout the

book to help you understand the ins and outs of
insurance and the tricky subject of liability in com-
mon and obscure situations. The object of this
chapter was to tackle a few of the most basic defi-
nitions that apply to insurance and that you’ll en-
counter when it’s all your fault!

50
 CHAPTER 3

CHAPTER 3
OWNING A HOME IS
A TARGET ON YOUR
BACK

The first time that most people realize they have

assets worth protecting from lawsuits—spurious
or not—is when they buy their first house. It’s
one of the bracing lessons of financial maturity;
saving enough money to put everything you have
down on the best old Victorian in a marginal neigh-
borhood exposes you to the potential of a writ of
attachment from the unemployed neighbor who
slips and cracks his head on your porch while leav-
ing a complaint about your barking dog.

Welcome to home ownership.

If you own a house, the odds are that your

homeowners insurance policy is your main pro-
tection from personal liability claims. You may
not have thought about this when you were pric-
ing homeowners policies—most people don’t. But
mortgage lenders do. That’s why they want to
have insurance in place before you close on that
shabby chic Victorian. The lenders know that
homes are the main mechanism by which people
build financial net worth. And this net worth needs
to be protected.

51
OWNING A HOME IS A TARGET ON YOUR BACK

The liability portion of the homeowners policy is

designed to protect assets if you are sued by some-
one who is injured—physically, mentally or oth-
erwise—while on your property. But this cover-
age is a mixed bag. Insurance companies will usu-
ally pay out losses for property damage...but they
can turn stingy about paying for liability claims.

Two cases in point, each with very different out-

comes:

• In the 2000 federal appeals court case

Nikki David v. Tanksley, et al., a fam-
ily sued its homeowners insurance
company, seeking coverage for burn
injuries sustained by a bystander when
they attempted to start a Chevy Im-
pala that had been in storage. The court
determined that the car was not in
“dead storage”—as it had to be in or-
der to be covered by the policy (in-
stead of a separate auto policy). So, the
insurance company did not need to
defend the Tanksleys or indemnify the
bystander. For the injuries suffered
by the bystander, the Tanksleys had
to pay $500,000—out of pocket.
Goodbye home equity.
• The same year, in the Missouri Court
of Appeals case American Family Mu-
tual Insurance Company v. Bramlett,
the insurance company argued that the
business pursuits exclusion negated li-
ability coverage for a lawnmower ac-
cident that injured a child being cared
for in the policyholder’s home. (The

52
 CHAPTER 3

idea was that the family that owned

the house was running a childcare busi-
ness there.) At trial, the court deter-
mined that mowing the lawn consti-
tuted a “non-business pursuit.” So, the
insurance company had to provide li-
ability coverage for the injury.
These two cases deal with disparate elements to a
homeowners policy.

In the first case, the Tanksleys’ policy would nor-

mally have covered liability for bystanders injured
on or near their property. However, the trial court
noted: “The Tanksleys’ homeowners policy ex-
cludes from coverage any ‘bodily injury or prop-
erty damage arising out of the ownership, main-
tenance, use, loading or unloading of motor ve-
hicles.’” A homeowners policy only covers inju-
ries caused by a car in dead storage. It will cover
damages caused by the garaged ’63 Spitfire you’ve
been restoring (but not driving) for 15 years…but
it doesn’t cover damages caused by the tempera-
mental ’69 GTO that you are jump-starting so
you can get to the Black Crows concert in style.
You’re supposed to have an auto policy for that.

In the second case, a more common question

comes up. Namely, what constitutes business ver-
sus non-business pursuits? If you work at home—
even part-time—you should pay attention to this.

The standard homeowners policy excludes cover-

age for anything related to business pursuits at
home. In the Bramlett case, the wife was watching
kids part-time for money. One of these kids was
hurt when the husband was mowing the lawn.

53
OWNING A HOME IS A TARGET ON YOUR BACK

The court concluded that, even though the wife

was running a childcare business out of the house,
mowing the lawn was not a business activity. The
child was not injured because he was there as a
client…he was injured in a way that might have
happened in the normal course of hanging out with
the neighbors.

A legalism: There was no allegation of negligence

on the policyholder’s part. If there had been, things
might have been different. That might have
dragged the part-time childcare business into the
dispute. As it stood, even though the caregiver
provided a service out of her home, these pur-
suits and the circumstances whereby the child in-
jured himself did not meet the exclusionary rules
of the homeowners policy.

ORIGIN OF HOMEOWNERS' RISKS

A hundred years ago, U.S. government regula-

tions prevented property insurance companies
from selling liability insurance. (By the same to-
ken, liability insurance companies couldn’t sell
property insurance.) So, a homeowner had to pur-
chase two or more policies, often from different
companies, to obtain total insurance protection.

In the 1940s, these regulations changed. These days,

standard homeowners policies (there are several,
designed for single-family houses, condos and
other kinds of residences) provide liability auto-
matically in addition to the property coverages.
The combination of two or more types of cover-
age into one policy is called a package policy.

54
 CHAPTER 3

By combining property and liability coverages,

the insurer reduces processing costs, determines
losses more accurately, and passes these savings on
to the consumer in the form of lower premiums.

If an accident occurs on your property, anyone

who is hurt can hold you financially liable for his
injuries. In the above cases, both families were
named as defendants in cases that involved unin-
tentional accidents to guests on their respective
properties. The liability coverage in most
homeowners policies applies to the injured
person’s claim and the cost of defending you—the
homeowner—if you are sued.

And the injury doesn’t have to occur on your

property. The standard homeowners policy’s li-
ability protection applies to injuries that an in-
sured person causes anywhere in the world.

Who’s an insured person?

An insured includes the named insured, a spouse

and relatives resident in the household, as defined
on the policy. So, if your mother-in-law lives with
you, an upside is that your standard homeowners
policy covers any damages she causes. Other than
the intentional psychological wounds to you.

In addition, an insured includes any person or or-

ganization legally responsible for animals or wa-
tercraft owned by an insured household member.
What does this mean? If your son’s Boy Scout
troop takes your pet wolverine or your boat on a
camp-out and the animal or watercraft causes harm
to someone, you’re covered.

55
OWNING A HOME IS A TARGET ON YOUR BACK

MECHANICS OF COVERAGE

There are two kinds of coverage provided under

the liability section of a homeowners policy. The
first is personal liability coverage. This pays an in-
jured third party for losses which are due to the
negligence of the insured, and for which the in-
sured is liable. The second is medical payments to
others. This covers necessary medical bills incurred
within three years of an accident causing bodily
harm—including reasonable charges for surgical,
x-ray, dental, ambulance, hospital, professional
nursing, prosthetic devices and funeral services.

Medical payments coverage does not apply to

medical expenses related to injuries of the named
insured or any regular resident of the household,
except residence employees (maids, gardeners, etc.).

At the insured location, coverage applies only to

people who are on the insured location with the
permission of an insured. Away from the insured
location, coverage applies only to people who suf-
fer bodily injury caused by:

• an insured person;
• an animal owned by or in the care of
an insured;
• a residence employee in the course of
employment by an insured; or
• a condition in the insured location or
the ways immediately adjoining.
In some cases, these costs are simply determined;
in other cases, the facts may be unclear—and the

56
 CHAPTER 3

insured may or may not be legally liable. In these

cases, the insurer will often pay medical costs as a
goodwill gesture to avoid any legal action.

Example: A visitor to Melvin’s home slips and

falls on the front steps. The slip results in a lightly
sprained ankle and medical expenses in the amount
of $475. Later, the visitor sues Melvin for $10,000,
claiming damages for negligence. The insurance
company will pay the $475 quickly, in hopes of
preventing the larger lawsuit; but it’s going to in-
vestigate the negligence claim thoroughly—and will
probably take some time doing so.

The insurance company has plenty of incentive to

avoid lawsuits. Under the standard homeowners
policy, it will provide a legal defense against
claims—even if the claims are groundless, false or
fraudulent. So, its adjusters and investigators are
trained to pay simple claims quickly and hammer
questionable claims hard.

Both personal liability and medical payments cov-

erage have limits; medical payments coverage is
usually much lower than personal liability. Un-
less you ask otherwise, you’ll get the basic limits
of these coverages, which are the minimum
amounts available. (Of course, higher limits of li-
ability can be purchased for additional premiums.)

Remember: Personal liability insurance applies sepa-

rately to each insured person, but total liability cov-
erage resulting from any one occurrence may not
exceed a limit stated in the policy.

57
OWNING A HOME IS A TARGET ON YOUR BACK

Example: Melvin and his sister are both walking

the dog when it bites Ethel; they both are named
in the resulting lawsuit. However, their
homeowners policy only covers them up to the
single limit. If Melvin had been involved in one
dog bite and his sister another, the policy covers
each separately, up to the limit.

PREMISES LIABILITY

As a homeowner, you carry heavy liability bur-

dens related to things as simple as a slippery stair-
case or a serious pitfall to things less obvious: air-
borne contaminants, water temperatures, etc..

Example: A January 2000 Georgia state court de-

cision pitted two friends against each other when
one visited the other’s home, sustained second-
degree burns in the shower and accused the
owner—her friend—of negligence. The case, Waldo
v. Moore, provides an interesting look at how state
laws come into play in some liability cases, and
how, as a homeowner, there’s really nothing you
can’t be held liable for.

Alice Waldo, who had visited Margaree Moore’s

home previously and bathed without incident,
took a shower one morning after staying over.
When she turned on the hot water, she failed to
test the flow before immersing herself in the wa-
ter—which was approximately 130 degrees Fahr-
enheit. Waldo (in her sixties) slipped and fell—and
remained there until others heard her cries.

Moore, who had raised the thermostat on her

water earlier in order to wash clothes, did not in-

58
 CHAPTER 3

form Waldo of the temperature change. Waldo

claimed that Moore’s “intentional conduct in in-
creasing the water temperature combined with
[her] negligent omission in failing to mention this
fact when [Waldo] announced the intention to
bath...amounted to willful and wanton negligence
for which [Moore was] liable.”

According to Georgia premises liability law, a

homeowner owes a social guest protection to the
extent that he or she refrains from inflicting “will-
ful or wanton injury.” There is no duty of keep-
ing the premises up to any standard of safety, ex-
cept for pitfalls, mantraps and things of that type.
Thus, the court entertained two questions:

1) Does scalding water in the shower con-

stitute a hidden peril?
2) Does the defendant’s action amount
to willful and wanton negligence?
The appeals court said yes to these two questions.
Although other judges filed dissenting opinions,
Moore—and her insurance company—became li-
able for her guest’s unfortunate accident.

Even when it comes to friends and happy

sleepovers, there are situations that can occur for
which a policy can cover—and save—you from
the expensive consequences. This particular case
was no exception.

DUTY TO DEFEND

The first key issue in liability coverage is the in-

surance company’s duty to defend a policyholder.

59
OWNING A HOME IS A TARGET ON YOUR BACK

This means that if you are sued by a third party,

the insurance company must cover the cost of a
defense—even though there’s been no determina-
tion about whether you are guilty or liable.

As we have seen—and will see again, throughout

this book—this duty to defend is a critical matter
in liability cases, which are often determined in
the early stages of litigation. (Personal injury law-
yers taking cases on contingency will often scram
if they don’t score a strong legal victory in the
early stages of a suit.)

Of course, an insurance company’s duty to de-

fend has some limitations. The 1996 Missouri
Court of Appeals decision Loretta McDonough v.
Liberty Mutual Insurance considered a few of these.

McDonough was a trustee of the Terrace Gardens

Subdivision in suburban St. Louis. Terrace Gar-
dens refused the request of a Michael and Teresa
Schiff to build a hockey rink on land within the
subdivision that they—the Schiffs—owned.

The Schiffs sued the Terrace Gardens Subdivision

trustees, including McDonough. The trustees
didn’t have insurance through the subdivision, so
each had to rely on his or her personal insurance
to respond to the Schiff’s claims.

McDonough had two relevant policies from Lib-

erty Mutual—a homeowners policy and a personal
catastrophe liability or umbrella policy (we con-
sider umbrella insurance separately later in this
book). She notified Liberty Mutual and asked the
company to defend her against the Schiff’s claims.

60
 CHAPTER 3

Liberty Mutual refused to provide McDonough’s

defense, claiming the policies she had purchased
didn’t provide coverage for the type of claims as-
serted by the Schiffs. It argued that she needed
separate insurance for her actions as a trustee.

McDonough didn’t have time to bicker with Lib-

erty Mutual. She hired an attorney and financed
her own defense to the Schiff suit. (The case was
tried by a Missouri state court, which found in
favor of McDonough and the other trustees.)

Between Liberty Mutual’s refusal to cover her

expenses and the court ruling in her favor,
McDonough sued Liberty Mutual for breach of
contract and “vexatious refusal to pay.”

In that separate lawsuit, the state trial court issued

a summary judgment for McDonough. Liberty
Mutual appealed.

The insurance company argued that the trial court

had made a mistake in its interpretation of the
policies. It insisted the Schiffs’ suit wasn’t covered.

Before making its decision, the appeals court reit-

erated how it handles these sorts of disputes:

When determining an insurer’s duty to

defend, we look to the insurance policy
provisions and the allegations of the peti-
tion charging liability to the insured. Un-
less the facts alleged in the petition come
within the coverage of the insurance
policy, the insurer has no duty to defend
the insured.

61
OWNING A HOME IS A TARGET ON YOUR BACK

Liberty Mutual argued that its policies provided

“coverage only when a claim or lawsuit alleged
money damages as a result of an occurrence pro-
ducing bodily injury or property damage or per-
sonal injury.” The insurance company based its
denial of coverage on three grounds:

1) the Schiffs’ petition did not request

monetary damages;
2) no “occurrence,” as defined by the
homeowners policy, took place; and
3) the Schiffs sustained no direct bodily
injury or property damage as a result
of McDonough’s actions.
McDonough argued that neither policy explicitly
stated that damages meant monetary damages and
that the term “occurrence” was ambiguous.

Again, the court was careful to reiterate its role:

In construing insurance policies we are to

give the language of the policy its ordi-
nary meaning. Unless an ambiguity exists
or statute or public policy require other-
wise, the policy must be enforced as writ-
ten.... Ambiguity exists when the language
of an insurance policy reasonably and
fairly is open to different constructions.
Ambiguity [also] arises when there is du-
plicity, indistinctness or uncertainty in
meaning.
The appeals court cited Black’s Law Dictionary,
which defines damages as “[a] pecuniary compen-
sation or indemnity...[a] sum of money awarded
to a person injured by the tort of another.” It also

62
 CHAPTER 3

cited Webster’s Collegiate Dictionary, which de-

fined the word as “compensation in money im-
posed by law for loss or injury.”

Using these definitions, the court concluded that

the term damages, as used in the policy, was lim-
ited to monetary damages and did not include the
Schiffs’ claims. (The Schiffs hadn’t sued for money;
they’d sued for permission to build a hockey rink.)

Next, the appeals court had to consider whether

Liberty Mutual’s use of the term occurrence was
ambiguous. The policy covered “bodily injury or
property damage caused by an occurrence.” It then
defined occurrence as an accident, “including...ex-
posure to...harmful conditions.”

In the dispute between McDonough and the

Schiffs, there had been no accident or exposure to
harmful conditions of any type. So, the court con-
cluded there had been no occurrence.

The court elaborated this point:

The Schiffs were prevented from install-

ing a hockey rink on their property by
the act of a governing body, the [Terrace
Gardens] board of trustees. The home-
owners policy issued to [McDonough] pro-
vides no coverage for acts of governing
bodies, and consequently, Liberty Mutual
was not obligated under the homeowners
policy to defend [her] in the Schiffs’ law-
suit.
The court also found there was no coverage un-
der the umbrella policy.

63
OWNING A HOME IS A TARGET ON YOUR BACK

On a separate—and much weaker—point,

McDonough argued that Liberty Mutual should
have defended her because of representations made
by Donald Schweppe, the Liberty Mutual agent
who’d sold her the policies. She said that Schweppe
had assured her the homeowners and umbrella
policies would protect her in her capacity as trustee.

The court didn’t give this argument any credence:

We follow the general rule that an insurer’s

agent cannot bind an insurer by a construc-
tion of a policy which is contrary to the
plain meaning of language used in the
policy and would vary its terms. Liberty
Mutual is not bound by the representa-
tions of its agent which contradict the lan-
guage of the policies....
The policies clearly did not cover McDonough.
Liberty Mutual didn’t have to defend her. If
McDonough had wanted coverage to protect her
in her capacity as trustee, she should have pur-
chased directors and officers liability insurance.

ADDITIONAL COVERAGES

The personal liability coverage in a homeowners

policy provides three kinds of insurance in addi-
tion to the stated limits of liability:

• claim expenses,
• damage to the property of others, and
• first aid to others.

64
 CHAPTER 3

Claim expense coverage includes the costs of de-

fending a claim, court costs charged against an in-
sured and premiums on bonds that are required
in a suit defended by the insurance company.

Expenses incurred by the company, such as inves-

tigation fees, attorneys’ fees, witness fees and any
trial costs are covered by the policy.

If any bonds are required of you in the course of

lawsuit, such as release of attachment or appeal
bonds, the company pays the premium for such
bonds but is under no obligation to furnish the
bonds. That is your responsibility.

When the insurance company requests your assis-

tance in investigating or defending a claim, rea-
sonable expenses—including loss of earnings up to
$50 per day—are usually covered.

Claim expense insurance also covers postjudgment

interest, which accrues prior to actual payment. If
a judgment is rendered against you, there usually
is a time lapse between the rendering of the judg-
ment and the payment of the damages awarded.
The company pays any interest charges accruing
on the damage award during this time period.

Expenses for first aid to others—an injured third

party— are covered when the charges are incurred
by an insured person—and when the charges re-
sult from bodily injury covered by the policy.
So, you’re covered for your attempts to be a good
Samaritan. However, expenses for first aid to an
insured are not covered.

65
OWNING A HOME IS A TARGET ON YOUR BACK

If you damage the property of others, the policy

provides replacement costs on a per occurrence
limit. This additional coverage won’t pay for:

• damage caused intentionally by an in-

sured person who is at least 13 years
of age (there has to be some cutoff age,
otherwise this would cover the inten-
tional acts of insured adults);
• property owned by you, because this
coverage is designed to cover property
owned by others; or
• property owned or rented to a tenant
or a person who is resident in your
household.
Example: Melvin borrows a camera from his
neighbor and accidentally drops it in his swim-
ming pool while taking pictures. His policy pro-
vides up to $500 to replace the camera. However,
if Melvin willfully throws the camera into the
pool, screaming “I hate you, you bastard, and I’m
going to wreck your camera,” there will not be
any coverage. Unless Melvin is the 10-year-old son
of the guy who owns the house—in that case, the
policy will pay. Got it?

COVERAGE CONDITIONS

The liability coverage in a homeowners policy has

a number of other conditions, which can limit its
applicability. These conditions include:

• The bankruptcy of an insured person

does not relieve the insurance com-
pany of its obligations under the

66
 CHAPTER 3

policy. (We’ll consider this issue in

greater detail in Chapter 9.)
• Personal liability coverage is treated
as excess over any other valid and col-
lectible insurance—unless the other in-
surance is written specifically as excess
over the personal liability coverage.
• Your duties in the event of a covered
occurrence include providing written
notice identifying the insured in-
volved, your policy number, names
and addresses of claimants/witnesses,
and information about the time, place
and circumstances of the occurrence.
• You are also required to promptly for-
ward every notice, demand or sum-
mons related to the claim and, when
requested, to assist in the process of
collecting evidence, obtaining the at-
tendance of witnesses and reaching
settlement.
• You are not supposed to assume any
obligations or make any payments
(other than first aid to others follow-
ing a bodily injury), except at your
own expense.
• Payment of medical costs to others is
not an admission of liability by you.
When medical payments are made, the
insured or someone acting on the be-
half of the injured person has to pro-
vide written proof to support any
claim. The injured party must submit
to a physical examination, if requested

67
OWNING A HOME IS A TARGET ON YOUR BACK

by the insurance company, and autho-

rize the company to obtain medical
reports and records.
A standard policy will also pay a certain amount—
usually up to $1,000—for your share of any
homeowners association or condominium loss
assessment made because of bodily injury or prop-
erty damage occurring on jointly-owned property.
(But, as McDonough found out, there have to be
real money damages sought for this coverage to
kick in.) Higher limits are available.

However, if a local government makes a charge

against your association, your share of the loss is
not covered. (This coverage would apply if you,
as a volunteer officer of the association, were sued
individually, too.)

Some states allow coverage for domestic employ-

ees under the personal liability coverage—but this
is not usually the case. Usually, a domestic must
work a specified number of hours a week or re-
side on the premises in order for coverage to be
mandatory. So, if your housekeeper is grocery
shopping for your kids and slips in the store,
breaking her arm, there may be coverage under
your homeowners policy. If she’s shopping for
personal reasons though, there is no coverage.

COVERAGE EXCLUSIONS

Insurance companies love exclusions—the legal

loopholes under which they don’t have to pay
claims. They fill standard policies with exclusions.
In fact, any time you read a standard insurance
policy, one of the best places to start is with the

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exclusions (and proceed carefully, there may be

more than one exclusion section in a single policy).

In standard homeowners liability coverage, there

are three major exclusions. We’ve seen some ele-
ments of each of these already, but they are worth
considering in detail.

The first major exclusion is business activities. (We

consider the liability risks posed by home-based
businesses in greater detail in Chapter 6.)

Liability assumed under a written contract is cov-

ered, as long as the contract is personal in nature.
There is no coverage for business-related contracts
or activities. Personal liability coverage is not a
business policy—it only covers personal activities
and exposures. The standard policy form itself
states:

Any liability arising purely out of the

insured’s occupation or business and/or
the continual or permanent rental of any
premises to tenants by the insured is ex-
cluded.
However, there are some activities which can be
construed as business activities but are specifically
covered under the policy as exceptions to the ex-
clusion. Among these:

...the insured may rent out the resi-

dence and be covered by the policy
under limited circumstances....
...A portion of a residence might be
used for professional purposes, such

69
OWNING A HOME IS A TARGET ON YOUR BACK

as a beauty parlor or physician’s

office...[but]there is no coverage for
professional liability arising out of
these activities.
The second major exclusion: Injury to members
of the insured household.

Lawsuits between people covered by the same

policy are excluded. Before this exclusion was
added to the standard policy, some courts per-
mitted family members to sue other family mem-
bers and collect damages. The Utah Supreme
Court considered exactly this kind of claim in its
1992 decision Blaketta Allen v. Prudential Prop-
erty and Casualty Insurance Co.

In 1981, Allen’s husband met with a Prudential

agent to discuss homeowners insurance. During
the meeting, Mr. Allen completed an application
for a policy under which Prudential would insure
the Allens’ home and provide liability coverage
against accidents occurring on the property.

The Allens received the policy in the mail approxi-

mately two months later. Attached to the policy
was an endorsement excluding members of the
Allens’ household from liability coverage. Nei-
ther Allen nor her husband read the endorsement.

Three years after the agreement went into effect,

the Allens’ two-year-old son was injured when Mrs.
Allen spilled a pot of boiling water on him. After
the accident, Mr. Allen contacted the Prudential
agent, seeking recovery against the policy for his
wife’s accidental injury of his son. Based on the
household exclusion, Prudential denied coverage.

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 CHAPTER 3

Mrs. Allen sued, seeking to invalidate the exclu-

sion on the grounds that the existence of the ex-
clusion violated her reasonable expectations of
coverage. The district court dismissed the lawsuit.

Mrs. Allen appealed. She argued that the house-

hold exclusion should be held unenforceable be-
cause it violated her reasonable expectations.

The Utah Supreme Court, considering this argu-

ment, classified reasonable expectations claims into
three groups:

• construction of an ambiguous term in

the insurance contract to satisfy the
insured’s reasonable expectations;
• refusal to enforce the fine print of an
insurance contract because it limits
more prominent provisions giving
rise to the insured’s expectations; and
• refusal to enforce an insurance contract
provision when it would frustrate the
reasonable expectations of coverage
created by the insurer outside of the
contract.
The court didn’t find any of these applicable to
the Allens’ case. The Prudential policy clearly
stated that coverage was excluded for “any Insured
under…the definition of Insured.” It then defined
insured as “residents of the Named Insured’s house-
hold, his spouse, the relatives of either, and any
other person under the age of twenty-one in the
care of any Insured.” The exception clearly meant
no medical payments coverage for Allen’s son.

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OWNING A HOME IS A TARGET ON YOUR BACK

The homeowners policy is not meant to be a sub-

stitute for accident and health insurance—and this
exclusion makes it clear that there is no coverage
for an injury suffered by the named insured or
other family members in the same household.

The third major circumstance: intentional acts of

an insured person or acts that can be expected to
produce bodily injury or property damage.

So, if you mean to hurt someone, your

homeowners insurance won’t cover the damages.

In early 1991, Ariel Hessing sought coverage un-

der his father’s homeowners policies for his former
girlfriend’s claims for medical costs and other dam-
ages. Hessing had pleaded guilty to beating the
woman at his father’s New Jersey home in 1985.
Her civil lawsuit against him was pending.

New Jersey State Superior Court Judge Burton

Ironson dismissed Hessing’s claim, ruling that the
insurers didn’t have to provide coverage—even
though Hessing was a family member living in
his father’s home—because the act was intentional.

“The decision sends a signal that people who lash

out at their wives or girlfriends will have to per-
sonally pay and cannot transfer the responsibility
to an insurance carrier,” said Lawyer James
Rothschild, of Pennsylvania-based Harleysville
Mutual Insurance, a company involved in the case.

In addition to the above exclusions, there are other

circumstances in which homeowners insurance
does not cover liabilities, including:

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 CHAPTER 3

• a loss assessment charged against the

named insured as a member of an as-
sociation or corporation;
• rendering or failure to render profes-
sional services;
• transmission of a communicable dis-
ease by an insured person;
• sexual molestation, corporal punish-
ment, or physical or mental abuse;
• the use, sale, manufacture, delivery,
transfer or possession by any person
of controled substances (illegal drugs),
other than legitimate use of prescrip-
tion drugs ordered by a physician; and
• entrustment by an insured person of
an excluded vehicle, watercraft or air-
craft to any person, or vicarious pa-
rental liability for the actions of a mi-
nor using any of these items.
The first two are best covered by business or pro-
fessional liability policies. The others are basically
reiterations of the intentional act exclusion.

RISKS POSED BY VEHICLES

One of the most dangerous activities anyone can

undertake is driving a motorized vehicle—be it a
car, a golf cart or a boat. And the dangers posed
aren’t just personal—vehicle accidents are the most
common cause of liability claims. A reasonably
smart person might suppose that vehicle accidents
and homeowners insurance come together in a lot
of liability claims. They do. And, they do often.

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OWNING A HOME IS A TARGET ON YOUR BACK

We’ve already considered the distinction between

liabilities caused by your house and your car.
That’s easy. But what if it’s not your car that cre-
ates a liability? And what if it’s not a car at all?

Homeowners insurance does not apply to any

exposure—even liability—created by driving any
vehicle that is registered and tagged with a state
motor vehicle administration. There is also no
coverage for liability arising out of vehicles that
you own, operate, rent or borrow. These vehicles
should be covered by an auto policy.

However, there is coverage for the vicarious li-

ability created when a member of your household
drives someone else’s vehicle.

Vicarious liability is a nasty proposition. It can

make something all your fault…even when it’s
not—strictly speaking—your fault.

Example: Melvin is sued for damages caused by

his 12-year-old daughter, who went joy riding with
his car. Sadly for Melvin, there is no coverage under
his homeowners policy because of a vicarious li-
ability exclusion for his own cars. However, if his
reprobate daughter had borrowed a neighbor’s car,
Melvin could claim coverage under the policy. Its
exclusions only apply to his family and his cars.

Liability involving the following types of unreg-

istered vehicles is covered under a standard
homeowners policy:

• a trailer parked on an insured pre-

mises;

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 CHAPTER 3

• an off-road recreational vehicle that

you rent, borrow or own—as long as
it is used only at an insured location;
• damage or injuries involving golf carts,
when used for golfing; and
• motorized lawn mower tractors, elec-
tric wheelchairs and similar vehicles
in dead storage.
The watercraft exclusion is very similar to the
motor vehicle exclusion. Large boats are more ap-
propriately covered by boat or yacht policies.
However, liability claims involving the follow-
ing types of boats are covered:

• motorboats with inboard or inboard-

outboard motors that you don’t own;
• motorboats with outboard motors of
greater than 25-horsepower that you
have owned since before inception of
the insurance contract—as long as the
insurance company is notified of the
exposure;
• motorboats with outboard motors of
greater than 25-horsepower that you
acquire during the policy period;
• sailboats that you own—as long as they
are under 26 feet long (a homeowners
policy will cover bigger sailboats, as a
long as you don’t own them); and
• boats in storage, regardless of size.
The standard homeowners policy includes an air-
craft exclusion similar to the other vehicle exclu-

75
OWNING A HOME IS A TARGET ON YOUR BACK

sions. A hang glider would be considered an air-

craft, and would be excluded since it is designed
to carry a person. Of course, if you shake up your
passengers while you’re flying the Gulfstream V
you bought after the big IPO, your homeowners
policy isn’t going to be of any use.

On the other hand, liability involving model

planes, including remote-controled model planes,
is covered. And that’s a more likely risk for the
majority of us who are not executives at Oracle.

CHARGES OF NEGLIGENCE

We’ve dispensed with most of the technicalities

that can jam up liability coverage under a stan-
dard homeowners policy. That done, the main
issue you need to consider is when someone ac-
cuses you of negligence with regard to damages he
or she has suffered. Negligence makes the money
in question go up. It also makes insurers nervous.

A good example of a case in which negligence

played a role was the 1999 Illinois state court deci-
sion Timothy Koonce v. Pacilio. If you think a
backyard is a safe place to play (and to send chil-
dren to play), then think again.

On April 10, 1992, 10-year-old Timothy Koonce

was playing with nine-year-old Nello Pacilio, in
the Pacilio family’s backyard. The boys were shak-
ing and hanging on a clothesline when it snapped
and struck Timothy’s left eye, making it bleed.

Although Nello denied seeing any wire hit Timo-

thy in the eye, he said there were no rocks nearby

76
 CHAPTER 3

and that they were not playing with pencils or

anything sharp at the time. It was later determined
that the lines had indeed caused the injury.

Through his parent and natural guardian, Timo-

thy brought a premises liability action against the
Pacilios, alleging that he was injured when a clothes-
line on their property snapped and a wire con-
nected to the clothesline punctured his left eye.
An Illinois court entered judgment on jury ver-
dict for the Pacilios. Timothy’s lawyers appealed.

On appeal, the court held that:

• the Pacilios’ lawyer’s improper argu-

ments to the jury, including imply-
ing that the Pacilios had no insurance,
required a new trial;
• refusal to give missing evidence in-
struction was an abuse of discretion;
and
• exclusion of evidence that one of prop-
erty owners had previously been a de-
fendant in another premises liability
action was not an abuse of discretion.
At trial, Timothy’s lawyers argued that the Pacilios
carelessly and negligently maintained their pre-
mises by permitting a clothesline to exist on the
premises in a dangerous condition; by failing to
warn of that condition; by failing to properly fix,
repair and maintain the clothesline; by permitting
minors to play in the area of the clothesline; and
by failing to properly supervise the minors. They
also contended that Timothy was injured when

77
OWNING A HOME IS A TARGET ON YOUR BACK

the clothesline snapped and a wire punctured his

eye causing permanent loss of vision in that eye.

After deliberation, the jury returned a verdict in

favor of the Pacilios.

On appeal, Timothy’s lawyers argued for a new

trial, insisting that the Pacilios’ lawyer’s closing
argument was improper and highly prejudicial—
it falsely suggested to the jury that the Pacilios
had no insurance and would bear the burden of
any judgment entered against them.

The appeals court agreed with Timothy’s lawyers’

arguments. It stated:

It is well settled that it is improper to in-

form the jury, either directly or indirectly,
that the defendant is, or is not, insured
against...liability on a judgment that might
be entered against him in a negligence ac-
tion.... Likewise, a defendant cannot sug-
gest to the jury that a defendant would be
personally responsible for satisfaction of
the judgment entered when the defendant
has insurance or will be indemnified.
Courts have determined, through various cases,
that evidence of insurance or lack of it is irrel-
evant to the issue of negligence. Such evidence may
influence a jury in determining in which party’s
favor to render a verdict, and in determining the
size of the verdict.

The mere mention of insurance or lack thereof

does not automatically require reversal and remand

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for a new trial. But, if undue emphasis is placed

on the irrelevant evidence, or if the jury’s verdict
is affected by it, then reversal is warranted.

The appeals court concluded that the Pacilios’

lawyer’s closing remarks improperly attested to
their honesty and character and inaccurately sum-
marized the evidence presented at trial. All in all,
defense council aimed “to portray the defendants
as faultless uninsured homeowners.” The court
ordered another trial—but the Pacilios’ insurance
company didn’t want to go through the same
problem again. It suggested a settlement.

SOCIAL HOST LIABILITY

If you host a New Year’s Eve party, serve spiked

eggnog and bottles of André Rosé, there may be
laws that govern your responsibility as a dispenser
of liquor (if not your taste in sparkling wine).
Technically, you are considered a social host and
in some states social host liability applies to you.
In at least 21 states, statutory liability extends to
noncommercial servers. In 10 other states, similar
liability has been established by common law.

A social host’s responsibility for the actions of

drunk guests was first addressed in a 1984 New
Jersey State Supreme Court ruling that a private
host serving liquor could be held liable for a drunk
guest’s subsequent motor vehicle accident. The
court’s decision did not apply, however, to situa-
tions when there are parties with many guests,
when guests serve each other, or when a host is
busy with other responsibilities and is not serving
liquor or when the host is drunk.

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OWNING A HOME IS A TARGET ON YOUR BACK

Subsequent rulings—particularly one in 1988—tem-

pered that law even further, limiting social host
liability. However, courts in some states have ruled
that social hosts are not liable and that this is a
matter of public policy, which should be decided
by the legislature. In at least three states—Missouri,
Washington and Colorado—courts have decided
that social hosts cannot be treated under the law
the same way as those who sell drinks for a living.

Most of the liquor liability cases heard in state

appeals courts in the 1990s limited social host li-
ability. In Texas, for example, a court ruled in
1993 that the drinker, not the social host, is re-
sponsible for the driver’s behavior. Supreme
Courts in only four states have imposed liability
on social hosts and in two of those states—Cali-
fornia and Iowa—laws were later passed that abol-
ished court-imposed social host liability. In Michi-
gan, social hosts of a party where minors consume
alcohol are not liable for criminal acts of their
guests other than alcohol-related auto accidents.

In 1999, the Vermont Supreme Court rejected an

appeal in a case that sought to make property
owners liable for deaths or injuries resulting from
unauthorized drinking on their property. The
ruling stated that social host liability would not
apply if the land owners are neither present nor
furnish the alcohol.

A Massachusetts Appeals Court decision in late

1995 expanded social host liability in that state.
The court said that bar patrons who “pick up the
tab” can be held liable if the person for whom
they buy drinks injures others by negligently op-

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 CHAPTER 3

erating a motor vehicle. The case concerned an

uncle who paid for his nephew’s drinks at a bar
and then allowed him to drive home. En route,
the nephew was stopped by police for speeding
and received a warning. Soon after, his car col-
lided head-on with another car after drifting into
oncoming traffic. The plaintiff won a $1.2 mil-
lion verdict against the nephew, uncle, the bar and
the Commonwealth of Massachusetts; all but the
nephew appealed. The appeals court reversed the
judgments against the bar and the Common-
wealth, but ruled that the uncle, by paying for the
nephew’s drinks, made liquor available to him and
he therefore could be liable as a social host.

Does a standard homeowners policy cover this

kind of liability? The jury—quite literally—is still
out. However, there is little doubt that cases of
social host liability—especially stretched to the
limit of claims against someone who picked up a
tab in a bar—would fall within the duty to
defend…and probably the general liability
coverage…of a standard homeowners policy.

Until Congress enacts a federal law to define and

govern social host liability, you must look toward
your state’s laws for such guidance. And even those
laws are individually interpreted on a case-by-case
basis.

DOMESTIC EMPLOYEES

If you own a house and have people come and

work there—a once-a-week housekeeper, a live-in
nanny or a full complement of livery-wearing
staff—you face a certain liability risk with these

81
OWNING A HOME IS A TARGET ON YOUR BACK

domestic employees. We’ve considered a few ex-

treme examples of these risks before; now, we’ll
take a quick look at the basic risks they pose.

Domestic employees are no longer a staple of the

very rich. Many households today, middle and
upper-middle class alike, employ one or more
people to perform domestic work. These tasks
include cleaning the house, shopping for food,
preparing meals and washing clothes, and caring
for children and elderly relatives.

If you choose to employ people to perform such

tasks without obtaining workers’ compensation
insurance, as required by law in some states, you
are not only failing to protect these people, but
you are putting yourself at legal and financial risk.

In New York, for example, the Workers’ Com-

pensation Board resolves conflicts when a claim
for compensation is filed and a worker’s right to
benefits is contested. The definition of employer
under New York’s Workers’ Compensation Law
encompasses not just corporations or partnerships,
but any person who has one or more persons in
employment. Workers’ compensation insurance
must usually be provided by an employer as soon
as she or he employs one person for any length of
time, even as short as one hour.

As an exception to this general principle, how-

ever, New York law specifically excludes as em-
ployees for whom compensation coverage is re-
quired domestic servants who are employed by
the same employer for less than 40 hours a week.
Also excluded from the law’s protection are people

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 CHAPTER 3

engaged by the owner in casual employment con-

sisting of yard work, household chores and mak-
ing repairs to or painting in and about a one-fam-
ily owner-occupied residence.

A person whose only job is to clean a house comes

within the definition of a domestic servant. A fam-
ily who hires someone to clean the home once or
twice a week employs that worker for less than 40
hours, so that worker is excluded from the pro-
tection of the workers’ comp insurance. On the
other hand, anyone who employs a house cleaner
for more than 40 hours a week is required by law
to secure compensation insurance for that worker.

It is far more common for families, particularly

those with young children, to hire someone for
the dual purpose of performing both housekeep-
ing chores and child care. Does a family need comp
insurance for that worker (variously referred to
as a caregiver, a housekeeper, a nanny or an au pair)?
If the employee works 40 hours or more a week
there is no question that she or he is an employee
who comes within the protection of the law, and
compensation insurance must be secured.

Compensation coverage for this kind of employee

is not provided by a homeowners policy. An
employer must secure compensation benefits sepa-
rate from the endorsement.

As a practical matter, homeowners who intend to

hire a firm or individual on an independent con-
tractor basis should ask for a written agreement
setting forth the nature and cost of the work and
should also ask for, and retain, the business’s own

83
OWNING A HOME IS A TARGET ON YOUR BACK

certificate of compensation insurance. Such fac-

tors can help convince a court that a worker was
either an independent contractor or the employee
of an independent contractor, rather than an em-
ployee of the homeowner.

Even if it were safe for a homeowner to assume

that his or her part-time household worker would
be considered a domestic servant, if that worker
files a claim for compensation, other uncertain-
ties abound. Since the 40-hour cutoff is what de-
termines both a claimant’s entitlement to benefits
and the employer’s corresponding obligation to
provide insurance, it is not surprising that domes-
tic servant cases before the board often involve an
employee claiming he or she worked 40 or more
hours and an employer asserting the worker
worked less than 40 hours.

In the case of live-in workers, for example, em-

ployees argue that their services were continually
called on, and that they were required to be avail-
able 24 hours a day.

The compensation endorsement in a homeowners

liability policy is extremely limited to the situa-
tions in which it provides benefits—it was designed
to cover only the employee who performs mi-
nor, quick jobs around certain homes, not a regu-
larly employed domestic servant such as a home
health care aide or a nanny.

CONCLUSION

If damage was caused by you, your spouse, chil-

dren, or pets to another person or persons on the

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 CHAPTER 3

premises of your home, you can be held liable.

We’ve also seen that “things”—like your lawn
mower, your stored (prized) car and even a steam-
ing, hot shower can hurt guests.

There’s no safe haven anymore; homes are dan-

gerous places—breeding grounds for seemingly
frivolous lawsuits.

If you think a Christmas tree is a fire hazard, con-

sider how, regardless of the fire hazard, each or-
nament could harm a curious guest. The lights
could electrocute an unassuming toddler. The an-
gel could fall from the top and spike your octoge-
narian aunt.

Or, in the worst case, your mother-in-law goes

into anaphylactic shock because she’s highly aller-
gic to Douglas Firs and you failed to warn her
that indeed, the tree is real. Later, she sues you for
her medical bills (she went into cardiac arrest and
remained in the hospital for a week), pain and suf-
fering and of course—lost wages.

Liability coverage is one of the distinguishing char-

acteristics of homeowners insurance. It’s what sepa-
rates homeowners coverage from dwelling or fire
coverage. But liability insurance has become so
important in the modern marketplace that even
this distinction is fading.

Increasingly, liability coverage is added to dwell-

ing and fire policies. When liability coverage is
not attached to a dwelling policy directly, it’s some-
times written as a separate policy.

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OWNING A HOME IS A TARGET ON YOUR BACK

It is important to know the different definitions

of liability and how they apply to you legally. It
is also important to know when limits of liability
occur in your insurance policy and when the in-
surance company stops paying.

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 CHAPTER 4

CHAPTER 4
WHY LIABILITY IS
SUCH A BIG DEAL
WHEN YOU DRIVE

Driving a car is the most risky thing that most

people do in the normal course of their daily lives.
Knowing this, most people who drive have auto
insurance. Most states require drivers to have at
least basic coverage. But driving can result in per-
sonal liabilities that a basic policy doesn’t cover.

Liability means a very specific thing in terms of

auto insurance. If you are at fault in an accident,
liability insurance pays for the bodily injury, prop-
erty damage and intangible losses suffered by the
other people in the wreck. It also pays your legal
bills if they sue you.

Don’t underestimate how many legal claims can

come out of an auto accident: tangible losses like
medical bills, lost wages, property damage (the
other cars, a $10,000 custom stereo, the 200 pieces
of lead crystal in the trunk); and intangible losses
like pain and suffering...even loss of consortium.

Really. It’s shocking how much people claim

things like loss of consortium after a car wreck.
Some insurance experts estimate that three-quar-

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

ters of all auto liability claims are for intangible

losses.

An important caveat: If you cause an accident, you

can’t hold yourself liable for your own injuries. You
have to buy separate insurance—usually called com-
prehensive coverage—for your own losses.

Damage you do to yourself is also called first party

liability. In auto liability issues, you’ll often see or
hear references to first party and third party. The
third party is the other driver (or drivers...or
people in their cars) involved in an accident.

First party liabilities are relatively easy for insur-

ance companies to calculate and control. Third
party liabilities are far more difficult.

However, the mere fact that injury or damage

has occurred does not necessarily mean that you
are legally liable—no matter how much an angry
driver or his angry lawyer yells at you.

LIABILITY COVERAGE

A standard auto policy is usually written with a

single limit of liability per accident, sometimes
called a combined single limit. It is the maximum
amount that the insurance company must pay for
all damages arising out of a single accident.

If you have a policy with a single limit of liability

of $100,000 per accident, your insurance company

88
 CHAPTER 4

will pay up to $100,000 for all bodily injuries, prop-

erty damage and intangible loss arising out of an
accident—if you are at fault—regardless of the
number of persons injured, and regardless of what
portion of the loss is bodily injury, property dam-
age or intangible loss.

The minimum liability limits required by law vary

from state to state. Several states require that au-
tomobile owners have liability coverage in the fol-
lowing amounts:

• $15,000 per person and $30,000 per ac-

cident for claims stemming from
bodily injury, and
• $10,000 per accident for claims stem-
ming from property damage.
Many experts recommend that your bodily in-
jury liability limits be $100,000 per person and
$300,000 per accident. (These are common and
widely available amounts.) Even higher limits are
available from most insurance companies.

If you own a home and have any sort of liquid net

worth, you probably should buy higher limits than
state minimums. If a court awards someone more
money than your auto insurance limits, you will have
to pay the balance from your own pocket.

Usually, if you lease a car, the finance company

will require that you carry higher limits. Since—
technically—the finance company owns the car, it

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

might be held liable for any losses from a wreck

that your insurance doesn’t cover.

Some insurance companies sell auto policies with

split limits of liability coverage, and many of the
companies that usually write single limits provide
split limits on request.

Split limits are frequently expressed as three num-

bers separated by slash marks. The first two num-
bers represent the bodily injury limits in thou-
sands of dollars. The third number represents the
property damage limit in thousands of dollars.

For example, Washington State’s minimum liabil-

ity coverage is 25/50/10, meaning a car owner must
have at least $25,000 of coverage for injury to one
person, at least $50,000 for injury to two or more
people per accident and a minimum of $10,000
for property damage per accident.

For most people, split limits are the most economi-

cal way to carry sufficient auto liability coverage.

LIABILITY LIMITS

But even sufficient coverage has its limits. As we’ve

noted, the limit of liability on a policy is the most
the company will pay as a result of one accident.
This maximum is not increased because several
cars are insured on the same policy or because of
the number of claims made or the number of ve-
hicles involved in a particular accident.

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 CHAPTER 4

Also, liability insurance payments are reduced by

amounts paid for the same accident on behalf of
the liable person. These include direct cash pay-
ments, payments made by other insurance cover-
ages (including workers’ compensation or disabil-
ity benefits) and payments made under different
sections of the same policy.

For example: Running late for a photo shoot,

Darva crashes into Monica, who was on her way
to lunch. Darva is at fault for the wreck, which
caused $10,000 in damage to Monica’s car, $1,000
in damage to the berets and presidential memora-
bilia in Monica’s car and $111 in wages lost while
Monica recuperates from the trauma of the wreck.
Darva’s insurer might have to pay $11,111.

But things go differently. Feeling guilty, Darva

spends her own money to replace Monica’s berets
and presidential memorabilia. And, as it turns out,
disability insurance from Monica’s job covers her
lost wages.

Since they are both honest people, Darva and

Monica tell Darva’s insurance company about the
alternative arrangements. So, Darva’s insurance
company only has to pay $10,000 to repair the
damage to Monica’s car.

DEFENSE COSTS

Because defending a lawsuit can be expensive, pay-

ment of legal costs is an important part of auto
liability insurance. In some cases, the cost of de-
fending a lawsuit can be as much as—or more
than—the amount ultimately awarded as damages.

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

Your insurance company pays unlimited defense

costs in an automotive liability suit—and these de-
fense costs are paid in addition to the limits of
liability. (If defense costs were included within the
limit of liability, you’d have to purchase much
higher limits of insurance to be adequately pro-
tected.)

If your insurer defends against a liability suit and

you lose, and if the company delays making a pay-
ment, the court might require that interest be paid
or an offer of payment is made. This postjudgment
interest is covered but counts toward your policy’s
overall limit of liability.

In addition, most policies will pay up to $50 per

day for loss of earnings you incur because of atten-
dance at hearings and legal proceedings at the in-
surance company’s request. But this coverage
doesn’t impact most liability limits significantly.

Key point: An insurance company is only obligated

to defend claims that are—or may be—covered by
the policy. It has no duty to defend a legal claim not
covered by the policy. So, if you are being charged
with drunk driving (a criminal offense and not cov-
ered), your insurer won’t pay for your defense.

OTHER LIABILITY COVERAGE

The average person usually carries $25,000 per

person per accident in liability. But if you live in a
high-cost market, such as a big city, and you need

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more than minimum amounts of liability insur-

ance—you may be able to slash your auto insur-
ance bill by hundreds of dollars with a personal
liability umbrella policy—and increase your cov-
erage amounts.

Personal umbrella liability policies are stand-alone

insurance policies that supplement most other li-
ability insurance you have purchased, including
auto policies.

For example: Your auto policy offers $100,000 in

liability protection. A $1 million umbrella policy
would boost your total car-related liability cover-
age to $1.1 million. If you cause a major accident—
five or six other cars damaged and a dozen inju-
ries—you’ll probably have enough coverage.

Umbrella liability policies are usually inexpensive

and cover more than very high auto liability lim-
its. (Chapter 5 focuses on umbrellas in detail.)

Key point: An umbrella policy only kicks in when

you’re sued. It doesn’t help you if your house or car
is destroyed in a fire or flood.

HANDLING MULTIPLE CLAIMS

One issue that comes up often, in the wake of an

accident: How does the insurance company divide
a certain liability limit between two people mak-
ing claims against a single at-fault driver in a single
accident?

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

To be more specific: If your liability limit is

$100,000 per accident and there are two other cars
involved in an accident you caused, how will each
of those drivers’ claims be settled?

The insurance company will give each claimant a

share of the limit of liability proportionate to his
or her claim in relation to the total of all claims
submitted.

So, if one driver claims $60,000 in liability dam-

ages and the other claims $90,000, the insurance
company will give each a proportional part of the
$100,000 limit—$40,000 and $60,000, respectively.
They’ll have to sue you directly for the rest of
their claims.

A more common conflict affecting coverage lim-

its: set-off provisions that limit one kind of cov-
erage when another has been claimed.

In the 1982 Nevada Supreme Court decision

Sullivan v. Dairyland Insurance Co., an insured’s
passenger sustained physical injuries that were far
in excess of the driver’s liability coverage. The pas-
senger sought to collect both the liability and the
medical payments coverage from the insurer.

Dairyland relied on a set-off clause that allowed it

to deduct medical expenses from the uninsured
motorist insurance payment. The state supreme
court determined that the passenger could recover
under both coverages despite the set off clause
because “...the set-off clause only operates to pre-
vent double recovery for the same elements of
damage....”

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The court concluded that although the set-off limi-

tation was in keeping with the reasonable expecta-
tions of the policyholder, it was inapplicable when
the damages exceeded the coverage limits.

Obviously, liability is the most important reason

most people buy auto insurance. If you cause an
accident, the damage you can do to another
person’s car is usually limited. The damage you
can do to that person, however, is essentially un-
limited. And in many (unfortunate) cases, dam-
ages exceed one’s coverage and ultimately, one’s
ability to make payment.

When you’re reviewing or comparing auto insur-

ance policies, remember that the word liability
has different meanings for different parties. For
you, it’s a potentially unlimited downside you
want to limit. For the insurance company, it’s the
obligation taken on when issuing an insurance
policy.

Remember: The term limit of liability, which occurs

throughout the standard auto policy, relates to the
insurance company’s obligations to you—not your
protection against civil lawsuits.

W H AT ’ S IN AN AUTO POLICY

Simply speaking, there are two kinds of car insur-

ance. There’s the kind you’re required to have,
such as medical benefits, bodily injury and prop-
erty damage liability. And there’s the kind you’re

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

probably going to want, even though it isn’t man-

dated by law.

A typical auto policy consists of six types of cov-

erage—three mandatory coverages and three cov-
erages that are not mandated by law. Your auto
policy may include all six of the coverages or only
some of them; only four apply to liability.

The six types of coverage include the following:

1. Bodily Injury Liability. Coverage for

injuries you cause to someone else. As
we mentioned earlier, most states re-
quire you to buy bodily injury liabil-
ity coverage of at least $15,000/$30,000
(the $15,000 pays for injuries to one
person; the $30,000 is the total avail-
able per accident).
2. Medical Payments or Personal Injury
Protection (PIP). Coverage for treat-
ment of injuries to the driver and pas-
sengers of your car. At its broadest,
PIP can cover medical payments, lost
wages and the cost of replacing services
normally performed by someone in-
jured in an auto accident. In most
states, you must buy at least $5,000
worth of coverage. The typical driver
buys $10,000. However, if you have
health insurance you may not need it.
3. Property Damage Liability. Coverage
for damage you cause to someone else’s
property. In most states, you must
buy at least $5,000 worth of coverage.

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Many standard policies include a

higher limit—often $25,000. (Of
course, if you total your neighbor’s
Jaguar, you’ll need a little more. Al-
though, as part of your property dam-
age liability coverage, your insurance
company pays for a rental car for your
neighbor while he’s getting his Jag
fixed, it’s considered a loss of use ex-
pense. However, your insurance com-
pany isn’t so generous with you. Loss
of use is not part of your physical dam-
age coverage; but you can add on rental
coverage for a small fee.)
4. Collision. Coverage for damage to
your car from a collision. The colli-
sion could be with another car, a light
post, fire hydrant, etc. Like medical
benefits, this coverage is a no-fault
coverage. (In other words, it pays—
regardless of who is at fault. We’ll go
over this in more detail later.)
5. Comprehensive. Coverage for dam-
age to your car that doesn’t involve a
collision with another car. Covered
risks include fire, theft, falling objects,
missiles, explosion, earthquake, flood,
riot and civil commotion. If you’re
financing a car purchase, most lenders
require you to purchase collision cov-
erage. Insurance companies usually
give you a $500 deductible, unless you
request a different amount. As is al-
ways the case, the higher your deduct-
ible, the lower your premium.

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

6. Uninsured Motorist Coverage (UM).

Coverage for treatment of your inju-
ries as a result of collision with an un-
insured driver. Underinsured Motor-
ist coverage (UIM) can also be included
in an auto policy. UIM coverage
comes into play when an at-fault driver
has auto liability insurance, but the
limit of insurance is inadequate to pay
for your damages. It usually makes
sense to purchase the same level of this
coverage that you have for bodily in-
jury liability.
As mentioned above, the mandatory auto insur-
ance coverages in most states include bodily in-
jury liability, medical benefits and property dam-
age liability. The others are not required but most
people buy them to protect them from common
risks.

MEDICAL PAY M E N T S

Medical payments coverage is an optional part of

auto insurance. This coverage pays reasonable
medical expenses if you, members of your family
or any other passengers sustain bodily injuries
while riding in your car, regardless of who is at
fault. Of course, the insurance company gets to
decide what is or isn’t reasonable. But the cover-
age also applies to you and your family members
when you’re riding in another automobile, or if
you’re injured as pedestrians by an automobile,
so it’s well worth the purchase.

This coverage allows immediate payment to you

or other covered persons, regardless of who is at

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fault, but your insurer may seek to recover the

loss from the other party if that party is liable for
the accident. All reasonable and necessary medical
expenses are covered up to the amounts and within
the time specified in your policy.

Medical payments coverage is valuable if you do

not have health insurance because payment will be
made while liability is being determined. If you al-
ready have health insurance, you may only need
coverage for expenses beyond what is provided by
your primary insurance. Excess medical payments
coverage pays for eligible medical expenses not
covered by your primary insurer—including
deductibles and copayments.

Personal injury protection (PIP) and broader no-

fault coverages are expanded forms of medical pay-
ments protection that may be required in your
state. Even if it’s not required, such coverage is
frequently offered. Expanded features include lost
wages and payments for childcare and other ser-
vices you would normally perform (but are tem-
porarily unable to) due to injuries caused by an
accident.

AT-FAULT BUT NOT INSURED

As you have no doubt read or heard, many driv-

ers don’t have auto insurance of any sort. If one
of them causes an accident and hurts you, all of
the legal judgments in the world aren’t going to
get you paid. UM coverage is designed to protect

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

you for bodily injuries caused by another driver

who doesn’t have liability insurance; it also pro-
tects you for bodily injury caused by a hit-and-
run driver who isn’t found.

Even in states that strictly enforce auto insurance

rules, uninsured motorists go to great lengths to
stay on the road. Some purchase temporary insur-
ance to obtain license and inspection seals, then
discontinue their payments; others use counterfeit
insurance cards.

The term uninsured motor vehicle may vary from

state to state.

Several caveats: Vehicles owned or furnished for

the regular use of a family member, owned or
operated by a self-insurer, or owned by a govern-
mental unit are not considered uninsured motor
vehicles (but a vehicle owned or operated by a
self-insurer that becomes insolvent is considered
an uninsured vehicle). Also, vehicles operated on
rails or treads, those designed for use off public
roads (but not while being operated on public
roads), or vehicles situated for use as residence
premises (e.g., motor homes) are not uninsured
motor vehicles.

What if the at-fault party isn’t another driver? Or

even another person? Does UM coverage still ap-
ply? The 1995 case Matthews v. State Farm Mu-
tual Insurance Company considered the strange
issue of liability—when a car collided with a horse.

100
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Brenda and Ashley Matthews were injured when

their car, driven by Brenda, smashed into a horse
that had gotten loose on the highway. The horse
belonged to Phillip and Mary Bolin.

At the time of the accident, the Matthews’ car was

insured under a policy issued by State Farm. State
Farm paid basic and added reparation benefits.

The Matthewses then filed an action against the

Bolins alleging their negligence in the use, mainte-
nance, ownership, operation and control of their
premises—including the keeping of the horse. This
claim was subsequently settled for the maximum
amount of the Bolins’ homeowners insurance
policy: $100,000. The Matthewses then sued their
own insurance company under the UM coverage
in their policy, claiming that the damages they
suffered in excess of $100,000 must be paid by
their insurance. The trial court held that the horse
was not covered by the UM provision.

The Matthews family appealed. But the Kentucky

Appeals Court agreed with the trial court. It held
that the insurance policy covered injuries in ex-
cess of coverage limits when inflicted by the driver
of a motor vehicle—not a horse.

The policy issued by State Farm to the Matthewses

applied solely to claims against an underinsured
“owner or driver” of a “land motor vehicle.”

A R B I T R AT I O N

With UM coverage, you and your insurance com-

pany usually have to agree to arbitration. Arbi-

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

tration means negotiation by impartial persons

when two sides cannot agree on settling an unin-
sured motorists claim.

Not all disputes are as wacky as hitting a horse on

the highway. Disagreements usually center on what
you, the policyholder, were doing when the acci-
dent took place.

Each party selects an arbitrator. Then, the two

arbitrators select a third. Each party pays the cost
of its own arbitrator and splits the cost of the third
arbitrator. If they cannot agree within 30 days,
either party may request a court judge to decide.

Arbitration usually takes place in the county in

which you, the insured person, live and the deci-
sion is binding as to the entitlement of damages
and the amount, unless the amount exceeds that
required by financial responsibility laws, in which
case either party may demand the right to a trial.

N O - FA U LT INSURANCE

A favorite auto insurance topic among consumer

advocates and some regulators is the no-fault sys-
tem. In effect, no-fault insurance means that all
claims are first party—your insurance pays for
damages to you or your car, regardless of who
causes an accident in which you are involved. This
means if you don’t have insurance, you can’t make
a claim against someone else.

While there are arguments about whether no-fault

insurance is a benefit to consumers, it certainly
does simplify car-related liability disputes.

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There are no-fault elements to all auto insurance

policies. The medical payments and property dam-
age sections of the collision coverage pays, no
matter who was responsible for an accident. No-
fault systems take this element to a more com-
plete degree.

Supporters say that no-fault promises quicker pay-

ment of insurance claims, because there’s no wait
for insurance companies—or courts—to decide
who’s to blame for an accident. A growing num-
ber of insurance companies agree, saying that no-
fault systems reduce their costs—and the resulting
higher auto insurance premiums—by limiting the
number of lawsuits over auto insurance policies.

That’s a big plus for an insurance sector in which

legal fees account for 12 percent of premium costs
(while medical expenses account for 15 percent).

The basic factors that shape no-fault programs in-

clude:

• Thresholds. Designers of a no-fault sys-

tem must decide when injuries are so
severe that a person should be allowed
to sue the driver responsible. Make the
threshold too low, and people will
flock to court; too high, and some
might not be fairly compensated.
Most no-fault proponents favor a ver-
bal threshold that spells out which spe-
cific injuries permit a trip to court.
The alternative is a monetary thresh-
old, which allows lawsuits for dam-
ages above a specified amount. But

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

detractors are concerned this encour-

ages the padding of medical bills to
exceed the threshold.
• Benefit (or liability) limits. What are
the maximum benefits an injured
motorist can receive under a no-fault
policy? While some suggest a limit as
high as $250,000, most insurance in-
dustry proposals put the cap on ben-
efits at less than $100,000, which in-
surance companies say covers most
auto liability claims.
• Lost coverage allowances. No-fault can
mean that drivers pay more to main-
tain their current level of coverage.
For instance, since no-fault only cov-
ers insured motorists and their passen-
gers, a driver might have to buy a sepa-
rate liability policy to cover such
things as hitting a parked car.
• Cost containment. Low-cost policies
also could require medical treatment
from a managed care provider.
One reason proponents defend no-fault so
staunchly is that when they say no-fault, they gen-
erally mean pure no-fault.

Under a pure no-fault system, virtually all law-

suits related to auto accidents are eliminated. The
right to sue and a chance for a damage award are
replaced with the right to guaranteed benefits.
Lawsuits are retained only to punish convicted
drunken drivers and others guilty of criminal con-
duct. Policyholders pay premiums to protect

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themselves. If they (or their passengers) are injured,

they are compensated by their own insurers—no
matter who caused any part of an accident.

That’s unlike a liability system, which requires the

responsible party’s insurer to pay for medical bills
and car repairs.

Although there is no pure no-fault system in the

U.S., it’s had its history of attempts.

In 1995, the Hawaiian state legislature adopted

what would have been the first pure no-fault pro-
gram. The California-based RAND Institute esti-
mated that the Hawaiian pure no-fault initiative
would have provided drivers with $1 million in
medical and wage loss coverage for an average of
48 percent less than they were paying for less in-
jury coverage under the liability system.

But Governor Ben Cayetano—taking the side of

Hawaii’s trial lawyers—said the no-fault plan
would cost victims their chance to sue for com-
pensation for pain and suffering.

About the same time that the Hawaiian no-fault

plan fell into a political bog, a group of high-tech
entrepreneurs in California proposed a package
of ballot initiatives that included a nearly pure no-
fault auto insurance plan. The group called itself
the Alliance to Revitalize California (ARC) and
positioned its ideas as good for both consumers
and businesses. But ARC’s plan was also shot down
by political interests determined to maintain the
status-quo liability system.

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

The ARC program came pretty close to pure no-

fault. But most of the no-fault programs currently
in place can best be called partial no-fault. They
allow you to make a claim up to a certain dollar
limit without having to determine who caused an
accident.

REFORMING NO-FAULT

Some consumer groups defend the traditional li-

ability system because it allows people to win large
awards when they’re injured. This argument holds
that no-fault systems subsidize the wealthy—rela-
tively—by limiting all claims.

But defenders of no-fault also champion the poor.

Not only do many less-wealthy motorists find auto
insurance unaffordable, but they also are the ones
who most need the guaranteed prompt payments
to cover the costs of their accidents.

The experience of states experimenting with no-

fault insurance suggests that they haven’t been suc-
cessful in restraining auto-insurance rates. The
original concept of waiving the right to sue in re-
turn for prompt, guaranteed medical payments
often falls victim to the lobbying efforts of trial
lawyers (who insist on preserving the right to sue),
the medical profession (which pushes for higher
medical benefits) and certain consumer groups
(which want both).

Jeffrey O’Connell, one of the founding fathers of

no-fault insurance, began to criticize the system
in the 1990s. He argued that the original concept

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had been “bastardized” by state legislators beholden

to powerful special interest groups.

O’Connell didn’t give up, though. A model he

developed in 1994 would give consumers the
choice of purchasing no-fault coverage or, for a
significantly higher premium, full liability cover-
age. Those who elect no-fault would waive the
right to sue for noneconomic damages such as pain
and suffering. A PIP policy would cover their eco-
nomic damages regardless of fault. In return, they
would be insulated from liability claims by other
motorists.

Motorists who retain their right to sue for non-

economic damages would remain in the tort li-
ability system. However, such drivers also would
have to purchase tort maintenance insurance simi-
lar to uninsured motorists coverage.

In addition to lowering the costs of auto insur-

ance, O’Connell claims the proposal offers sev-
eral other advantages to drivers and insurers. For
example, he says, health care fraud and abuse
would decrease by cutting the link between medi-
cal costs and intangible damages, which—as we have
noted before—are usually calculated as multiples
of medical costs.

Under O’Connell’s plan, there would be no in-

centive for accident victims to run up unneces-
sary medical bills to qualify for pain and suffering
compensation.

In theory, no-fault insurance is an appealing alter-

native to the vicious circle of third-party liability

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

claims, lawsuits and rising premiums that plague

traditional insurance programs.

Unfortunately, the no-fault plans that have been

tested so far have had mixed results in practice.
No-fault supporters argue that this is because the
programs that have been tried are only partial ef-
forts. They argue that, in order to work effec-
tively, a no-fault program would have to prohibit
most liability lawsuits.

As long as people look at insurance as a means of

gaining financial windfalls larger than damages
they suffer in auto accidents, no-fault will have
trouble being implemented.

R E N TA L CAR LIABILITY ISSUES

You rent a car and sideswipe another car on your

way out of the rental agency’s lot, then you ca-
reen across the street and slam into a tree. Not
only does the other driver claim massive dam-
ages, but the tree-huggers come after you for kill-
ing the state’s last Dutch Elm. What do you do?
How are you covered? Basically, a rental agency
will offer you four main coverages before you
sign the dotted line. Many of these may be cov-
ered with your personal or corporate auto and
health insurance coverages.

1) CDW (Collision Damage Waiver),

LDW (Loss Damage Waiver). Al-
though technically not collision insur-
ance, in return for a daily fee, CDW
or LDW waives the right for a rental
car company to recover money from

108
 CHAPTER 4

the renter if the vehicle is damaged or

stolen. This does not cover damages
made to someone else’s car during
your rental (third party damages).
Your personal or business auto cov-
erage normally covers this when you
are renting a car. Check first with your
car insurance agent.
Some CDW’s can even become void
in certain circumstances. This may
happen if you drive in a negligent man-
ner or out of the state in which you
rented the car if geographical restric-
tions apply in your rental contract.
2) Personal liability coverages such as LIS
(Liability Insurance Supplement). Be-
sides LIS, an agency may offer supple-
mental or additional liability cover-
age that pays over and above what your
personal or business insurance covers.
If you do not already have personal
liability coverage you should purchase
the rental agency’s.
3) PAI (Personal Accident Insurance or
Coverage). This provides a one-time
payment for you or a passenger in case
of death or maiming from a car acci-
dent. This is generally covered under
your auto or health policies.
4) PEC (Personal Effects Coverage) or
Personal Property Insurance. This pays
if you have something lost or stolen
from your car. Opting for this cover-
age is obviously something you have

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

to decide for yourself since your ex-

isting coverage probably doesn’t in-
clude this coverage.
Before you step into a rental agency, it’s good to
know what your auto policy already covers.

Most standard auto policies used to cover you for

liabilities while you were driving a rental car. But
state laws and insurance industry trends have carved
away at that coverage. Check the part of you auto
policy called “non-owned vehicles” to see how much
protection your policy offers.

CONCLUSION

Auto insurance is for your protection, providing

the financial resources to deal with harm to you
and your auto, avoiding catastrophic losses and
shielding your assets from liability if you are at
fault in an accident.

Buying automobile insurance can be confusing.

But one rule of thumb does apply: Get as much
liability coverage as you can reasonably afford.
Liability coverage is what your insurance com-
pany pays to someone else in the event that you
are held responsible for an automobile accident.

Obviously, insurance needs vary from person to

person, but make sure you purchase enough li-
ability coverage to protect your valuable assets in
case you are sued.

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 CHAPTER 4

Additional liability insurance isn’t usually expen-

sive. Buying coverage in the $100,000/$300,000
range is generally a good idea. Higher liability
coverage levels are also available—but, at that stage,
a separate personal umbrella policy probably
makes sense.

Try to buy uninsured/underinsured motorist cov-

erage equal to the amount of your liability cover-
age. Uninsured motorist coverage is paid to you
by your automobile insurance company if you
are injured by an uninsured car or if you are a
victim in a hit and run accident. Underinsured
motorist coverage is paid to you by your insur-
ance company if you are injured by a driver who
does not have sufficient coverage to pay for all of
your injuries. This coverage is also not usually too
expensive.

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WHY LIABILITY IS SUCH A BIG DEAL WHEN YOU DRIVE

112
 CHAPTER 5

CHAPTER 5
WHEN YOU REACH
YOUR LIMIT: THE
UMBRELLA POLICY

For the majority of wealthy—or even middle-

class—Americans, personal liability represents a po-
tentially catastrophic financial risk. Unless your
homeowners coverage has special limits reaching
into the multimillion dollar range, losing a per-
sonal liability lawsuit can wipe out your assets.

And legal costs alone can cause hardship. That’s

why insurance coverage of defense costs is so im-
portant. As we noted earlier, Bill Clinton’s initial
defense of the Paula Jones sexual harassment and
defamation lawsuit is a memorable example of li-
ability insurance paying legal defense costs. For
most of us (even those who stay out of politics
and hotel suites with women we’ve just met), not
having to pay legal bills to defend ourselves and
not having to risk loss of assets due to a large judg-
ment are clearly key priorities.

If your assets are much greater than the liability

limits of your homeowners and auto policy, you
may want to purchase an umbrella policy to ex-
tend your liability coverage. As we’ve mentioned
briefly already, a personal umbrella policy offers

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WHEN YOU REACH YOUR LIMIT: THE UMBRELLA POLICY

coverage above and beyond the liability coverage

you have on your homeowners or car insurance
policy. An umbrella policy starts paying after your
regular policies have reached their limits.

In this chapter we will look at the details and me-

chanics of umbrella liability insurance.

THE BASIC FACTS

A personal umbrella policy is well worth the $200

or $300 a year that it costs—especially if you are at
or near retirement and have been fortunate
enough to accumulate a decent nest egg. If you do
not have liability insurance, your assets could be
lost to someone else through a liability lawsuit
and judgment. And we’ve seen some strange ones
already—cars hitting horses, neighbors shooting
neighbors, bosses hitting on employees.

Another good reason to purchase this coverage:

Obtaining an umbrella policy is a good way to
lower your auto and homeowners insurance costs,
since getting an umbrella typically is less expen-
sive than purchasing additional liability coverage
on a homeowners or auto policy.

The umbrella policy sits over other liability cov-

erages and will pay claims in excess of any under-
lying policies, plus liabilities that existing policies
do not cover. Hence, the term umbrella.

Keep in mind that you still will have to have at

least the minimum liability limits on your auto
policy that are required by law in the state where
you reside. And most personal umbrella policies

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 CHAPTER 5

also require that you have a minimum amount of

underlying insurance.

Generally, an umbrella policy is issued by your cur-

rent homeowners, renters or auto insurance com-
pany. If you have these other policies, you need to
carry specified liability maximums—often at least
$100,000 per person and $300,000 per accident,
for auto. Since the minimum liability coverage un-
der a personal umbrella is usually $1 million, you’d
have $1.3 million worth of auto and comprehensive
personal liability coverage for about $200 more a
year than you pay for regular auto coverage.

The price sounds too good to be true? It really

isn’t. Here’s why.

In effect, the liability limits on your auto and

homeowners insurance policies serve as a deduct-
ible on the umbrella policy. Umbrella liability
companies require you to have at least $300,000
insurance on your home and on your car. The
umbrella liability company now has a $300,000
deductible on your house and, more important,
on your car. Most likely, if there is a claim, it will
be paid by your auto policy.

High-deductible insurance policies are cheap for

two reasons. The first is that there are few claims.
Because there are few claims, there is little admin-
istration, which lowers the issuing company’s
costs. Give an insurance company a product that

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provides a stream of premiums, low administra-

tion and few claims, and you have an eager issuer.

Because an umbrella policy is designed to provide

liability insurance on an excess basis, above under-
lying primary insurance coverages and deductibles,
the scope of the coverage is generally broad and
the limits of coverage are high.

If you don’t have the usual underlying homeowners

or auto insurance, the umbrella company may force
you to pay a large amount ($100,000 or more) as a
so-called “self-insured retention.” This is another
way of saying deductible.

There is a great variation in the umbrella liability

market—because many insurance companies issue
their own policy forms instead of using industry-
standard forms. However, the Insurance Services
Office (ISO) has designed a standard personal um-
brella policy; a growing number of insurance com-
panies use it.

W H AT ’ S COVERED?

If you have personal liability coverage and a claim

is made or a suit is brought against you for dam-
ages because of bodily injury or property damage
your insurance company will:

1) pay up to the limit of liability for the

damages for which you are legally li-
able. Damages include prejudgment

116
 CHAPTER 5

interest awarded against the insured

person; and
2) provide a defense at its expense by
counsel of its choice, even if the suit is
groundless, false or fraudulent. The
insurer may investigate and settle any
claim or suit that it decides is appro-
priate. The insurer’s duty to settle or
defend ends when the amount for
damages resulting from the occur-
rence equals the limit of liability.
The duty to defend a claim ends when the insur-
ance company has paid damages equal to its limit
of liability. And, if laws prevent the insurance
company from defending you, it will pay expenses
for defense which are incurred with its written
consent.

In addition to the limit of liability, your insur-

ance company pays:

• All expenses incurred and costs taxed

against an insured person.
• Premiums on required bonds, but not
for bond amounts more than the limit
of liability. (You need not apply for
or furnish any bond.)
• Reasonable expenses (other than loss
of earnings) an insured person incurs
at the insurance company’s request.
• An insured person’s loss of earnings,
but not other income, up to $100 per
day, to attend trials or hearings.

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WHEN YOU REACH YOUR LIMIT: THE UMBRELLA POLICY

A useful note: If you’re an owner or tenant of a

condominium unit, the umbrella policy will pay
your share of loss assessments charged against you
by the condominium association.

Loss assessments against individual unit owners are

often made when the condominium association is
held liable for a loss which exceeds the limits of its
liability insurance, or is not covered by its policy.

BROADER SCOPE OF COVERAGE

As we’ve noted, umbrella policies offer broader

coverage than underlying policies. In the case of
homeowners insurance, this means that in addi-
tion to bodily injury and property damage, um-
brella policies cover false arrest, wrongful evic-
tion, libel, slander, defamation of character and
invasion of privacy.

The term drop down coverage is often used to name

the coverages provided by a personal umbrella that
are not provided by underlying liability policies.
Some of these include:

• Personal injury coverage. Most under-

lying homeowners policies provide li-
ability coverage for accidental bodily
injury (meaning physical injury or
death), but not for events involving
libel, slander, false arrest and the like.
The personal umbrella does cover you
for liability arising out of these events.

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• Regularly furnished autos. The stan-

dard auto policy contains language that
precludes liability coverage for the use
of vehicles made available for your
regular use (such as a company car).
The personal umbrella does not ex-
clude such situations.
• Contractual liability. The standard
homeowners policy limits coverage
for liability assumed by contract. The
personal umbrella is much broader in
its provision of this coverage.
• Damage to property of others that is
in your care, custody or control. The
standard homeowners policy excludes
coverage for damage to property left
in your care. The personal umbrella
does not exclude coverage for dam-
age to such property.

DUTY TO DEFEND

As we have mentioned before, a major benefit of

the personal umbrella policy is that it provides
for payment of defense costs. If you are accused
of being liable for damages to someone else and
are taken to court over it, you will incur legal
costs, even if the suit is totally groundless and ends
in your favor. Fortunately, most underlying li-
ability policies provide coverage for defense costs,
whether or not the suit is groundless. Also, these
costs are paid in addition to the available limits of
liability (in other words, the entire liability policy
limits are available to pay damages).

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However, the insurance company’s duty to de-

fend ends when it has paid or offered to pay its
maximum limit of liability.

Actually, the insurance company does more than

pay defense costs when a suit is brought against an
insured person. It not only assumes the cost for
defending a claim, it also has a legal duty to defend
the claim or suit.

This is where a personal umbrella policy comes in

handy. The duty to defend, as well as pay defense
costs, can be very important in situations where a
defense by an underlying insurer may not be pro-
vided or may not be available.

An example: You have a homeowners policy pro-

viding $100,000 of personal liability coverage, and
you also have $1 million of personal umbrella cov-
erage. One day, your normally well-behaved Chi-
huahua bites and severely injures your cousin’s
sister-in-law on the finger. And she’s a concert pia-
nist. She sues you for $500,000.

If the underlying insurer believes a defense may

be successful, it may defend the claim to conclu-
sion, regardless of the outcome. Perhaps there will
be no liability. Perhaps any liability awarded will
be less than the homeowners policy limit. Per-
haps the award will exceed that limit. The um-
brella insurer observes but does not participate in
the defense. It will, however, pay its share of any
award in excess of the $100,000 homeowners limit.

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However, the underlying insurer might not pro-

vide a defense. If it believes a successful defense is
doubtful, and that any settlement is going to ex-
ceed its policy limit, it might only offer to pay its
$100,000 limit and avoid defense costs (its obliga-
tion ends when it exhausts its limit). You no longer
have the underlying insurer defending its claim.

The personal umbrella becomes very valuable at

this point for two reasons: First, the umbrella
company will step in and defend the remainder of
the claim; second, the umbrella’s liability limit can
make up the remaining $400,000 if the pianist wins
her entire demand.

An underlying defense might also not be available

at all. Generally, this occurs when a loss is not
covered by an underlying policy, but is covered
by the personal umbrella on a drop down basis.
Obviously, if a situation is not covered by an un-
derlying policy, there is no underlying insurer to
provide a defense of the claim.

An example: Stuart stands up in a town meeting

and calls his neighbor “a mean drunk, an undis-
criminating adulterer and a merely adequate em-
bezzler.” The neighbor sues Stuart for slander.

Stuart has a homeowners policy, but it is not en-

dorsed to provide personal injury coverage. The
homeowners company is not obligated to provide
a defense or pay defense costs. But Stuart does have
an umbrella policy. This will provide a defense,
pay the defense costs and provide drop down per-
sonal injury coverage for damages that may be
awarded in addition to the defense costs.

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Even if you have umbrella coverage, you need to be

careful about defense costs. Many policies do cover
defense costs in addition to the limit of liability. But
be aware that under the terms of some personal
umbrellas, defense costs are included in the policy
limit and are not additional coverage—which means
every dollar the policy pays to lawyers is one that it
won’t pay in a final judgment.

DO YOU NEED AN UMBRELLA?

To determine whether you need umbrella cover-

age, you should first conduct an inventory of your
personal assets. This doesn’t have to be an exten-
sive physical inventory—it can be a simple list that
you make on a single sheet of paper.1 The purpose
is to produce a reasonably close figure that you
can compare with the liability limits of your
homeowners or renters policy. If the assets total
is larger than the liability limits, you need um-
brella coverage.

A note: You want to compare the value of your as-

sets to the personal liability limits of your policies.
This is a little unusual, since most of your belong-
ings would be actually covered by the personal prop-
erty section of a homeowners or renters policy against
disasters, damage or theft. But that direct coverage
isn’t what you’re looking for in this exercise.

1
The Silver Lake Editors’ book The Insurance Buying Guide
(1999) includes a detailed form for calculating the value of your
household assets and other tools for measuring your insurable
net worth.
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 CHAPTER 5

Before your personal liability policy goes into ef-

fect, your insurer will typically require that all
known major exposures be covered by any un-
derlying policies that you may have and that each
major exposure is declared in the umbrella policy
with a premium shown. So, if you own a boat
and you forget to declare it, there will be no um-
brella coverage for a boat exposure even if it is
covered by an underlying boatowners policy.

Many liability coverages are written as a combined

single limit, or CSL. This means that the single
dollar limit is made available for any type of in-
jury or damage for which you are found liable as
a result of a covered accident, occurrence or event.
A good personal umbrella policy provides cover-
age in this manner.

Another variation is known as split limits of cov-

erage. As we have seen, auto policies commonly
provide split limits. When an umbrella policy pro-
vides coverage above split limits, it will begin to
provide excess coverage above each of the stated
underlying sublimits.

Types of Liability Deductible Amounts

Per Occurrence
Auto $300,000
Personal 100,000
Recreational Motor Vehicles 100,000
Watercraft 100,000
Business Property 100,000
Business Pursuits 100,000
Employers Liability (where
Workers’ Compensation is
required by law) 100,000
Loss Assessment 50,000

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A variation provided by some insurers is an um-

brella with what is called a smoothed limit. Under
this approach, the umbrella limit is the total
amount of coverage that will be provided. Instead
of providing coverage in addition to that provided
by an underlying policy, the smoothed limit policy
only provides total coverage up to its limit.

The limits listed on the previous page are the mini-

mums for various required coverages. Automo-
biles must usually be insured for a single limit of
at least $300,000 per occurrence (split limits are
also permitted). Most other exposures must be
insured for a limit of at least $100,000.

The umbrella policy only pays amounts in excess

of these limits—even if the underlying company
becomes bankrupt or insolvent. For example, if
you are held liable for $350,000 in damages result-
ing from an automobile accident and the auto in-
surance company becomes bankrupt, the umbrella
policy will only cover $50,000 of the loss (the
amount in excess of the deductible).

A special $1,000 deductible applies to losses which

are covered by the umbrella policy but are not
covered by the underlying insurance for some rea-
son. For example, you’re using your car and util-
ity trailer to haul two large and valuable pieces of
furniture for a friend. An accident occurs, the fur-
niture is destroyed, and the friend sues for dam-
ages. Your auto policy excludes coverage for prop-
erty being transported by you, but there is no
such exclusion in the umbrella policy. This loss
would be covered by the umbrella and the $1,000
deductible would apply.

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Typically, personal umbrella coverage comes in

increments of $1 million, starting at $1 million
and going up to $5 million. (It is possible to get
higher limits; there are companies that write $10
million policies.)

If you are thinking of purchasing an umbrella

policy, it’s smart to place it with the same insur-
ance company that writes your home and auto
coverage. You’re likely to get a discount for hav-
ing multiple policies with the same company, but
even more likely to avoid gaps in coverage if one
company is handling all your overlapping insur-
ance needs. In addition, most companies tailor
their excess liability policy provisions around their
auto and homeowners policies.

PERSONAL INJURY LIABILITY

An umbrella policy also covers your liability for

personal injury, including: bodily injury, sickness,
disease, disability, shock, mental anguish and men-
tal injury. The definition can also be extended to
include: false arrest and imprisonment, wrongful
entry or eviction, malicious prosecution or hu-
miliation, libel, slander, defamation of character
or invasion of privacy and assault and battery not
intentionally committed.

If you commit any of the actions specified in this

section, it could lead to someone filing a personal
injury claim (notice that this term does not have
the same meaning as bodily injury) against you.

As we discussed in Chapter 2, under an umbrella

policy, the term occurrence means an accident, but

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it also includes continuous or repeated exposure

to the same conditions. However, under personal
injury coverage (libel, slander, etc.) the term oc-
currence means an offense or series of related of-
fenses.

An example: Libeling the same tenant in front of

others on various occasions would be treated as a
single occurrence if that tenant were to file a claim
for personal injury. Since the offenses were related,
the limit of insurance would not apply separately
to each offense.

False arrest claims usually involve damage to a

person’s reputation when a suspected wrongdoer
has been arrested without proper cause. False ar-
rest results from mistaken identity or an error in
judgment. False detention or imprisonment re-
strict a person’s freedom of movement, and can
also lead to a claim for damages. Malicious pros-
ecution generally occurs when a person brings
charges against another without a probable cause
to believe that the charges can be sustained, and
there is a malicious intent in bringing the charges.

Defamation is the holding up of another to ridi-

cule, and includes libel and slander. Libel is the
defaming of another by writings, pictures or other
publication injurious to the person’s reputation.
Slander is oral defamation of others which is inju-
rious to their reputation.

Invasion of privacy is the publicizing of another’s

private affairs for which there is no legitimate
public purpose, or the invasion into another’s pri-
vate activities which causes shame or humiliation

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to that person. Wrongful eviction is depriving a

tenant of land or rental property by unjust, reck-
less or unfair means. Wrongful entry is the re-
sumption of possession (repossession of real es-
tate) by an owner or landlord of real property by
unjust, reckless or unfair means.

LIBEL AND DEFAMATION

Umbrella policies include some interesting dis-

putes, because as excess insurance they only cover
the biggest risks. The 1990 New York Appeals
Court case Robert Brandstetter v. USAA Casu-
alty Insurance Co., et al. involved heavily-con-
tested defamation claims.

Brandstetter filed the lawsuit against USAA and

Physicians’ Reciprocal Insurers, seeking a declara-
tion that they were obligated to defend and in-
demnify him in an underlying lawsuit alleging li-
bel and defamation against him. The conduct al-
leged in that lawsuit was done maliciously, wrong-
fully and with the willful intent to injure.

Barbara Kraus was the Vice President of Nursing

Services for the New Rochelle Hospital Medical
Center. In October 1987, she reported to the Di-
rector of Medicine that she had been told by nurses
who worked in the Intensive Care Unit that
Brandstetter had failed to perform bronchoscopies
on four patients, that he had reported in the pa-
tients’ charts that he had performed the broncho-
scopies, and that he had forged patient forms.

While the hospital’s Law Committee found that

Kraus’s actions in reporting Brandstetter had been

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WHEN YOU REACH YOUR LIMIT: THE UMBRELLA POLICY

proper, the hospital subsequently exonerated

Brandstetter with regard to any alleged miscon-
duct. Kraus was fired in June 1988.

Kraus sued, alleging that Brandstetter defamed her

on two separate occasions. First, she alleged that
Brandstetter, in the presence of members of the
nursing staff, stated, “You nurses will receive your
Christmas bonus early, your boss is going to get
fired.” Second, she alleged that a publication of
the Medical Board’s newsletter was disseminated
to no less than 300 people throughout the hospi-
tal and the medical community at large, contain-
ing the following statement:

...this Medical Board is unanimous [sic] in

a vote of no confidence in the Vice Presi-
dent of Nursing Services, Mrs. Barbara
Kraus.
In addition to these claims, Kraus alleged inten-
tional infliction of emotional distress, conspiracy
to defame, and loss of consortium on behalf of
her husband against Brandstetter and others.

The trial court ruled for Kraus on two of her

charges. The appeals court upheld both charges,
writing:

...Kraus stated a legally sufficient cause of

action sounding in libel per se. The rea-
sonable interpretation of the statement in
the newsletter was that Kraus was incom-
petent in her professional capacity.
USAA had issued two policies to Brandstetter, one
a general liability homeowners insurance policy

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 CHAPTER 5

and the other an umbrella liability policy. Physi-

cians had issued him a professional liability policy.

Both of USAA’s policies had exclusionary clauses

which stated that the policy didn’t insure liability
arising from injury or damage that was expected
or intended by the insured.

The trial court effectively dismissed both of

Brandstetter’s claims. But there was some differ-
ence between the two. The appeals court noted:

Since [Brandstetter] seeks coverage from

USAA for actions that are allegedly inten-
tional, the exclusionary clauses apply as
to both of USAA’s policies...and USAA
owes no duty to defend or indemnify
[him] in the underlying action.
On the other hand, Physicians’ professional liabil-
ity insurance policy contained no such exclusion-
ary clause. Rather, Physicians’ policy agreed to
“defend every CLAIM against the INSURED.”

A “claim” was subsequently defined to include any

“suit...that alleges DAMAGES to an injured party
from an INCIDENT.” An “incident,” in turn,
included “any...act or omission to act or series of
related...acts or omissions to act resulting” in dam-
ages.

But the insurance policy issued by Physicians con-

tained an endorsement which expressly excluded
claims or suits arising from services rendered in
the course of Brandstetter’s employment at the
New Rochelle Hospital Medical Center.

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WHEN YOU REACH YOUR LIMIT: THE UMBRELLA POLICY

The appeals court concluded:

Contrary to [Brandstetter’s] arguments...,

we find, as a matter of law, that the un-
derlying lawsuit arose from services ren-
dered in the course of his employment at
that facility and, therefore, falls within the
express exclusion of the endorsement.
Accordingly, we conclude that Physicians
is not obligated to provide a defense...al-
beit for a reason different from that ex-
pressed by the [lower court].
Applying the general principle that any ambigu-
ities in an insurance policy should be construed
against the insurance company, the court came to
the conclusion that the allegations of the lawsuit
against Brandstetter fell within the coverage pro-
visions of the Physicians’ policy.

PROPERTY DAMAGE LIABILITY

Property damage means physical injury to, destruc-

tion of or loss of use of tangible property.

Property damage includes loss of use. If you dam-

age your neighbor’s home, your neighbor might
have to live somewhere else while the home is
being repaired. The extra expenses for loss of use
(rent, meals, transportation, etc.) could be claimed
in addition to the actual damages to the home.

Under a property damage liability policy, your

insurance company pays for personal injury or
property damage for which you are legally liable
and which exceeds the retained limit.

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A retained limit can be either:

• the total applicable limits of all re-

quired underlying policies and any
other insurance available to you, or
• the self-insured retention if the loss is
not covered by any underlying insur-
ance.

MEDICAL PAY M E N T S TO OTHERS

Under a personal umbrella policy, your insurance

company typically pays the necessary medical ex-
penses that are incurred or medically ascertained
within three years from the date of an accident
causing bodily injury. Medical expenses means rea-
sonable charges for medical, surgical, x-ray, den-
tal, ambulance, hospital, professional nursing, pros-
thetic devices and funeral services.

Medical payments coverage is provided “for oth-

ers,” meaning not to any insured or regular resi-
dents of the household except residence employ-
ees. Medical expenses can be paid for a period of
up to three years as a result of bodily injury. Cov-
erage is provided for any person on the insured
premises with your permission.

Coverage applies away from the premises if caused

by: 1) a condition on the insured location; 2) your
activities, such as engaging in sports; 3) a resident
employee in the course of employment; and 4) an
animal owned or in your custody.

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WHEN YOU REACH YOUR LIMIT: THE UMBRELLA POLICY

The minimum limit of insurance for medical pay-

ments coverage is usually $1,000.

Remember: A policy typically does not state that

the insurance company will pay for accidents only
for which you are legally liable. This type of cover-
age often benefits all parties concerned: the injured
person does not have to sue or prove negligence in
order to collect; you may avoid a lawsuit; and the
insurance company may be spared the expense of
defending a court case.

WHO IS AN INSURED?

An umbrella policy will cover you on an excess

basis while using a non-owned auto, only if the
use of that auto is covered by underlying insur-
ance. For example, you work for the ABC Com-
pany, which provides you with a car for use in
your sales work. As long as your employer’s policy
provides at least $300,000 of coverage for your
use of the company-owned car, your umbrella
policy will provide additional coverage.

Family members are insured for their use of owned

autos, or autos furnished for their regular use, only
if their use of such autos is covered by the required
underlying insurance.

For autos or boats owned or in your care, any

other person using such items, or any person or
organization responsible for the acts of someone
using such items, would be insured. So, if your

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daughter lets a friend drive the family Winnebago,

the friend would be considered an insured. If you
allowed your neighbor to use your Winnebago to
cart members of his daughter’s soccer team to this
Saturday’s scrimmage, the team would also be
considered an insured person.

For animals owned by any family member, any

other person or organization responsible for the
animals is insured. If, while on vacation, you leave
your pot-bellied pig with a neighbor who has
agreed to take care of it and the pig breaks loose
and ambushes another neighbors’ infant, the um-
brella policy would cover pigsitter as an insured
person if she is sued for the injury.

The following are not considered an insured un-

der an umbrella policy:

• the owner or lessor of an auto, recre-

ational motor vehicle or watercraft
loaned to or hired for use by an in-
sured or on an insured’s behalf;
• a person or organization having cus-
tody of animals owned by an insured
in the course of any business or with-
out the consent of an insured.
So, if you rent a boat for fishing, the boat rental
company is not considered an insured person un-
der the policy (it should have its own liability cov-
erage). Or, if your daughter owns a horse which
is boarded at Sunset Stables for a fee, the stable is
not considered an insured person under this policy
(it should have its own liability coverage).

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UMBRELLA EXCLUSIONS

The exclusions and limitations of an umbrella of-

ten follow the underlying policies. However, the
umbrella will usually have fewer exclusions than
the primary coverage, less restrictive exclusions
and a broader insuring agreement.

INTENTIONAL ACTS

Coverage under an umbrella policy is excluded

for an act committed by or at the direction of an
insured with intent to cause bodily injury or prop-
erty damage. This does not apply to bodily in-
jury or property damage resulting from an act
committed to protect persons or property, or to
prevent danger in the operation of an auto or boat.

Insurance is designed to cover accidental and un-

expected losses, so intentional acts are not cov-
ered. But a few exceptions are made—mostly for
situations in which an insured person acts with
the intent of protecting persons, property or pre-
venting a greater loss.

If you shoot a criminal who has broken into your

home to steal from you, you will be covered. An-
other example: If your car’s brakes fail and you
purposely drive into a building in order to avoid
hitting children crossing the street, the damage to
the building would be covered.

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 CHAPTER 5

The 1991 California Appeals Court decision Na-

tional Union Fire Insurance Co. v. Lynette C. dealt
with a disturbing—but disturbingly common—li-
ability claim: sexual molestation.

In August 1980, when Lynette was 10 years old,

she was placed by Colusa County as a foster child
with Debra and Duane Lopes. Beginning in Octo-
ber or November 1980, and continuing until
Lynette was removed from the Lopes home in
May 1983, Duane sexually molested her.

As a result of the molestation, Duane pleaded

guilty in November 1984 to committing lewd or
lascivious acts upon a child.

In August 1987, following three years of mental

health treatment arising from the molestations,
Lynette sued Duane and Debra. In regard to
Debra, Lynette alleged she had been negligent in
allowing Lynette’s placement in the foster home
because she knew that Duane had a propensity to
sexually molest children.

In February 1988, National sued for a declaration

that neither Duane nor Debra was covered under
the National insurance policy for the allegations.

The National policy had been issued to the Colusa

County Department of Social Welfare and cov-
ered foster parents, like Duane and Debra, desig-
nated by the county.

Lynette conceded that Duane’s sexual molestations

were not covered under the National policy. But
she didn’t concede the same point about Debra.

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WHEN YOU REACH YOUR LIMIT: THE UMBRELLA POLICY

Lynette’s lawsuit was tried before a judge as an

uncontested matter in September 1988. Judgment
was rendered against Duane and Debra, jointly
and severally, in the amount of $1.25 million. The
trial court found that Debra’s failure to use rea-
sonable care to prevent Lynette’s molestation
“was, along with [Duane’s] batteries, a concurring
legal cause of harm” to Lynette.

The trial court granted summary judgment for

National, denying any liability for the actions of
either Duane or Debra.

Lynette appealed. The only issue on appeal was

whether the liability insurance policy issued by
National covered Debra.

There were three provisions of the National in-

surance policy relevant to the case. The first was
the basic coverage clause, which provided:

To pay on behalf of the Insured all sums

which the Insured shall become legally
obligated to pay as damages because of any
act, error or omission of the Insured and
arising out of the Insured’s activities as a
Foster Parent occurring while the foster
child is in the care and custody of the Fos-
ter Parent. Such coverage hereunder shall
include, but not be limited to, bodily in-
jury, property damage or personal injury
for which the Insured is held legally liable.
The other two relevant provisions were:

• Exclusion (b) specified that the policy

didn’t apply “to any dishonest, fraudu-

136
 CHAPTER 5

lent, criminal or malicious act, error

or omission of an Insured.”
• Exclusion (1) stated the policy was in-
applicable “to licentious, immoral, or
sexual behavior intended to lead to or
culminating in any sexual act.” How-
ever, this exclusion was qualified when
one insured accused another insured
of excluded behavior.
According to the appeals court:

When that interpretation [of an insurance

contract] does not depend upon the cred-
ibility of extrinsic evidence—and that is
the case here—an appellate court may in-
dependently determine the policy’s mean-
ing regardless of what the trial court may
have concluded.
The appeals court went on to write:

Coverage provisions are construed broadly

in favor of the insured, while exclusion
provisions are construed strictly against
the insurer. However, strict construction
does not mean strained construction; un-
der the guise of strict construction, we may
not rewrite a policy to bind the insurer to
a risk that it did not contemplate and for
which it has not been paid.
Lynette argued the exception applied to her situa-
tion. One foster parent—Duane—molested a fos-
ter child, while the other foster parent—Debra—
was at most simply negligent in failing to prevent
the molestation.

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Since there was no sexual act in this case that was

not criminal, the second situation was the only
conceivable application—and, therefore, Debra was
covered.

Therefore, the appeals court reversed the lower

court’s judgment. National had to cover Debra’s
share of the judgment under the liability policy.

ADDITIONAL EXCLUSIONS

Personal injury losses resulting from an insured

person breaking the law are excluded. The intent
of this provision is similar to that of the exclusion
of intentional acts.

Business exposures are usually excluded; but ex-

ceptions are made for exposures stemming from
activities which may not be business related.

An example: While playing golf with a client, an

insured salesman hits a long drive and the ball hits
another golfer on an adjacent fairway and causes
injury. This accident would not be excluded because
playing golf is a “non-business” type of activity.

No liability coverage is provided for a person who

uses your vehicle or boat without reasonable au-
thority to do so. For example, if a person steals
your boat and causes an accident, the thief would
not be covered by your’s umbrella policy if sued
for damages (you would still be covered if sued as
the owner).

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Another example: If a neighbor has used your boat

on numerous occasions, and has been told that it
may be used whenever it is not being used by a
family member, the neighbor would be insured
for use of the boat. This is true even if an accident
occurs at a time when you have no knowledge
that the boat is being used.

There is no coverage for property owned by you,

or by an association of owners of which you are a
member (such as the common property jointly
owned by a condominium association). Coverage
is also excluded for damage to property that is
rented, used or occupied by you or in your care,
but only to the extent that you have agreed to
insure the property in a written agreement.

So, if you rent a new dining set and agree—in a

rental contract—to insure the furniture for a stipu-
lated amount, your umbrella policy will not pro-
vide coverage for that amount (it might provide
some additional excess coverage). The property
would be covered if you had not agreed to insure
the property by written agreement (but the um-
brella deductible will still apply).

A personal umbrella policy includes loss assess-

ment coverage for owners of condominium units.
When bodily injury, property damage or personal
injury occurs on the “common” premises (not
within any owner’s unit), a claim for damages may
be made against the association. If the loss is not
covered by or exceeds the limits of the association’s
liability policy, it would be necessary for the asso-
ciation to assess the individual owners for a pro-
portionate amount of the loss. For this coverage,

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the term occurrence has the same meaning as it

does for other liability coverages, except that it
also includes acts of directors, officers, or trustees
of the association.

Note: If you are serving as an officer of a corpora-

tion or member of a board of directors, your acts
are generally excluded from coverage because this
is a professional liability exposure. But coverage is
provided if you’re acting for a nonprofit organiza-
tion and receive no pay for services.

While the policy will cover some loss assessments

made by organizations such as condominium as-
sociations, it will not cover assessments made by a
governmental body against you or the association,
nor will it cover an assessment made by the asso-
ciation to pay for a deductible which applies to an
underlying policy.

FA M I LY COVERAGE ISSUES

Liability insurance is designed to pay damages suf-

fered by others when you are responsible. For this
reason, injuries suffered by you or family mem-
bers are not covered.

Before the family exclusion was added to the

policy, family members were, in some courts,
permitted to sue other family members and col-
lect damages.

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In the 1993 Arizona decision Christopher

Broadbent v. Laura Broadbent, Northbrook In-
demnity Co., et al., the appeals court considered
just such a case—of parental liability.

In April 1984, Christopher Broadbent was play-

ing in and around the swimming pool at the
Broadbent home while his mother, Laura
Broadbent, watched him. No one else was home.

At that time, Christopher was two years old and

didn’t know how to swim. While he was in the
water, he wore inflatable vinyl rings on his upper
arms to help him stay afloat.

The telephone inside the house rang and Laura

went inside to answer it. She left Christopher un-
attended beside the pool. He removed the flota-
tion rings.

Laura talked on the telephone for five to 10 min-

utes. While standing and talking on the telephone,
she could not see the pool area unless she stretched
the telephone cord to its limit and stretched her
body. She had also removed her contact lenses and
couldn’t see the outside area clearly.

After being on the telephone for at least five min-

utes, Laura stretched the telephone cord to check
on Christopher but couldn’t see him. She dropped
the telephone, ran to the pool and saw Christo-
pher floating in the deep end of the pool.

Christopher was revived, but suffered severe brain

damage.

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In February 1990, a lawsuit in the name of Chris-

topher Broadbent was filed against his mother,
alleging that her negligence caused his injuries. State
Farm Fire and Casualty Company, the Broad-
bents’ insurer under a homeowners policy, subse-
quently filed an independent action against Phillip,
Laura and Christopher Broadbent seeking a decla-
ration that Christopher’s claim was not covered
under its policy.

The trial court consolidated the two cases. State

Farm moved for dismissal of the Broadbents’
charges, arguing that the household exclusion in
the homeowners policy precluded coverage of
Christopher’s claim. It also argued that under
Arizona’s parental immunity doctrine, Laura
could not be legally liable for her child’s injuries.

The Broadbents argued that the parental immu-

nity doctrine didn’t bar Christopher’s claim be-
cause, rather than only a parental duty to Chris-
topher, Laura had a general duty to not allow
unsupervised young children access to the family’s
swimming pool.

They also argued that the doctrine of reasonable

expectation precluded application of the house-
hold exclusion.

The trial court issued decisions for both State

Farm and the Broadbents. Both sides appealed.
The appeals court permitted Northbrook Indem-
nity Company, which provided personal umbrella
liability insurance coverage on the date of the ac-
cident at issue, to appear in the appeal as a real
party in interest and on behalf of Laura.

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A key element to the appeal was the parental im-

munity doctrine, which State Farm wanted to
enforce so that it wouldn’t be liable under the
umbrella policy it issued to the Broadbents. The
parental immunity doctrine was a common law
creation that originated from a Mississippi Supreme
Court decision which held that, in the interest of
fostering peace and tranquility in families, chil-
dren were not permitted to sue their parents.

The applicability or nonapplicability of parental

immunity was determined on the basis of whether,
by the act that caused the injury, the parent
breached a duty owed to the world at large or a
duty owed to a child within the family sphere.
Thus, while the pool was an instrumentality in
the control of Laura, the duty of supervision she
breached was to Christopher alone. Laura could
not supervise the pool in the sense that other par-
ents could supervise their dog.

“This argument on behalf of the child fails because

the present appeal presents a case of negligent su-
pervision, rather than failure to control the in-
strumentality that caused the harm,” the appeals
court wrote.

It was argued that Christopher’s mother’s duty

to him arose out of her obligation as a property
owner. Christopher’s attorney argued that Laura
had a nonparental duty—to the world at large—to
exercise reasonable care to protect all children from
the danger posed by the pool.

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The court ruled:

A pool is like many other things that could

be dangerous to a child, such as a hot stove
burner, a cigarette lighter or even paint
thinner. The situation where a parent al-
lows a child to be unattended around items
that could be dangerous falls into the cat-
egory of negligent parental supervision,
which does not evoke a duty to the world
at large.
In summary, the appeals court concluded that
Laura, under the parental immunity doctrine, was
immune from liability for her negligent supervi-
sion of Christopher. It affirmed the trial court’s
grant of summary judgment.

Certain exclusions—which apply only to medical

payments coverage—are also intended to prevent
umbrella policies from becoming health insurance.
Medical payments coverage is not available for:

• A residence employee who is injured

while off the insured location and not
in the course of the employment. Ex-
ample: An employee is doing grocery
shopping for the employer and slips
in the store and breaks an arm; there
is coverage. If a residence employee is
shopping for personal reasons when
injured, there is no coverage.
• If any insured person is entitled to
workers’ comp benefits, either volun-
tary or under any kind of law, there
is no coverage for medical payments.

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 CHAPTER 5

• Any nuclear or radioactive contami-

nation whether controled or
uncontroled.
• Anyone who is a regular resident at
an insured location (other than a resi-
dence employee).

A FINAL EXCLUSION

Professional liability, or the rendering of or fail-

ure to render professional services, is not covered
under a personal umbrella policy.

If you’re a doctor, lawyer, accountant or other

professional, you should purchase separate mal-
practice insurance, errors and omissions coverage
or a separate professional liability policy that is
designed to cover these exposures.

OTHER COVERAGES

A personal liability policy covers you for personal

liability exposures, and provides no coverage for
damages required to be paid under any workers’
compensation, unemployment compensation, dis-
ability benefits or similar laws.

There is no coverage for liability for which you

are also an insured (or would be, except for the
exhaustion of limits) under any nuclear energy li-
ability policy. A nuclear energy liability policy is
one issued by: American Nuclear Insurers; Mu-
tual Atomic Energy Liability Underwriters;

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Nuclear Insurance Association of Canada; or any

of their successors.

The personal umbrella policy provides liability

coverage over and above your personal auto li-
ability policy. Generally, this means bodily injury
and property damage liability coverage. So, um-
brella policies do not provide uninsured motor-
ists coverage, underinsured motorists coverage or
any similar coverage unless modified to do so.

In most cases, loss assessment coverage is a sepa-

rate coverage under a liability policy. The liabil-
ity coverage agreement and the provisions for
defense coverage do not apply to loss assessments.

LANDLORD LIABILITIES

Liabilities that arise out of your duties as a land-

lord to property other than the residence premises
are not covered under a personal umbrella policy.
Whether you’re renting from others or to others,
the rental of small residences and condominium
units is considered to be more of a residential ex-
posure and not a business exposure, so it is not
excluded. If, however, you own a large apartment
building with more than four units, it would be a
business exposure and would be excluded.

An exception is made for the occasional rental of

the residence premises for use as a residence. So, if
you go on vacation, you can rent out your princi-
pal residence and it will be covered.

Part of a residence (such as the second unit in a

duplex or a room in your house) may be rented

146
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to others. But there is a limit in each single-family

unit of two roomers or boarders who are unre-
lated to the occupying family.

You can also rent out part of your property for

use as a studio, office, school or private garage.

GETTING YOUR CLAIM PAID

Payment of a liability claim is not an admission

of liability by you or the insurance company.

In addition, medical payments are voluntary and

are not to be construed as admitting liability should
the injured party bring suit at a later date.

If a dispute arises over payment of a claim, you may

not bring suit against the insurance company until
you’ve complied with all of the policy provisions.

The insurance company can’t be named as a code-

fendant in a lawsuit against you. Furthermore, the
company has no obligation to make any payment
from a liability (though it does have to pay for
your legal defense) until a final judgment against
you has been rendered or the insurance company
has agreed to settlement of the claim.

If you become bankrupt or insolvent, the com-

pany remains obliged to provide coverage and
respond to the terms and conditions of the policy.

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U N D E R LY I N G POLICY CONFLICTS

An often-cited 1992 Massachusetts Supreme Court

case dealt with the conflicts that can occur between
umbrellas and underlying policies.

Following an automobile accident in which his

daughter was killed while riding as a passenger in
someone else’s car, Chester McLaughlin sought
coverage from Liberty Mutual Insurance under
his auto policy for compulsory uninsured or op-
tional underinsured motorists coverage.
(McLaughlin had also purchased automobile in-
surance from Liberty for his two sons. He sought
to collect benefits under these policies as well.)

Liberty Mutual insured two of McLaughlin’s cars

for uninsured motorists coverage up to limits of
$100,000 per person and $300,000 per accident.
Under an umbrella policy, McLaughlin was in-
sured for liability to third parties in excess of the
limits of liability coverage under an automobile
insurance policy and a homeowners policy.

As a result of negotiations between McLaughlin

and Liberty Mutual, a settlement was reached and
McLaughlin collected the full amount of uninsured
motorists coverage available under the policies.

McLaughlin then contended, that his personal ca-

tastrophe liability (umbrella) policy constituted a
motor vehicle liability policy under Massachusetts
law. He also claimed it provided him with unin-
sured motorists coverage up to the umbrella policy
limit of $2 million.

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Liberty disagreed and sued to get a court ruling

against umbrella coverage. The trial court sup-
ported Liberty’s motion and entered a judgment
declaring that McLaughlin’s umbrella policy did
not contain uninsured motorists coverage.

McLaughlin appealed. The state supreme court

agreed to hear the case.

The question it considered: whether an umbrella

policy constituted a “motor vehicle liability
policy” within the meaning of Massachusetts’s
uninsured motorists coverage statute.

Its answer was a resounding no.

“There is nothing in the language of either Massa-

chusetts state law or McLaughlin’s umbrella policy
which would require Liberty to provide uninsured
motorists coverage to McLaughlin under his um-
brella policy,” the court wrote.

The state law which required all vehicle liability

policies to insure for uninsured motorists cover-
age, did not require umbrella policies to provide
the same coverage. It applied only to the underly-
ing auto insurance policy, and not to excess poli-
cies such as McLaughlin’s umbrella policy.

The statute stated, in relevant part, that:

[n]o policy shall be issued or delivered in

the commonwealth with respect to a mo-
tor vehicle...registered in this state unless
such policy provides coverage in amounts
or limits prescribed for bodily injury or

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death for a liability policy under this

chapter...for the protection of persons in-
sured thereunder who are legally entitled
to recover damages from owners or op-
erators of uninsured motor vehicles.
The clear language of McLaughlin’s umbrella policy
indicated that it protected solely against the risk
of a judgment against an insured in excess of the
coverage for liability provided by the underlying
auto and homeowners insurance policies. It didn’t
provide uninsured motorists coverage.

The policy read, in relevant part:

[t]he company will pay on behalf of the

insured all sums in excess of the retained
limit which the insured shall become le-
gally obligated to pay as damages, direct
or consequential, because of personal in-
jury or property damage with respect to
which this policy applies….
The Massachusetts court concluded that the most
persuasive decisions from other states held that
umbrella policies were not auto liability insurance
policies under relevant uninsured motorist stat-
utes. In fact, Florida and Kansas had recently
amended their uninsured motorists statutes explic-
itly to provide that umbrella policies were not
included.

“We hold that an umbrella policy is not a motor

vehicle liability policy and does not provide [un-
insured motorists] coverage,” the court concluded.

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CONCLUSION

Your auto and homeowners policies have at least

some liability insurance that would be used to settle
legal claims. But what if a settlement (or judgment,
if it goes to court) is $800,000 and you
only have $300,000 of liability insurance? The in-
surer would pay its $300,000, but where are you
going to get the other $500,000?

Virtually everything you own would be fair game

to pay off the debt. The only good news is that
some states protect certain assets (like your home)
from seizure.

Worried? You should be. With America’s love

affair with lawsuits, you can’t afford to not have
umbrella liability insurance.

As we mentioned earlier, umbrella liability insur-

ance pays $1 million, $2 million and sometimes
even $5 million or more of a claim—on top of
what your basic policies will pay. You’re usually
able to set the amount.

For the protection you get, umbrella liability cov-

erage is not very expensive. Premiums are usually
$200 to $300 a year for $1 million worth of cover-
age. The cost depends on such criteria as the amount
of coverage, the insurance company issuing the
policy and your own “personal risk factors” (such
as the number of traffic tickets you’ve gotten in
the past and, possibly, your credit report).

When people do buy umbrella coverage, they of-

ten don’t buy enough. For example, you may have

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assets worth $1 million, figure that you need

enough coverage to protect your assets, and there-
fore buy a $1 million policy. But what if a judg-
ment of $2 million is handed down?

If you’re portrayed as a millionaire and lose a per-

sonal liability lawsuit, you can lose all of your as-
sets and still owe money. Your future income, if
you have to make settlement payments over time,
can be jeopardized. The same goes for any inher-
itance you may receive, not to mention any in-
heritance you may want to leave your children.

How much you own is a start—but not always

the whole story—when deciding how much cov-
erage to buy. Do you live in a wealthy part of
town? Do you travel a lot? Do you entertain a
lot? Do you operate a home-based business and
have employees or clients coming to your home
on a regular basis? These things can make you a
target.

It’s depressing to think of all the liability risks you

take, any of which can decimate your net worth.
It’s fine to take calculated risks—for example, if
you don’t drive your car every day and you in-
frequently have people on your property, you
may decide that instead of spending money on
umbrella premiums you’d rather take the risk that
you will never be hit with a liability lawsuit. This
strategy is called “self insurance.” And many people
self-insure—by not buying insurance—without
realizing what they’re doing.

The goal of umbrella liability insurance is to pro-

vide affordable, comprehensive coverage in case

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of a catastrophic loss, incidental exposure, or gaps

in coverage.

If nothing else, umbrella coverage offers psycho-

logical comfort. You’ll know that if your neigh-
bor falls on your front steps or you rear-end the
car in front of you that you’re protected.

But one last reminder: Umbrella coverage isn’t a

cure-all. It doesn’t protect you from every risk in
the world—it is excess insurance for whatever pri-
mary liability policies you have.

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154
 CHAPTER 6

CHAPTER 6
WHEN YOU'VE GOT
A SMALL BUSINESS
TO PROTECT

So, you’ve decided to start a candy company us-

ing your grandmother’s famous recipe for boy-
senberry fudge. Good luck. And watch out. It’s
hard enough to get the stuff into Bloomingdale’s
for the Christmas rush.

Once you’re making money, more troubles—li-

ability troubles—can crop up.

The U.S. Bureau of Labor Statistics estimates that

there are more than 18 million home-based busi-
nesses in the United States. More than 60 percent
of those businesses are inadequately insured, ac-
cording to a survey by the Independent Insurance
Agents of America (IIAA).

Whether you spend two hours or 62 hours a week

on your home-based business, you face many of
the same the risks that corporate giants do. About
half of new businesses succeed past two years, be-
coming assets that need to be protected.

So why do so many home-based business owners

neglect to purchase adequate insurance for their

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

new enterprise? They don’t think about business

policies when they’re padding around in terrycloth
robes between their desks and kitchens. They think
of themselves as small and struggling, rather than
established players that need coverage.

Dozens of likely scenarios can peril the home-based

business: a neighborhood punk breaks into your
house and steals your computers or the clumsy
FedEx guy falls in your foyer while waiting for
you to sign the delivery log. When he sues you
for pain, suffering, loss of wages—and his wife sues
you for loss of consortium—you’ll be sorry you
didn’t buy a business policy.

This kind of accident can wipe out years of hard-

won value. And, rather than printing invoices,
you’ll be sending out résumés.

Another reason that home-based businesses are so

often uninsured is that the owners believe—
wrongly—that their business activities are covered
by their renter’s or homeowners insurance. These
types of policies don’t provide coverage for busi-
nesses, though.

Even the most basic small business insurance policy

(usually called a business owners policy or BOP)
can cover loss of income, business personal prop-
erty, personal and advertising injury, on-premise
liability, off-premise liability, professional errors-
and-omissions, separate business structures and
other assets. It’s a broad kind of coverage.

Looking more closely at the numbers, liability is

an even bigger issue than it might first seem. Ac-

156
 CHAPTER 6

cording to the IIAA, nearly 70 percent of home-

based business owners are between the ages of 55
and 64. Since many of these entrepreneurs are re-
tired or close to retirement age, they have per-
sonal assets (nearly paid-off mortgages, sizeable
retirement accounts, etc.) that need protection.

LIMITS OF OTHER INSURANCE

One thing can’t be reiterated enough: Standard

personal insurance doesn’t cover business risks.
And, not matter how small a business might be, it
will count as a business when you have to make a
claim. Consider how standard policies deal with
business risks:

• Automobile Coverage. If you are us-

ing your automobile for business ac-
tivities—transporting supplies or prod-
ucts or visiting customers—you need
to make certain that your automobile
insurance protects you from accidents
that occur while on business.

If you have a personal vehicle that you sometimes

use for business or if your home-based business is
the owner of one or more vehicles, you may need to
buy a Commercial Automobile Policy.

• Homeowners Coverage. If you rely

on your homeowners policy as your
only means of insurance protection,
you may find your home-based busi-

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

ness underinsured or uninsured in the

event of a loss.
Homeowners policies were never intended to
cover business exposures. Consequently, cover-
age for the items you use in your business such as
computers, fax machines, filing cabinets, tools and
inventory are limited to $2,500 in your home and
$250 away from home under most policies. And
your homeowners coverage provides no liability
insurance for your home-based business.

If you’re working at home, review your existing cov-

erage. Your homeowners insurance probably doesn’t
cover your business. You also need coverage for
things like liability and business interruption.

TWO KINDS OF COVERAGE

First, let’s take a look at what coverage you may

need. Insurance coverage generally falls into two
categories. This is true of homeowners, auto and
most business policies. Those two categories in
business terms are:

• Property Coverage—Your business

structures and possessions are covered
against loss or damage caused by cer-
tain covered risks such as fire and theft.
• Liability Coverage—This means that
if you become legally obligated to pay
money to another person for bodily
injury or property damage caused by

158
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your business, your insurance com-

pany will cover those costs (up to the
maximum indicated in your policy),
including the costs of defending your
business in the lawsuit. This coverage
extends to medical payments for in-
jured parties.
Of course, every business has its own special re-
quirements. There are many specific insurance
coverages available to address the needs of your
home-based business.

SEVERAL OPTIONS

To insure your business, you have three main op-

tions—endorsements to your existing homeowners
policy, an in-home business policy or a small
businessowners package policy.

1) Endorsements. Depending on the type

of business you operate, you may be
able to add an endorsement to your
existing homeowners policy. For as
little as $14 a year, you can double
your standard homeowners policy lim-
its for business equipment from $2,500
to $5,000. Some companies offer en-
dorsements that include property and
limited business liability coverage.
Endorsements are typically only avail-
able for businesses that generate $5,000
or less in annual receipts. They are
available in most states.
2) In-Home Business Policy. The insur-
ance industry has responded to the

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

growing number of home-based busi-

nesses by creating in-home business in-
surance policies that combine
homeowners and business owners cov-
erage into a single policy. For about
$200 per year you can insure your
business property for $10,000. Gen-
eral liability coverage is also included
in the policy. A business owner can
purchase anywhere from $300,000 to
$1 million worth of liability coverage.
The cost of the liability coverage de-
pends on the amount purchased. If
your business is unable to operate be-
cause of damage to your house, your
in-home business policy covers lost
income and ongoing expenses such as
payroll for up to one year. The policy
also provides limited coverage for loss
of valuable papers and records, ac-
counts receivable, off-site business
property and use of equipment. These
policies provide both business cover-
age such as business liability and re-
placement of lost income, and
homeowners coverages such as fire,
theft and personal liability. In some
cases, the companies that offer these
policies require that you buy your
homeowners and auto policies from
them, too.
3) Business Owners Package Policy
(BOP). Created specifically for small
businesses, this policy is an excellent
solution if your home-based business
operates in more than one location or

160
 CHAPTER 6

manufactures products outside the

workplace. A BOP, like the in-home
business policy, covers business prop-
erty and equipment, loss of income
and extra expenses, and liability. How-
ever, these coverages are on a much
broader scale than the in-home busi-
ness policy.

UP CLOSE WITH BOPS

A BOP is a self-contained, complete package policy

that provides broad coverages for small and me-
dium-sized apartment buildings, offices and retail
stores. Each policy includes mandatory property
and liability coverages and offers optional cover-
ages. As with any policy, many standard condi-
tions and exclusions apply.

The standard BOP form is modeled after the com-

mercial package policy program that big compa-
nies buy. The same wording, organization of cov-
erages and design are followed.

Then, the standard BOP adds coverages that are

similar to commercial property coverage and com-
mercial general liability coverage, along with op-
tional crime and boiler and machinery coverages.

The types of business eligible for a BOP include:

• apartment buildings which do not ex-

ceed six stories in height and do not
have more than 60 dwelling units (in-
cidental mercantile, service or process-

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

ing risks which do not exceed 15,000

square feet, and incidental offices are
permitted);
• office buildings which do not exceed
six stories in height and do not exceed
100,000 square feet in total area (inci-
dental mercantile, service or process-
ing risks which do not exceed 15,000
square feet, and apartments within the
office building are permitted);
• mercantile risks which do not exceed
15,000 square feet and do not have
annual sales in excess of $1 million;
• service or processing risks which do
not exceed 15,000 square feet and do
not have annual gross sales in excess
of $1 million, provided that no more
than 25 percent of their gross sales is
derived from off-premises operations;
and
• building owners and business opera-
tors who are tenants, residential con-
dominium associations and office con-
dominium associations. Service and
processing risks are newly eligible for
coverage (previously, mercantile risks
involving retail sales of merchandise
were eligible, but risks involving ser-
vice or processing were not eligible).
The businessowners program is designed to pro-
vide coverage to those with moderate insurance
exposures. It excludes those with risks that do not
fit the intended exposure pattern. These include:
bars, restaurants, automobile dealers and all types

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 CHAPTER 6

of automotive repair and service operations, banks

and all types of financial institutions, places of
amusement, contractors and wholesalers.

Companies in these fields must be insured outside

of the businessowners program.

COMPONENTS OF A BOP

Each BOP is a complete contract and must in-

clude the following parts:

• the policy declarations,

• the common policy conditions,
• a standard or special property cover-
age form (one or the other),
• the businessowners liability coverage
form, and
• endorsements as required.
The policy declarations show the policy number,
name of the insurance company, name of pro-
ducer, name and address of the named insured and
the policy period. Spaces are provided for a de-
scription of the business, the form of business,
locations of described premises, and name and
address of any mortgage holder.

There are 11 common policy conditions attached

to every BOP. Some of these conditions relate to
basic things like cancellation, fraud and what hap-
pens when the policyholder dies; others involve
more specific things like how the insurance com-
pany determines premiums (i.e. they have a right
to audit, inspect, survey, report, etc.).

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Both the in-home business policies and the stan-

dard BOP forms offer the same optional cover-
age for employee dishonesty. Coverage applies to
loss of business personal property, including
money and securities, resulting from dishonest acts
of employees. Losses that result from any crimi-
nal or dishonest acts of the named insured or any
partners, however, are not covered.

This coverage carries a discovery period of one year

after the policy expiration date, and losses discov-
ered after that time are not covered.

LIABILITY COVERAGE

The standard BOP provides the following two

major liability coverages:

• business liability, and

• medical payments.
The business liability insurance covers your legal
liability for damages because of bodily injury or
property damage, and it also covers personal in-
jury and advertising injury.

The insurance company provides defense costs and

the standard set of supplementary payments found
on liability policies (i.e., cost of bail bonds, settle-
ment expenses, loss of earnings, prejudgment and
postjudgment interest on amounts awarded).

The medical expense insurance covers expenses for

bodily injury caused by an accident on premises
you own or rent, including the ways next to such
premises, or an accident because of your opera-

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tions. Medical expenses incurred within one year

of the accident date are covered, and payments
are made without regard to fault or negligence.

The businessowners liability form includes a long

list of exclusions. In total these are similar to the
combined exclusions applicable to bodily injury
and property damage liability, personal injury,
advertising injury and medical payment coverages
found on commercial general liability forms.

You should be aware of the types of exclusions

applicable to these coverages. Some of the exclu-
sions are complex and very detailed. Some are
exotic, like the clause that excludes damages caused
by war or nuclear materials. The following is a
brief glance at a few of these exclusions:

• bodily injury or property damage ex-

pected or intended by you;
• liquor liability;
• obligations under workers compensa-
tion, disability, unemployment, etc.;
• bodily injury to any employee aris-
ing out of and in the course of em-
ployment by you;
• pollution liability;
• bodily injury or property damage aris-
ing out of any aircraft, auto or water-
craft;
• bodily injury or property damage aris-
ing out of the transportation of mo-
bile equipment;

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

• professional liability;
• property damage (to your work, prod-
uct or other);
• damages claimed for any loss, cost or
expense because of loss of use, with-
drawal, recall, repair, removal or dis-
posal of your product, work or im-
paired property;
• various personal or advertising inju-
ries (slander, libel, defamation, etc.);
• medical expenses for bodily injury to
you, an employee or tenant;
• medical expenses for bodily injury to
any person if the bodily injury is cov-
ered by a workers’ compensation or
disability benefits law or similar law;
and
• medical expenses for bodily injury to
any person injured while taking part
in athletics.
Again, this list is a mere glance at the exclusions to
coverage. Read your BOP carefully and know
what is and isn’t covered. Think about that boat
parked in your driveway; think about a freelance
contractor’s slip and fall during a visit to your
office; and think about your forgetting to include
a warning label on a toxic product—assuming that
you’ve moved on from boysenberry fudge.

WHO IS AN INSURED?

If you buy a BOP as an individual—rather than as

a corporate entity—your spouse is also an insured

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 CHAPTER 6

with respect to conduct involved with your busi-

ness. If the named insured is a partnership or joint
venture, all members and partners and their
spouses are insured with respect to their business
activities. If the named insured is a corporation or
organization other than a partnership or joint ven-
ture, all officers and directors are insured with
respect to their duties as officers and directors;
and stockholders are insured with respect to their
liability as stockholders.

Employees are insured with respect to their ac-

tivities as employees, and any person or organiza-
tion acting as your real estate manager, or having
custody of your property, or operating mobile
equipment with permission is insured, but only
with respect to their exposure in that capacity.

The declarations shows three separate limits of in-

surance:

1) Liability and medical expenses limit.

It is a combined single limit and is the
most the insurance company will pay
for all bodily injury, property dam-
age and medical expenses arising out
of one occurrence, and all personal
injury and advertising injury sustained
by any one person or organization.

Note that the bodily injury and property damage

coverage is on an “occurrence” basis, while the per-
sonal and advertising injury coverage is on a “per
person or entity” basis.

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

2) Per person limit for medical expenses.

It is a sublimit that applies within the
overall liability per occurrence limit.
3) Fire legal liability limit. It applies on
a per fire or explosion basis. This is a
separate limit of insurance that applies
only to liability for damages to pre-
mises rented by you and arising out
of a fire or explosion.
While not shown on the declarations, the cover-
age form defines two aggregate limits that apply:

• The policy period aggregate for all in-

jury and damage under the products/
completed operations hazard is the li-
ability and medical expense limit
shown.
• The aggregate for all other injury or
damage (except fire legal liability) and
all medical expenses is twice the limit
shown in the policy for liability and
medical expenses.
If the policy is written for more than a one-year
period, the aggregates applies separately to each
annual period.

CONDITIONS AND DEFINITIONS

Businessowners liability coverage is subject to a

number of standard policy conditions. Bankruptcy
of the named insured does not relieve the insur-
ance company of any obligations. In the event of
an occurrence, claim or suit, you must notify the
insurance company, provide information, and sub-

168
 CHAPTER 6

mit copies of any demands or legal papers. With

respect to any vehicles or mobile equipment sub-
ject to a financial responsibility law, the policy
provides the minimum coverage required by law.
Legal action against the insurance company may
not be taken unless all terms of the policy have
been fully complied with.

There will be a so-called separation of insureds, with

respect to rights, duties, claims and suits under
the policy. This means that everyone covered by
the policy is treated separately except with respect
to the limits of insurance.

The policy also includes a number of standard com-

mercial liability definitions, including: Advertis-
ing injury, auto, coverage territory, impaired prop-
erty, insured contract, mobile equipment, personal
injury, your product and your work.

BOP ENDORSEMENTS

Endorsements may be used to alter the coverage

or to provide additional coverages.

A hired auto and non-owned auto liability endorse-

ment may be used to add coverage for either or
both of these automobile exposures if you do not
have a commercial auto policy. If you have a com-
mercial auto policy, the endorsement is not avail-
able for attachment to a BOP.

A comprehensive business liability exclusion en-

dorsement may be used to exclude specific opera-
tions or locations from coverage. A limitation of
coverage to designated premises or project en-

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

dorsement may be used to exclude coverage ex-

cept for the premises or projects specifically des-
ignated in the declarations.

A variety of endorsements may be used to add ad-

ditional insured parties to a BOP. Special endorse-
ments exist for managers or lessors, state or politi-
cal subdivisions, townhouse associations, co-own-
ers of premises, engineers, architects and survey-
ors, and others.

PROFESSIONAL LIABILITY

In many small businesses, the business owner pro-

vides advice or professional services for which
customers pay a fee. However, if these services
are in some way unsatisfactory, the customer may
sue the service provider for professional negligence.

Accountants, attorneys, financial planners or any-

one who provides professional services may find
themselves as the defendant in a lawsuit. While
many of these suits are unsuccessful, legal defense
costs and potential settlement awards are ample
reason for professional liability coverage.

Professional liability insurance is particularly im-

portant for attorneys and psychologists, for ex-
ample, who work out of the home.

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 CHAPTER 6

That said, these policies are important for more

than just lawyers and doctors. Professional liabil-
ity policies are available for:

• advertisers, broadcasters and publish-

ers,
• insurance agents and brokers,
• accountants,
• architects and engineers,
• attorneys,
• pension plan fiduciaries,
• stockbrokers, and
• directors and officers of corporations.
Due to the growing frequency of malpractice suits
and the sympathies of courts, professional people
are held more accountable for their mistakes than
ever before. Ever higher sums are being awarded
to plaintiffs in malpractice suits. The need for pro-
fessional liability insurance has grown in direct pro-
portion to these trends.

Professional liability coverage protects you against

legal liability resulting from negligence, errors and
omissions, and other aspects of rendering or failing
to render professional services. It does not cover
fraudulent, dishonest or criminal acts.

Many professional liability policies contain exclu-

sions commonly found in general liability poli-

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

cies, such as liability you assume or obligations

that fall under a workers’ compensation law.

In the medical field, professional liability cover-

age is often referred to as malpractice insurance.
In other areas, the coverage is known as errors and
omissions insurance, particularly where there is no
coverage for bodily injury. However, all profes-
sional liability is a form of malpractice insurance.

Most professional liability policies today are writ-

ten on a claims-made basis, which obligates the in-
surance company that has written the policy cur-
rently in effect when a claim is made to cover,
even if the negligent act or error occurred many
years before (provided it did not occur before any
retroactive date shown on the policy).

In most cases, errors and omissions insurance ex-

cludes coverage for bodily injury and damage to
tangible property—forms covering insurance
agents, accountants, and attorneys exclude bodily
injury and property damage. The negligence, er-
rors and omissions of many professionals will only
generate claims for financial damages. But the na-
ture of a profession determines the nature of mal-
practice claims, and the insuring agreements re-
flect this fact.

COMMERCIAL GENERAL LIABILITY

At several points in this chapter, we have men-

tioned commercial general liability (CGL) insur-
ance. This is the kind of liability that larger com-
panies usually carry. Although this book is de-
signed for individuals and smaller business, the

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 CHAPTER 6

mechanics of CGL insurance are worth consider-

ing, because they define many of the terms that
apply to people and small firms.

CGL protects a business from a variety of busi-

ness liability exposures arising out of its premises,
operations, products and completed operations.
The insurance usually covers legal obligation aris-
ing out of injuries or damage suffered by mem-
bers of the public, customers, tenants and others.

Major changes were made in CGL forms and ter-

minology during the 1980s and 1990s. For one
thing, the abbreviation CGL had originally stood
for “comprehensive general liability” coverage.

The word “comprehensive” was replaced (with

“commercial”) because it wrongly suggested that
any liability was covered. Many plaintiffs’ attor-
neys attempted to use the term “comprehensive” to
extend coverage to absurd lengths.

Older CGL policies had broken coverages down

in dozens of separate subsections (each with its own
separate insuring agreement). The newer CGL
policy is broader and more flexible. It covers most
risks—unless it’s amended to eliminate a cover-
age. Endorsements might eliminate coverage for
products, advertising injury, personal injury or
medical payments. Other endorsements might ex-
clude coverage for liability arising out of sched-
uled locations only, while preserving the cover-
age everywhere else.

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

Separate forms are available for companies that

have very limited and specific exposures. There is
a form that provides only the products and com-
pleted operations insurance. Another form pro-
vides owners and contractors protective coverage—
it is used when an owner or contractor requires a
contractor or subcontractor to provide coverage
for a specific job, which can only be done by issu-
ing the coverage as a separate policy.

Separate forms are also available for exposures that

are not covered by CGL forms (e.g. pollution
coverage, liquor liability, etc.).

In sum, the CGL is designed to assume coverage

while still customizable to amend, limit or expand
coverages. It allows companies to tailor coverage
to fit specific needs and exposures.

OCCURRENCE AND CLAIMS-MADE

Originally, general liability covered accidents—

sudden, unexpected events that happened at a spe-
cific time and location. Under the newer CGL
policies, the concept of accident was expanded to
include continuous or repeated exposure to con-
ditions that result in bodily injury or property
damage that was neither expected nor intended
(by the company).

Basically, the occurrence form covers injury or dam-

age that happens during the policy period, while
the claims-made form responds to claims filed dur-
ing the policy period.

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 CHAPTER 6

An occurrence form covers injury or damage that

occurs during the policy period, even if the claim
is made three, four or five years later.

An example: Ramjac Corp. had a separate $1 million

occurrence policy in each of three years during which
its faulty fingerpaints were poisoning toddlers.
Lawsuits followed. The court required Ramjac’s in-
surance company to pay $3 million—the $1 million
limit for each of the three years of occurrence.

The process of adding that the court did in this

example is called stacking. In contrast, a claims-
made policy doesn’t allow this. It covers claims
that are first made during the policy period. If
you continually renew claims-made coverage with
a $1 million limit, a single loss can only be charged
to one policy.

Claims that take place after the end of a policy

period create an exposure known as a claims tail.
Tail coverage is automatically built into the insur-
ing agreements of occurrence forms. This is not
the case with claims-made forms.

Claims-made CGL forms would be unacceptable

if they left policyholders exposed to serious in-
surance gaps that could not be covered. So, ex-
tended reporting periods (also called ERPs) were
created to solve the problems of claims tails and
transitions back to occurrence coverage. Proper
use of ERPs allows a policyholder to change from
an occurrence CGL policy to a claims-made CGL

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

policy without any situations in which a loss is

covered by two policies or is not covered at all.

Most policy provisions under the two types of

CGL policy are identical. The insuring agreements
differ slightly, because the coverage trigger is dif-
ferent under claims-made coverage. There are a
few differences in the claims-made conditions, and
the claims-made form has an additional section
concerning extended reporting periods.

In the declarations page, the insurance company

“declares” the facts of the policy (name of insured,
policy number, etc.). The declarations page may
also show a retroactive date, before which no cov-
erage applies.

Although a retroactive date is not required, it de-

fines when coverage begins and is useful for creat-
ing a clean line between occurrence and claims-
made coverage.

When claims-made coverage is written without a

retroactive date, duplicate coverage may exist. In
that case, the claims-made coverage would apply
as excess over earlier occurrence policies.

BUSINESS UMBRELLA POLICIES

Just like individuals, businesses sometimes need

umbrella liability coverage. However, there are
no standard commercial umbrella policies. So,
making general comments is difficult.

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 CHAPTER 6

Some business umbrellas are written to “follow

form,” which means they do not provide broader
coverage than the primary insurance. Others are
more like personal umbrellas, providing cover-
ages not included in the underlying insurance.

For many businesses, an umbrella policy protects

business assets that could be threatened by multi-
million dollar liability lawsuits. Usually, commer-
cial umbrella forms provide a minimum of $1
million of insurance, but they are frequently writ-
ten with limits of $10 million to $100 million.
The policies may include occurrence or claims-
made terms.

Commercial umbrellas also help to fill two types

of insurance gaps—those created by oversights, and
those resulting from exposures that may not be
fully insurable under traditional policies. Where
no primary insurance exists, the required self-in-
sured retention will usually be $25,000 or more.
For particularly risky exposures, the insurer may
require a retention of $50,000 or $100,000—and as
much as $1 million.

Business umbrellas usually cover advertising and

related liabilities. They also usually provide world-
wide coverage for products liability, which is an
important coverage for any firm selling to inter-
national markets. Blanket contractual liability cov-
erage, for both oral and written contracts, may be
included.

Frequently, business umbrellas also provide liabil-

ity insurance for incidental malpractice, non-owned
aircraft and non-owned watercraft exposures. It is

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

not uncommon for umbrellas to provide employ-

ees liability coverage, by making employees part
of the definition of “named insured.” Employees
could be sued as individuals for acts or omissions
related to their employment.

Finally, business umbrellas may be written to pro-

vide liquor law liability and many other liability
coverages not covered by BOPs or CGL policies.
But these additional coverages get expensive.

WORKERS’ C O M P E N S AT I O N

If you hire employees, you need to have workers’

compensation insurance (also called employer’s
liability coverage). This insurance—different than
a BOP—pays medical expenses, rehabilitation costs
and lost wages to any employee injured on the
job (technically, “in the course of employment,”
which includes business trips, running errands for
the company and other out-of-the-office activities).

The coverage also insures against psychiatric or

chronic disabilities—namely, job-related stress and
slow-to-develop problems like carpal tunnel syn-
drome. These subtle claims can be as
devastaing...or more so...to a small business than
the classic lifting injury or broken bones that most
people equate with the term workers’ comp.

Workers’ comp coverage is mandatory—much like

auto liability coverage is for anyone who owns a
car. For most small businesses, the best way to
buy workers’ comp insurance is through state-ad-
ministered insurance funds. 1
1
The details of workers’ comp are too complex for us to discuss
completely in this book. For more information, see Silver Lake’s
book Workers’ Comp for Employers (1994).

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 CHAPTER 6

As with auto liability, some people try to get

around carrying it. This is a very bad idea. State
employee and labor departments examine payroll
taxes and other records to find businesses that
don’t carry the workers’ comp coverage. The fines
and penalties that can follow are often enough to
put a small business out of business.

WHY BOPS ARE IMPORTANT

There’s no better way to demonstrate the neces-

sity of a business policy than to give you a real-life
scenario. In the 2000 Vermont Supreme Court
case Luneau v. Peerless Insurance Co., et al., an
ambitious lad’s business pursuit went sour from
one accident that his homeowners policy didn’t
cover. It all began one September night in Swanton,
Vermont…at the Champlain Country Club.

Robert Wagner worked for Green Mountain

Coffee Roasters, but for a number of years he
had been conducting his own business on the side
as a disk jockey. His business cards read, “Music
Unlimited,” and he had deducted income on his
tax returns from his disc jockey activities, includ-
ing $5,000 for 1994. Related expenses had also been
deducted as business expenses.

On September 4th, 1994, he was paid $300 to serve

as the disk jockey at a wedding reception. When
he set up his equipment, he stacked his loudspeak-
ers next to the dance floor. During the reception
he drank several alcoholic beverages, and at one
point he became involved in a scuffle with an in-
toxicated guest who was upset because Wagner had
forgotten to play his requested song.

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

During the scuffle, one of Wagner’s speakers be-

came dislodged and struck a bystander in the head.
The bystander, a woman named Judy Luneau, was
hurt badly. The impact caused bleeding, bruising,
swelling and a concussion. After the incident, she
suffered from neck, back and shoulder pain. She
incurred medical expenses and also lost approxi-
mately $5,600.00 in wages for the work she missed
due to her injuries.

On February 9th of the following year, Luneau

filed a lawsuit against Wagner alleging that, while
he had been “employed as a disc jockey” during
the September 4 th reception, he had been negli-
gent (1) in “the placement, use and supervision of
the stereo equipment,” and (2) in his “physical con-
duct,” resulting in her injury.

Luneau and Wagner subsequently stipulated to a

judgment that Wagner was liable to her in the
amount of $60,000, which the court entered. Of
course, as in many cases, the loser (Wagner) didn’t
have sixty grand. So he transferred to her any
rights to being indemnified by his insurance com-
pany. This meant Luneau had to go after the in-
surance company for her settlement. And, on Feb-
ruary 7th, 1997, she filed a complaint against Peer-
less Insurance.

However, the court determined that since Wagner

was negligent both in his placement of the speak-
ers and in becoming involved in the shoving match
(the result of which caused injury to Luneau), his
acts of negligence fell within the business pursuits
exclusion of the homeowners policy. Wagner
didn’t have a business policy; so, Peerless Insur-

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 CHAPTER 6

ance Company had no duty to indemnify Wagner

(and pay Luneau).

Although the policy included personal liability

coverage, it included a business pursuits exclusion
clause that read:

Coverage E—Personal liability and Cov-

erage F—Medical Payments to Others do
not apply to “bodily injury”…[a]rising out
of “business” pursuits of an “insured.”
This exclusion, common to homeowners policies,
does not apply to activities that are usual to non-
“business” pursuits.

Thus, the court determined that when the acci-

dent took place, Wagner’s activities were “entirely
related to his business pursuit at that time.”

Whether or not a particular activity falls within

the business pursuits exclusion is a question of fact
to be decided on a case-by-case basis.

After the Luneau court determined that Wagner

was plainly engaged in the business of being a disk
jockey at the wedding, it had to decide whether
Wagner’s activities at the wedding (which directly
resulted in the injury) were “usual to non-business
pursuits.” If so, his homeowners would have to
cover.

The court relied on previous case law, specifically

the 1967 decision Gulf Ins. Co. v. Tilley. In that
earlier case, a child was injured when she pulled a
coffee pot down on herself. Her family sued the
home day-care provider, who had used the pot to

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

prepare coffee for herself and a friend. Although

the day-care provider’s homeowners insurance car-
rier denied coverage under the business pursuits
exclusion, the court found the case fit within the
exception for activities that are usual to non-busi-
ness pursuits. It reasoned that “preparation of hot
coffee is an activity that is not ordinarily associ-
ated with a babysitter’s functions.”

However, since the Tilley decision, most courts

have moved away from that narrow notion of
liability. The Luneau court wrote that a
homeowners policy is:

designed to insure primarily within the

personal sphere of the policyholder’s life
and to exclude coverage for hazards asso-
ciated with regular income-producing
activities…[which] involve different legal
duties and a greater risk of injury or prop-
erty damage to third parties than personal
pursuits.
Wagner had legal duties while conducting his busi-
ness. When he failed to take the proper precau-
tions, he became negligent—all within the course
of his business activity.

The court thought it was particularly significant

that the injury to Judy Luneau resulted from a
“scuffle” between the disc jockey and a wedding
guest. If the scuffling guest had sued Wagner, things
might have been different. The exception for “ac-
tivities which are usual to non-business pursuits”
might have applied. Even though the disc jockey
was on duty and playing music, engaging in a physi-
cal fight is a non-business activity.

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 CHAPTER 6

So, when all was said and done, Luneau—the vic-

tim—lost. Despite a court ruling that made
Wagner liable for his negligence in his business
pursuit, she could not seek damages from his in-
surance company. She would have to try to col-
lect from Wagner.

And how would someone like Wagner pay? He

didn’t have the cash. Either he’d have to work
out some scheduled payments to Luneau or a court
could force him to liquidate his assets (the very
ones that allow him to conduct business) in order
to pay.

CONCLUSION

Bottom line: Business people can obtain business

liability insurance, and should—if they want things
covered when the business generates trouble as well
as cash.

Coughing up sixty grand in a small, one-man busi-

ness isn’t an easy thing to do. And it’s far more
expensive than buying a policy.

There are many more liability issues that face busi-

nesses—even small ones. The purpose of this chap-
ter has been to consider the risks that often apply
to start-up or home-based businesses. Clearly, the
standard business owners policy…or BOP…is the
best tool for handling these. BOPs are not terri-
bly expensive and protect you against the basic
problems that a home-based business can cause.

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WHEN YOU'VE GOT A SMALL BUSINESS TO PROTECT

184
 CHAPTER 7

CHAPTER 7
ODDBALL
LIABILITIES: SLIPS,
FALLS, DOG BITES &
FAMILY TROUBLES
Crazy things happen in everyday life. In fact, per-
sonal liability issues often turn on situations that
sound absurd...at first. In other words, oddball
liabilities aren’t really so oddball after all. As the
legal maxim goes: Things happen according to the
ordinary course of nature and ordinary habits of
life. There is no such thing as a safe haven. But
there are such things as insurance and an ability to
understand how we can protect ourselves.

We’ve seen how personal liability insurance pays

claims made against you that you are found le-
gally liable for under a homeowners policy. Per-
sonal liability also pays legal defense costs if a suit
or claim made against you is groundless, false or
fraudulent. This is important as attorneys (even
the 1-800 ones) may charge as much as $300 an
hour to defend you against a claim even if you are
not responsible for another person’s damages.

Standard insurance policies do not cover liabili-

ties created by business activities and intentional
or criminal actions. And your insurance company
may try to push a liability claim into one of these

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

categories if it has doubts. So, when a strange situ-

ation happens—your straight-A son sets the barn
on fire—be prepared to take it seriously.

SWIMMING POOL LIABILITIES

Just when you think you’ve created a safe haven

in your sprawling backyard for holidays and
work-free weekends—rose bushes, a gas grill and
tulips lining your black-bottom pool—you real-
ize that it’s not so safe. Or a lawsuit brought against
you and your family makes you realize that your
yard isn’t safe for everyone.

The main item in most backyards that causes li-

ability problems is a swimming pool. But some
swimming pool lawsuits are so poorly thought-
out that they don’t work in even the current liti-
gious atmosphere. And you—as a swimming pool
owner—have a few arguments on your side.

In Joseph J. O’Sullivan v. Norman Shaw, the Mas-

sachusetts Supreme Court considered two impor-
tant liability terms: open and obvious and duty to
warn. In this case, an adult dived head-first into
the shallow end of a swimming pool. At night.
He hit his head, broke his neck and blamed the
homeowners—who weren’t there at the time. A
typical case of someone trying to lay his own neg-
ligence onto someone else.

The details went something like this: Joseph

O’Sullivan was a friend of the Shaws’ granddaugh-
ter, and had used their pool at least once prior to
the night of the accident—during daylight hours.
He had observed various swimmers dive into the

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pool’s deep end from the divingboard and into

the shallow end by performing a flat or “racing
dive.” O’Sullivan himself had previously dived
into the deep end from the diving board two or
three times, and had made one dive into the shal-
low end. Although he did not know the exact di-
mensions of the pool, he was aware of approxi-
mately where the shallow part ended. Moreover,
he was aware of the shallow end’s approximate
depth, having observed other swimmers standing
in that part of the pool and having subsequently
stood next to these people outside the pool.

On the evening of July 16, 1996, 21-year-old

O’Sullivan was a guest at the Shaws’ home. The
Shaws were out of town, but their granddaughter
had permission to be on the premises and to use
the swimming pool. Sometime between 9 and 9:30
p.m., O’Sullivan suffered injuries to his neck and
back when he dived into the shallow end of the
pool. At the time, he was attempting, in racing
dive fashion, to clear the 10-foot expanse of the
shallow end and surface in the deep end, but he
entered the water at too steep an angle and struck
his head on the pool bottom, resulting in a frac-
ture of his cervical vertebrae.

By his own admission, O’Sullivan knew that he

could be injured if he were to hit his head on the
bottom of the pool, and his purpose in trying to
clear the shallow end was to avoid the sort of acci-
dent that occurred. His injury caused immediate
paralysis in his lower extremities and required a
two-day stay in the hospital, but the paralysis was
not permanent.

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

O’Sullivan sought to recover damages for his in-

juries. Superior Court Judge Howard J. White-
head entered summary judgment in favor of the
homeowners, and O’Sullivan appealed. Appeals
court Judge Lynch held that under open and ob-
vious rule, homeowners had no duty as matter of
law to warn guests of the danger of diving head-
first into the shallow end of a residential pool.

One of the pivotal questions was whether a defen-

dant has a duty of care to the plaintiff in the given
circumstances. And, it followed that:

• The duty is determined by reference

to existing social values and customs
and appropriate social policy.
• An owner or possessor of land owes a
duty of reasonable care to all persons
lawfully on the premises. This includes
an obligation to maintain property in
a reasonably safe condition in view of
all the circumstances, including the
likelihood of injury to others, the se-
riousness of the injury and the bur-
den of avoiding the risk.
• Landowner’s duty to protect lawful
visitors does not extend to dangers
that would be obvious to persons of
average intelligence.
• Open and obvious danger doctrine pre-
sumes a plaintiff’s exercising reason-
able care for his own safety.
• Open and obvious danger rule con-
cerns the existence of a defendant’s

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duty of care, which the plaintiff must

establish as part of his prima facie case
before any comparative analysis of
fault may be performed.
Of key importance in this case was the so-called
“open and obvious danger rule.” According to the
1995 decision Davis v. Westwood Group, argued
in a Massachusetts court, a legal duty owed by the
landowner to any visitor (claims of negligence had
to assume a breach of this duty) includes an obli-
gation to maintain property in a reasonably safe
condition; it also includes a duty to warn visitors
about any “unreasonable dangers of which the land-
owner is aware or reasonably should be aware.”

However, the same precedent held that a land-

owner is “not obliged to supply a place of maxi-
mum safety, but only one which would be safe to
a person who exercises such minimum care as the
circumstances reasonably indicate.” And the vari-
ous duties defined by Davis and other decisions
did not extend to dangers that would be obvious
to persons of average intelligence.

In fact, the court said:

Landowners are relieved of the duty to

warn of open and obvious dangers on
their premises because it is not reasonably
foreseeable that a visitor exercising (as the
law presumes) reasonable care for his own
safety would suffer injury from such bla-
tant hazards.
In other words, where a danger would be obvious
to a person of ordinary perception and judgment,

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

a landowner may reasonably assume that a visitor

has knowledge of it and, therefore, any further
warning would not necessarily reduce the likeli-
hood of harm.

The reasoning (and deciding) of this case was rather

simple. In applying the open and obvious rule,
and thus the question of duty to warn, the court
noted:

It would be obvious to a person of aver-

age intelligence that a swimming pool
must have a bottom. We have no doubt
that an ordinarily intelligent adult in our
society would be aware that the bottom
of a swimming pool is a hard surface, li-
able to cause injury if one were to strike it
with one’s head. Moreover, the design and
layout of the Shaws’ pool would have in-
dicated to a person of average intelligence
that the end into which the plaintiff dived
was not intended for this activity: the div-
ing board was affixed to the opposite end
of the pool, making it apparent that the
pool’s deepest water was located at that
end and that diving was intended to take
place there.
The court concluded that a person of average in-
telligence would clearly have recognized that div-
ing head first into shallow water posed a risk of
injury by striking the bottom of the pool. And
because the danger of diving into the shallow end
of a swimming pool—at night—is open and obvi-
ous to a person of average intelligence, the Shaws
had no duty to warn O’Sullivan. Therefore, they
could not be found liable for his injuries.

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Surprised by the outcome? Basically, open and ob-

vious can cancel a duty to warn—especially when
it comes to the risky, stupid acts of seemingly com-
petent adults. You may wonder how a court de-
cides whether an adult is competent or not; and
that, of course, is also determined on a case-by-
case basis. Just remember, you can’t always blame
someone else for your flagrant negligence.

WHOOPS, THERE GOES ANOTHER

LITIGIOUS GUEST

Slip-and-fall claims are some of the most bogus

liability issues in the American legal system. From
New York judges who sue the state as a kind of
additional pension benefit to California insurance
scammers who fabricate claims against friends and
family, slip-and-fall claims often involve absurd
circumstances.

Insurance companies know that these claims are

often shady—and they will often investigate slip-
and-fall liabilities carefully. This can make prob-
lems for you, if you are the policyholder facing a
lawsuit. The best strategic approach to take if
you’re facing a slip-and-fall claim may be to fol-
low the practice of the insurance companies: Don’t
dole out any money until you’ve fully investi-
gated the merits of the claim.

And, generally, the courts give property owners

some good tools for battling iffy claims.

The September 2000 Ohio Appeals Court deci-

sion Daisy Lee, et al. v. Joseph Grant, et al. consid-

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

ered some of the basic mechanics of a weak slip-

and-fall liability case.

On March 9, 1996, Daisy Lee attended a baby

shower at the home of Marsha Hayes. Hayes and
her husband were renting the home from its own-
ers, Joseph and Hanna Grant. Lee arrived at the
house at about 4:30 p.m.; she parked her car on
the street and walked up the driveway to the house.
As she walked up the inclined driveway, she no-
ticed several areas of snow and ice. Lee and several
other shower guests held on to each other.

Lee left the shower at approximately 7:30 p.m.

but decided that she did not want to go back down
the driveway. She noticed that the front walkway
leading to the street appeared to be clearer than
the driveway and decided to return to her car via
the front walkway. As she walked down the walk-
way, Lee’s left foot slipped causing her to fall back-
wards. Lee noticed that her heels were on a piece
of ice. As a result of the fall, Lee suffered injuries
to her left wrist, hand and arm.

On March 9, 1998—just inside the legal time lim-

its—Lee filed a lawsuit against Joseph and Hanna
Grant. Lee alleged that the Grants negligently failed
to maintain the property, failed to give notice of
a dangerous condition, and failed to properly re-
move the accumulation of ice and snow. Lee al-
leged that she fell on an unnatural accumulation
of ice and snow that was negligently allowed to
remain on the path of exit intended for use by
invitees. To make the a case a nearly perfect ex-
ample of legal abuse, Lee’s husband added a loss
of consortium claim.

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The Grants filed a motion to dismiss the case.

Citing the Ohio state court decision Brinkman v.
Ross, they argued that, because Lee fell on a natu-
ral accumulation of snow and ice, they could not
be held liable for her injuries. They also argued
that, under another state decision, landlords who
have “neither possession nor control of rented
property cannot be held liable for damages result-
ing from the condition of the property.” The
Grants attached excerpts Daisy Lee’s deposition,
in which she clarified the situation:

When she arrived at the baby shower at

around 4:30 p.m., the weather was sunny
and cold. As she walked up the driveway
toward the house, she noticed patches of
ice and snow in her path, some of which
appeared to have been partially cleaned.
As she left the house, she decided to use
the front walkway, which appeared to have
been cleaned more than the driveway. Lee
stated that she was watching where she was
going and that she was looking down at
the time she fell. She stated that she saw
some snow on the walkway but did not
see the ice. She admitted knowing that
snow can be slippery if it freezes.
Joseph Grant also testified that he never cleaned
the driveway or the front walkway of the home
at any time since the tenants had occupied the
property. He also stated that the tenants had com-
plete, unrestricted access to the property.

Daisy Lee insisted that unnatural accumulations

of ice and snow caused her to fall. She also argued
that, upon leaving the party, she chose the side-

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

walk of the dwelling where snow and ice had been

rearranged so as to prevent her from recognizing
the full danger involved. Finally, she claimed that
when she’d first entered the house for the party,
she’d told Marsha Hayes about the condition of
the driveway. Hayes said the driveway had not
been completely cleaned by the Grants.

In September 1999, the trial court granted the

Grants’ motion for summary judgment, ruling
that the Lees failed to present any case law to dis-
pute the Grants’ legal arguments and case law. The
Lees appeals. That loss of consortium must have
been weighing heavily on them.

The Lees argued the trial court had erred in grant-

ing summary judgment in favor of the Grants.
Specifically, they argued, a landlord who does not
retain the right to admit or exclude people from
leased property does not reserve the possession or
control necessary to impose liability upon him
for injuries caused by the condition of the pre-
mises. But the appeals court didn’t buy this argu-
ment. It wrote:

In this case, Grant stated that the tenants

had complete, unrestricted access to the
property and that Grant never cleaned the
driveway or the front walkway of the
home at any time since the tenants occu-
pied the property. This testimony consti-
tutes evidence that Grant did not retain
any control over the property so as to
support an imposition of liability upon
him for injuries caused by the property’s
condition.

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The appeals court also rejected the Lees’ argument

that Daisy Lee’s affidavit raised an issue of fact
about whether the snow and ice had been rear-
ranged by the landlord, Grant. Her affidavit, in
which she claimed that Hayes had told her that
Grant had failed to clean the driveway, wasn’t
enough to create an issue of fact for trial. Any-
thing Hayes said about the ice in the driveway
was hearsay—and not admissable evidence.

The appeals court concluded:

Lee did not meet her burden of establish-

ing a material issue of fact for trial. Con-
sequently, the trial court properly granted
Grant’s motion for summary judgment.
Another, similarly weak slip-and-fall claim put the
issue in an even clearer context…and plainer terms.
The 1993 Supreme Court of Ohio decision
Brinkman, et al. v. Ross, et al. included the per-
spective of the state’s trial lawyers—which reflected
their usual selfish interest; but it also included some
common sense from the state’s high court.

Richard and Nadine Ross invited Carol and

Charles Brinkman to visit them at their home as
social guests. The Brinkmans accepted the invita-
tion for the evening of February 4, 1989. Before
the Brinkmans were due to arrive, the private side-
walk situated between Rosses’ driveway and resi-
dence became hazardous to walk on due to a natu-
ral accumulation of ice and snow. The Rosses knew
of the hazardous condition, but they took no steps
to alleviate the condition or to warn the
Brinkmans of its existence.

195
ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

The Brinkmans and their daughter arrived and

parked in the driveway. While walking on the side-
walk between the driveway and house, Carol
Brinkman slipped on the snow-covered ice and
fell, sustaining serious injuries. The fall was caused
solely by the natural accumulation of ice on the
sidewalk, which ice had been concealed from view
by a natural accumulation of snow. Immediately
prior to the fall, Carol Brinkman had warned her
daughter of the slippery condition of the sidewalk.

The Brinkmans filed suit against the Rosses, alleg-

ing that the Rosses had been negligent in main-
taining “an ice-covered sidewalk concealed by a
blanket of snow leading to the entranceway of
[their] residence.” The Rosses asked the court for
a summary judgment dismissing the claims. The
trial court agreed with the Rosses, dismissing the
lawsuit because under “long-standing Ohio law
there is no liability for failure to remove natural
accumulations of ice and snow from sidewalks.”

The Brinkmans appealed. The court of appeals, in

a divided vote, reversed the judgment of the trial
court. Its majority held that, when a homeowner
knows of a hazardous condition on his premises
caused by a natural accumulation of ice and snow
and expressly invites a social guest to visit the pre-
mises at an appointed time, the homeowner owes
a duty to the guest “to take reasonable steps to
remove the hazard and to warn the guest of the
dangerous condition.”

The Rosses pressed that decision up to the state

supreme court, which agreed to consider the case.

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The state supreme court called the appeals court’s

decision a “radical extension of homeowner liabil-
ity with regard to natural accumulations of ice
and snow.” In Ohio, it is well established that an
owner of land ordinarily owes no duty to busi-
ness invitees to remove natural accumulations of
ice and snow from the private sidewalks on the
premises, or to warn the invitee of the dangers
associated with such natural accumulations of ice
and snow. In the 1968 decision Sidle v. Humphrey,
the court had ruled that:

The dangers from natural accumulations

of ice and snow are ordinarily so obvious
and apparent that an occupier of premises
may reasonably expect that a business in-
vitee on his premises will discover those
dangers and protect himself against them.
The underlying rationale in Sidle was that every-
one is assumed to appreciate the risks associated
with natural accumulations of ice and snow and,
therefore, everyone is responsible to protect him-
self or herself against the inherent risks presented
by natural accumulations of ice and snow.

Of course, there was a slight difference in the

Brinkman case. It involved the duty of a home-
owner to a social guest, rather than a business to a
customer. But the Ohio Supreme Court didn’t
think there was much of a distinction in that dif-
ference. It ruled:

[T]here is no reason why we should now

hold that a homeowner owes a duty to
his or her social guest to remove natural

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

accumulations of ice and snow from side-

walks and walkways, or that the home-
owner must warn the guest of the natural
hazard, when a similar duty has not been
imposed upon owners or occupiers of
land with respect to business invitees.
That said, the court acknowledged that the case
involved a very narrow issue of a homeowner’s
liability to a social guest with respect to injuries
occasioned by a slip and fall caused by a natural
accumulation of ice and snow. If the claims had
involved other issues, the court admitted that it
might have found the Rosses liable.

The Ohio Academy of Trial Lawyers had filed a

friend-of-the-court brief asking the state’s high
court to abolish all distinctions in Ohio regarding
the duties owed by landowners to “social guests,”
as opposed to those classified as “business invitees.”
The lawyers expected that this would allow more
lawsuits against businesses. The state supreme
court’s decision had the opposite effect. It ruled
that there didn’t need to be a decision on the dif-
ference between the two sorts of visitor, since nei-
ther could sue, anyway:

…[W]e determine there is no distinction

between the duties of a homeowner to a
social guest on the one hand and to a busi-
ness invitee on the other hand concerning
natural accumulations of ice and snow on
sidewalks or walkways on the home-
owner’s premises. Whatever the classifi-
cation of the entrant upon the premises,
there exists no duty for the homeowner

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to remove or make less hazardous natural

accumulations of ice and snow.
Finally, the Ohio Supreme Court summed up the
problem with the Brinkmans’ claims—and made
a statement that can apply to most slip-and-fall
claims:

Living in Ohio during the winter has its

inherent dangers. …It is unfortunate that
Carol Brinkman slipped and fell on [the
Rosses] sidewalk. However...we are un-
willing to extend homeowner liability to
cover slip-and-fall occurrences caused en-
tirely by natural accumulations of ice and
snow. To hold otherwise would subject
Ohio homeowners to the perpetual threat
of (seasonal) civil liability any time a visi-
tor sets foot on the premises, whether the
visitor is a friend, a door-to-door salesman
or politician, or the local welcome wagon.
That sums up slip-and-fall claims. Most states as-
sume that people should be smart enough to deal
with obvious risks—and that homeowners can’t
anticipate every possible thing that can go wrong
on their property. Legitimate slip-and-fall claims
usually need to find some sort of negligence or
greater responsibility on the part of visitors.

And most insurance companies treat shaky slip-

and-fall claims with the skepticism they deserve.
If you’re of “average intelligence” and you see an
“open and obvious” danger, be wary—don’t be
suit-happy. Dive into deep ends. And go for the
galoshes when Mother Nature makes life a little
more trying.

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

FIDO BITES THE NEIGHBOR’S KID

It might sound like a cliché, but dog bites are a

major source of personal liability claims. If you
have pets, you are responsible for any harm they
do to people. According to the Centers for Dis-
ease Control and Prevention, there are approxi-
mately 4.7 million dog bites per year. These bites
cost over $1 billion with the property/casualty
insurance industry paying roughly $250 million
of that in homeowners liability.

You may be thinking, “My dog isn’t vicious. I

keep him safely confined. He loves children. Noth-
ing could ever happen.” Or, you may think you’re
safe because you put up a precautionary sign that
reads “Beware of Dog” in the front of your house.
But trouble can still come.

You’re running late some morning and don’t quite

get the gate latch closed all the way. Your dog gets
out, wanders the neighborhood and finds some
kids playing street hockey. The stick and hockey
puck look like great fun so he decides to join them.

High in prey drive from watching all the activity,

Fido runs toward the kids, barking like crazy. A
frightened child runs, waving her hockey stick in
the air. Fido goes for the stick but misses it and
accidentally bites the child on the hand.

The little girl’s mother comes outside to see a

screaming eight-year-old cradling a bloody hand
and your dog crouching defensively nearby. The
little girl is alternately crying about her hand and

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insisting the she didn’t do anything to provoke

the vicious attack. The mother, not a calm sort,
calls an ambulance and the police. The little girl’s
father has been out of work for a while—so, when
he shows up in the ER, he’s worried about his
daughter and how he’s going to pay the hospital
bills. And how he’s going to pay the mortgage
and his next car payment. He figures he’d better
call a lawyer.

Your whole life has just been turned upside down—

and you’re sitting through a boring staff meeting
thinking about all the e-mails you have to return
on the Schnitzelhausen project.

Dog owner liability is determined by the state law

where the bite occurred. In most states, you, as
the dog owner, are financially responsible for dam-
ages caused by your dog. Many states impose strict
liability if your dog bites someone if it is loose or
if the person bitten was in a public place or per-
mitted on your property. For example: Wash-
ington state law says:

The owner of any dog which shall bite

any person while such person is in or on a
public place or lawfully in or on a private
place including the property of the owner
of such dog, shall be liable for such dam-
ages as may be suffered by the person bit-
ten, regardless of the former viciousness
of such dog or the owner’s knowledge of
such viciousness.
The three most common bases of dog-bite law-
suits are: a specific dog bite statute, common law

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

rule and ordinary negligence. Each affect liability:

1) Dog Bite Statutes. Laws in numerous

states impose “strict liability”; that
means you, the owner, are held re-
sponsible regardless of whether you
were at fault. The effect of these stat-
utes, however, may be mitigated by
the conduct of the victim—i.e., if they
were trespassing, or teasing, torment-
ing or provoking the animal.
2) Common Law Rule. In addition to
statutes, the courts have developed a
system of rules called the “common
law.” The common law imposes liabil-
ity on you if you knew the dog was
inclined to be dangerous and knew it
had a tendency to cause the type of
injury that was, in fact, suffered.
3 ) Negligence. Under the negligence
theory, the victim must prove that
your careless behavior in handling or
controling your dog directly caused
the injury. Also, that the incident oc-
curred when the victim used reason-
able care to prevent the injury. Un-
like strict liability, which does not con-
sider your conduct as it does in negli-
gence, strict liability requires proof of
your knowledge of your pooch’s dan-
gerous propensity.
In most personal injury lawsuits, the victim may
be compensated for medical bills and, if relevant,
for lost wages as well as damage to property. If
your conduct was outrageous or your dog had

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injured someone previously, you may be liable

for punitive damages. Damages for pain and suf-
fering, although more difficult to assess, may also
be recovered. However, the extent and value of
the damages must be proven by the bite victim.

As a dog owner, you may have some defenses,

which also vary from state to state. You may suc-
cessfully defend such a lawsuit if you can prove
that: the bite victim was trespassing; the victim’s
own negligence contributed to his injures; the vic-
tim provoked the dog into attacking; or the vic-
tim knew there was a risk of being injured by the
dog, had an opportunity to avoid the injury and
did not do so.

WHO COVERS A DOG IN A TRUCK?

Let’s take a closer look at two cases and see how

typical dog bark liability scenarios played out in
real courts. This first one not only deals with a
biting dog—but it also hashes out which of two
different insurance policies would cover the dam-
ages.

Specifically, in the 1997 decision Richard D. Diehl

v. Cumberland Mutual Fire Insurance Co., the
Superior Court of New Jersey had to decide
whether a dog-bite injury in a car would be cov-
ered by an auto policy or a homeowners policy.

On December 26, 1989, Richard Diehl was driv-

ing away from his home when he saw his brother
George approaching in a pickup truck. Richard
pulled over and got out of his car. As he walked
around the rear of the pickup truck, he was bitten

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

in the face by George’s dog, which was in the open

cargo area.

The truck was owned by Theresa Brown and in-

sured by the New Jersey Automobile Full Insur-
ance Underwriting Association through its servic-
ing carrier, CSC Insurance Services (CSC). At the
time of the incident, George lived with his mother
who had homeowners insurance with Cumberland
Mutual Fire Insurance Company.

A few weeks after the bite, Richard’s attorney gave

Cumberland—the homeowners insurance com-
pany—the notice of a claim. Following an investi-
gation, Cumberland denied coverage.

Richard then filed a lawsuit against George alleg-

ing negligence as a result of the dog bite. And, on
August 1, 1991, unrelated to Richard’s complaint,
Cumberland gave CSC—the auto insurance com-
pany—notice of the denied claim, alleging that
CSC’s insured’s vehicle was used in the incident.
CSC wrote back to Cumberland claiming that it
would investigate to “determine coverage.”

George was served with Richard’s lawsuit on Au-

gust 15, 1991. Richard’s lawyers sent a copy of the
complaint to Cumberland. More than six months
later, in April 1992, Cumberland wrote to
George’s mother and informed her that it was
denying coverage.

In August 1992, a year after the lawsuit started,

the court entered judgment in favor of Richard
and against George in the total amount of
$55,085.72. In a normal legal move, George and

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 CHAPTER 7

his mother assigned to Richard all of their claims

against Cumberland for refusal to defend and in-
demnify them for the dog bite complaint and judg-
ment. Richard then filed a lawsuit against
Cumberland for damages and for the refusal to
defend. Cumberland argued that the claim did not
arise from any covered loss.

A few months later, Richard’s lawyers wrote to

CSC, describing the accident and enclosing a copy
of the complaint. CSC did not reply. So, Richard’s
lawyers amended the lawsuit to add CSC as a de-
fendant. CSC made various defenses, including
lack of coverage.

Complex legal maneuvering followed. CSC and

Cumberland each filed a motion for summary
judgment based on lack of insurance coverage.
After argument, the judge granted CSC’s motion
and dismissed all claims against it. The judge con-
cluded that, because an injury caused by a dog sit-
ting in the back of a vehicle did not arise out of a
“use of the automobile,” it did not trigger cover-
age under an automobile policy. Thus,
Cumberland’s homeowners policy had to provide
coverage.

Almost four years after Richard’s lawsuit was first

filed, the trial court entered judgment against
Cumberland in the amount of $55,275.16, pre-
judgment interest in the amount of $5,861.79 and
legal fees and costs (for Richard’s lawyers) of
$2,590.

Cumberland appealed, insisting that Richard’s in-

juries were excluded from coverage under the

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

homeowners policy because they were covered

under the automobile policy. (The homeowners
policy excluded coverage for bodily injury aris-
ing out of the “maintenance, operation, owner-
ship, or use…of any…motor vehicle…owned or
operated by…any insured.”)

The appeals court cited some general principles in

earlier case law. According to Westchester Fire Ins.
Co. v. Continental Ins. Co., there had to be a “sub-
stantial nexus between the injury and the use of
the vehicle in order for the obligation to provide
coverage to arise.” Westchester dealt with the li-
ability issues arising from an injury to a person
who was struck by a stick thrown from an
insured’s car.

Under the substantial nexus test, auto coverage

applies if the negligent act, which caused the in-
jury (although not foreseen or expected), was a
natural and reasonable consequence of the use of
the automobile. In other words, a clear connec-
tion must exist between the legitimate use of a car
and an incident arising out of that legitimate use.

Another case, Lindstrom v. Hanover Ins. Co., dealt

with a similar issue. In Lindstrom, the New Jersey
Supreme Court concluded that the drive-by shoot-
ing of a person that caused gunshot injuries was
an accident within the contemplation of the in-
surance coverage. The high court explained:

In our view the automobile did more than

provide a setting or an enhanced oppor-
tunity for the assault. In addition to al-
lowing the assailant to be at the place of

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 CHAPTER 7

attack, it furnished the assailant with what

he must have assumed would be both ano-
nymity and a means of escape. The assail-
ant would not likely have committed such
an act of apparently random violence
without the use of a car.
Back to the dog in the pickup. The Diehl appeals
court acknowledged that other states have reached
different conclusions in determining whether, for
the purpose of extending automobile liability in-
surance, a dog bite can arise out of the use of a
vehicle. However, consistent with Lindstrom, it
held that automobile liability insurance should
cover the injury caused by a dog bite to the face
occurring while the dog was in the open cargo
area of a pickup truck because it arose out of the
use of the vehicle to transport the dog.

Moreover, the Diehl court contended:

…[T]he bite incident was facilitated by the

height and open design of the deck. In our
view the act was a natural and foreseeable
consequence of the use of the vehicle, and
there was a substantial nexus between the
dog bite and the use of the vehicle at the
time the dog bit the plaintiff.
Looking for a bottom line to this case? Two con-
clusions: 1) the dog owner was indisputably liable
for his pet’s behavior, and 2) his auto policy had
to cover for the damages. We won’t guess what
happened between the two brothers on a personal
level.

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W H O ’ S D O G I S I T, A N Y WAY ?

Another important insurance issue: Who is an in-

sured? Though it might seem like an easy distinc-
tion—that is, who is covered as an insured under a
specific policy, such as homeowners—surprisingly,
it is not always so clear.

Consider the 1991 Louisiana Appeals Court case

Laura Cain, et al. v. Richard A. Parent, et al., a
suit brought on behalf of a minor child for a dog
bite injury. The case also involved the dog owner’s
filing a third-party petition, asking the court to
declare her insured under her mother’s
homeowners policy. This brought the court to
focus on the definition of resident, another im-
portant insurance term.

In August 1987, Laura Cain was bitten by an

American Staffordshire Terrier owned by Tianne
Siener. When the bite occurred, the dog was be-
ing walked by Siener’s brother, Michael Siener.
The whole thing took place in Lafayette, Louisi-
ana near a townhouse occupied by Tianne and
owned by her mother, Eileen Parent.

Following the incident, Al Cain and Carmen Cain,

Laura’s parents, filed suit against Tianne, Michael,
their mother Eileen, her husband and Allstate In-
surance Company—their homeowners liability
insurers. Subsequently, Tianne filed a third-party
petition for declaratory judgment, seeking a dec-
laration that she was an insured person under her
mother’s Allstate homeowners policy and that
Allstate therefore had a duty to defend.

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A trial court found that Tianne and her brother

were insured persons under the Allstate policy is-
sued to their mother. Allstate appealed. The issue
on appeal: For the sake of this dog bite lawsuit,
were Tianne Siener and Eileen Parent mother and
daughter…or landlord and tenant?

According to Allstate, Eileen Parent’s policy did

not cover the accident because the dog was not
owned by her, the only named insured on the
policy. Further, Allstate contended that Tianne
was not an insured under the policy since she was
not a resident of the named insured’s household
at the time of the occurrence.

According to Section II of the Family Liability

and Guest Medical Protection policy issued by
Allstate to Eileen Parent:

Allstate will pay all sums arising from an

accidental loss which an insured person be-
comes legally obligated to pay as damages
because of bodily injury or property dam-
age covered by this part of the policy.
In addition, the policy clearly defined the insureds:

Insured person—means you and, if a resi-

dent of your household:
a) any relative; and
b) any dependent person in your care.
Allstate’s argument: If Tianne were a member of
her mother’s household at the time of the dog
bite, the policy provided liability coverage because
she was Parent’s daughter. However, if Tianne

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

were not a member of her mother’s household,

the policy did not provide coverage. And she
wasn’t a member of her mother’s household.

The court considered existing case law that sum-

marized what it means to be a resident of the same
household. Unfortunately, however, these cases
didn’t offer much concrete help.

When the U.S. Supreme Court considered the

question, it ruled that, when construing “resident
of the same household” in the context of a legally
separated wife, for example, the determination did
not depend solely on whether a couple was living
under the same roof. The high court placed em-
phasis on membership in a group rather than at-
tachment to a building and noted it was a matter
of intention and choice rather than location.

From this framework, the appeals court decided

that Eileen Parent and her daughter, Tianne, main-
tained separate households. Each represented an
independent family unit. Tianne was not a mem-
ber of her mother’s household and thus, she wasn’t
an insured under Allstate’s policy.

Tianne also argued that if the appeals court were

to reverse the trial court’s decision, the Allstate
policy would cover no one against any loss. The
court disagreed, specifically because Tianne was
not the policyholder. “If there should be any merit
to this assertion,” said the court, “the matter is
between [Tianne’s] mother and Allstate.”

In some ways, this was a loss for Laura Cain—the

woman who’d been bitten by Tianne’s dog. With-

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out the insurance company’s resources, she would

have to get her money from Tianne—who didn’t
have very deep pockets. This proves the old legal
maxim that winning a judgment is easy, collect-
ing one is hard.

In other words, it doesn’t always matter who’s at

fault as much as it matters how much the at-fault
person can afford to pay.

PA R E N TA L LIABILITY

The Cain decision raises the important issue of

how liability issues affect family members. If your
brother or uncle or third-cousin does something
awful, can you be held liable?

In the real world, this question usually focuses on

another family tie: If your child does something
awful, can you be held liable? In Cain, the answer
was no. But, in that case, the daughter was a legal
adult living on her own. If your child is still a
child, liability issues usually go differently.

In civil cases, the concept of vicarious liability

holds that parents must pay for damages caused
by their minor children. Often, homeowners in-
surance covers at least some of the damage under
a standard liability clause, with varying deductibles.
Beyond this, a good umbrella liability policy can
cover parents and their kids, whether they are liv-
ing at home or are away at school.

All states now hold parents responsible for at least

some of the damage their children cause. This is

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in large part as a result of some high-profile cases—

like the Columbine, Colorado, high school
shootings—and an overall increase in violent acts
by juveniles.

A side note: Despite the parental liability claims

following the Columbine tragedy, the parents of
gunman Dylan Klebold filed court papers blam-
ing authorities for failing to prevent their teen’s
murderous rampage. The Klebolds threatened to
sue the Jefferson County sheriff’s department and
school district. In a bizarre twist, the Klebolds
argued that if investigators had told them about
their son’s Internet rantings and his friend’s vio-
lent tendencies, they would have kept the two
boys apart and prevented the mass murder.

Sound ludicrous? Well, it’s merely a product of

the human condition. As evidenced by other cases,
when something bad happens, people jump to
hold someone else liable—before taking a good
look at themselves and acknowledging their own
negligence. This is when the courts step in.

Parental liability laws are cropping up in every

state. These laws generally require parents to pay
for damages done by their children—whether it’s
damage to property or a person. However, the
specifics vary by state; some states hold parents
liable for property damage and bodily injury
caused by a child—in others, parents are only li-
able for the criminal acts of their children. Typi-
cally, parents are sued in civil court. However, in
some states (for example Oregon), parents can be
charged criminally with a class A misdemeanor
for their children’s actions.

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A caveat: intentional or criminal acts are, as usual,

excluded from insurance coverage. So, if your kid
gets involved in some kind of mischief—even of
the prankish sort—you are going to have to settle
legal claims out of your grocery money (Or, as in
the Klebold case, you can try to blame other au-
thorities in your child’s life. Good luck.)

Parental negligence is a more serious charge. In

these instances, a court decides a parent (or even a
teacher or counselor) should have known of the
damage a child was about to inflict. Juries have
found parents guilty of civil negligence and or-
dered them to pay up to $500,000 because of bad,
destructive things their children have done.

As in the Cain case, it’s often difficult to collect

civil damages in cases seeking to prove parental
negligence. Though state law may allow the claims,
juries are often split on what constitutes appro-
priate behavior on the part of the parents. And,
even when a plaintiff wins in court, it can be very
difficult to collect from the at-fault family, who
is often a struggling middle-class type. Lawyers
say these cases are used to make a point, not
money.

In March 2000, the Alaska Supreme Court con-

sidered the case of an insurance company’s refusal
to defend the parents of a grown man who physi-
cally and sexually assaulted a child. Note: a grown
man. This was more than a simple case of a son’s
misbehavior; this case called into question paren-
tal liability because the incident occurred in the
parents’ home.

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

Harold Lancaster, the grown man in question,

lived with his parents, Eleanor and Dolan
Lancaster, and his daughter. On the night of No-
vember 11, 1995, his daughter invited an 11-year-
old friend to spend the night. The elder Lancasters
were away that evening, a fact unbeknownst to
the friend’s parents. Harold sexually and physi-
cally assaulted his daughter’s friend. Following the
incident, the victim’s parents brought a suit against
the Lancasters for the criminal wrongdoings of
their son. They alleged that the elder Lancasters
were negligent in failing to disclose Harold’s pres-
ence or his alleged propensity to assault children
and in failing to watch over their daughter.

The Lancasters’ insurance company, Allstate, in-

voked exclusions for intentional and criminal acts.
Again, we see here an insurer’s refusal to cover
damages based on specific exclusions contained in
the policy. However, this case got tricky.

The parents of the assaulted child settled with the

Lancasters in exchange for an assignment of rights
that allowed them to sue Allstate. When an Alaska
district court asked the state supreme court to an-
swer three questions concerning potential tort
duties of adjustors and the insurer’s coverage ob-
ligations under state law, the Supreme Court of
Alaska held that:

1) Allstate’s salaried adjustor owed the

policyholders a duty of care, enforce-
able in a tort action against the adjus-
tor personally, to exercise reasonable
care in connection with any investiga-
tion of the case;

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 CHAPTER 7

2) bodily injuries sustained by the child

arose from an “accident”;
3) the policy’s criminal and intentional
act exclusions did not exclude cover-
age; and
4) the policy’s joint obligations clause was
irrelevant to either intentional or
criminal acts exclusions.
To make a long story short, the court determined
that the incident did constitute an “accident” for
purposes of the homeowners policy. Thus, Allstate
had to cover for the damages suffered by the vic-
tim while visiting in the Lancasters’ home. Why?

According to the family liability coverage part of

Allstate’s policy, “Subject to the terms, limitations
and conditions of this policy, Allstate will pay dam-
ages which an insured person becomes legally ob-
ligated to pay because of bodily injury or prop-
erty damage arising from an accident and cov-
ered by this part of the policy.”

The policy did not, however, define “accident.”

Nor did it specify whether a court should apply
the term subjectively—from the perspective of
either the policyholder claiming coverage or the
victim—or objectively. Without specific policy
language, the court’s practice of enforcing the
policyholder’s reasonable expectations required it
to determine whether the loss was the result of an
accident from the perspective of the policyhold-
ers claiming coverage.

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

The court ruled:

From the standpoint of the elder

Lancasters, it was not unreasonable that
their interpretation of the policy focused
on the acts the victim attributed to them,
as distinct from the acts she attributed to
Harold. They were sued for their con-
duct, not Harold’s. The victim did not
attempt to make them vicariously liable
for Harold’s acts. Rather, her complaint
alleged that the elder Lancasters’ negli-
gence legally caused injury to her.
With respect to the victim, the elder Lancasters’
alleged conduct was allegedly negligent, and there-
fore neither intentional nor criminal. It thus trig-
gered neither exclusion. So, the Lancasters’
homeowners policy had to pay the victim.

Sometimes a criminal act is an insurer’s way out

of covering an insured, especially when that act is
intentional; however, as seen in this case, that ex-
clusion does not always hold.

LIABILITY AND MINOR CHILDREN

If you think about parent/child cases at all, you’re

probably looking for a more typical parental li-
ability case involving a genuine, minor child and
his liable or negligent parents. Here’s one for the
ages: A 14-year-old boy drives the family lawn
mower on a public road to the church and col-
lides with and injures another boy on a bicycle.

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The court hearing the resulting lawsuit offered a

list of the five points1 that explain when parents
may be held liable for the torts of their children:

1) where the relationship of master and

servant exists and the child acts within
the scope of his authority accorded by
the parent;
2) where a parent is negligent in entrust-
ing to the child an instrument which,
because of its nature and purpose, is
so dangerous as to constitute, in the
child’s hands, an unreasonable risk;
3) where a parent is negligent in entrust-
ing to a child an instrumentality which,
though not necessarily a dangerous
thing of itself, is likely to be put to a
dangerous use because of the known
propensities of the child;
4) where the parent’s negligence consists
entirely of his failure to reasonably
restrain the child from vicious con-
duct imperiling others, when the par-
ent has knowledge of the child’s pro-
pensity toward such conduct; and
5) where the parent participates in the
child’s act by consenting to it or by
ratifying it and accepting the fruits.
The facts of this case—called Stronger v. Riggs—
were simple, and so was the outcome. On May
14, 1998, Daniel Riggs left his home on a riding
lawn mower en route to the local church where

1
Although these points are based on Missouri law, you’ll find
similar definitions in most jurisdictions.

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

his father was the pastor. He was to mow the

church lawn and, at the request of his mother,
Daniel drove on a public road.

Although his mother followed him in her car for

part of the two-mile trip, she eventually went on
ahead. During this time, one of three boys riding
his bike began taunting Daniel. This led Daniel to
go as fast as possible on the mower, which resulted
in a collision. The taunting boy sustained numer-
ous injuries—bruises, abrasions and emotional dis-
tress. Emotional distress? The boy’s parents let
their lawyer craft the case.

Among the arguments made at trial, and in refer-

ence to the five rules of liability, the court stated:

[A]lthough a motor vehicle is not a dan-

gerous instrumentality per se, it becomes
a dangerous instrument when it is en-
trusted to an immature, incompetent or
reckless minor.
Though Daniel Riggs was by all accounts a ma-
ture, good-natured boy with good intentions, the
court noted that the law held that any child under
16 does not possess the requisite care and judg-
ment to operate a motor vehicle on the public
highways. Thus, the mother breached her duty to
protect the public when she permitted her child
to operate the vehicle on the public roads.

It should be stated, however, that the court of

appeals made these statements and delineations.
Originally, the circuit court had granted summary
judgment for the Riggs. When the parents of the
injured bully appealed, the appeals court reversed.

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 CHAPTER 7

The pastor and his wife could be held liable for

the bicycle/lawnmower wreck. If they didn’t have
a homeowners policy or a personal liability um-
brella, they’d have to write the check themselves.
(As it turned out, the case eventually died in a
procedural bog after it was sent back for trial.)

Clearly, parents can be held liable for their

children’s wrongdoings. However, in many juris-
dictions, parents are not liable in damages for the
torts of their minor children merely because of
their status as parents. An exception to this rule
exists where the parents have knowledge about
their child’s dangerous propensities but still fail
to act reasonably to restrain the child from injur-
ing others.

A K I D W H O ’ S S I M P LY B A D

Perhaps the hardest part about parental liability is

that a situation may arise for which any law can-
not compensate. As we’ve seen, many laws that
govern a parent’s liability have caps for damages.
Is there any way around such a cap if your son is
killed by another boy for no apparent reason?

This is exactly what happened in the sad case of

Lavin v. Jordon. On June 29, 1995, Troy Lavin
delivered pizza to the Nashville home of Ross and
Susan Jordan. Shortly after his arrival at the home,
Sean Jordan, the Jordan’s son, killed Troy by
shooting him multiple times with a .22 caliber
rifle. Sean Jordan, who later pled guilty to sec-
ond-degree murder, didn’t even know Troy Lavin.

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ODDBALL LIABILITIES: SLIPS, FALLS, DOG BITES...

Lavin’s parents filed a lawsuit alleging that the

Jordans failed to control and police their son de-
spite their knowledge of his weapons possession.
According to the record, Sean Jordan had a “his-
tory of assaultive, violent, anti-social criminal be-
havior.” This was evidenced by his delinquent sta-
tus, having assaulted at least one other minor and
raped a schoolmate. The Lavins sought compen-
satory and punitive damages in the amount of $2
million.

The trial court held that, pursuant to the parental

liability statute, damages were capped at $10,000.
In an attempt to void the cap, the Lavins appealed.
The appeals court ruled that the cap didn’t apply,
stating: “the common-law cause of action for the
same tort [is] unaffected by the statute and [per-
mits] the parents to seek full recovery.”

The Jordans, facing a possible million-dollar judg-

ment and bankruptcy, appealed that ruling. The
state supreme reversed the reverse, holding that
the statutory cap on damages did apply.

Despite the obvious great loss of life suffered by

the Lavins, they could not seek full compensation
as they would for an adult murderer. (Though at
least one judge dissented—and would have waived
the cap.)

CONCLUSION

There isn’t much you can do once an oddball situ-

ation turns ugly. The best way to prevent this kind
of trouble is to be careful and pay attention to

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 CHAPTER 7

detail. Don’t ask a teenager to watch your house

or, at least, warn him not to use the pool.

Remember, liability coverages in insurance poli-

cies exclude protection in cases of permitted use.
If you don’t give permission, the insurance com-
pany will have a harder time denying a claim.

And what about kids who are simply bad? A

tougher issue. Try not to kid yourself that a
troublemaker isn’t one; get him the best care you
can...and keep him away from situations that will
fuel his destructive impulses.

Liability insurance does extend to family mem-

bers (so it may be an even better idea if you have
a trouble-prone kid). Unfortunately, it doesn’t do
anything to help the family member himself.

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 CHAPTER 8

CHAPTER 8
DEFAMATION,
EMOTIONAL DISTRESS
& INTELLECTUAL
PROPERTY CLAIMS
The personal injury liability portion of a standard
homeowners or umbrella liability policy covers
your liability for personal injury. Personal injury
includes bodily injury, sickness, disease, disabil-
ity, shock, mental anguish and mental injury. The
definition also extends to include libel, slander,
defamation of character and invasion of privacy.

If you commit any of the actions specified in this

section, it could lead to a personal injury claim
(notice that this term does not have the same
meaning as bodily injury).

Defamation, sometimes called “defamation of char-

acter,” is spoken or written words that falsely and
negatively reflect on a living person’s reputation.
Defamation is the holding up of another to ridi-
cule, and includes libel and slander.

Slander is a spoken defamation.

Libel is a written defamation. (Generally, radio

and television broadcasts that are defamatory are
considered to be libel, rather than slander.)

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DEFAMATION, EMOTIONAL DISTRESS...

For personal injury coverage, the term occurrence

means an offense or series of related offenses. Li-
beling the same tenant in front of others on vari-
ous occasions would be treated as a single occur-
rence if a personal injury claim were made. Since
the offenses were related, the limit of insurance
would not apply separately to each offense.

Invasion of privacy is the publicizing of another’s

private affairs for which there is no legitimate
public purpose, or the invasion into another’s pri-
vate activities which causes shame or humiliation
to that person.

Defamation is often included within the scope of

umbrella coverage. Claims like sexual harassment
are probably beyond the scope of coverage.

Claims with a mixture of covered and noncovered

claims are, in many states, considered sufficient to
trigger a company’s duty to defend. The company
may reserve its right to deny coverage. In some
states, the company may even reserve its rights to
recover the costs expended to defend a claim that
is not covered.

But subject to these reservations, the insurance

company generally must provide a defense.

Courts impose severe penalties on companies that

are found to have breached their defense obliga-
tion. Policyholders may be awarded punitive dam-
ages. Companies may be held liable for judgments
above limits. Defense determinations must be
made carefully and under state laws, based upon
the allegations of the complaint.

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 CHAPTER 8

In order to prove defamation, a person has to

prove that what was said or written about him
was false. If the information is true, or if he con-
sented to publication of the material, he does not
have a case. However, he may bring a defamatory
action if the comments are so reprehensible and
false that they affect his reputation in the commu-
nity or cast aspersions on him.

There are three main defenses to a libel claim (other

than asserting that it never happened or that you
were never involved):

1) Claiming, and proving, that the state-

ment was privileged (and thus not
public). Only certain professions (doc-
tors, lawyers, psychologists), or indi-
viduals (chiefly your spouse) can
maintain that privilege; and if any non-
privileged third party was part of the
communication, the privilege is bro-
ken. (Employees of a professional are
only partially covered, to the extent
that you need to use them to contact
the professional. Don’t expect to tell
your deepest, darkest secret to your
attorney’s secretary and maintain that
privilege.)
2) Claiming, and proving, that the state-
ment is true, for “truth is an absolute
defense.”
3) Claiming, and proving, that the state-
ment was an opinion, not an assertion
of a fact. Since this last defense is only
as good as the weakest or worst, but

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DEFAMATION, EMOTIONAL DISTRESS...

still reasonable, misinterpretation, it’s

not one you want to rely on. There’s
a world of difference between saying
“I think he’s a crook,” and “he’s a crook.”
Especially if a third party might inad-
vertently leave out the first two words
when passing your message on.
Establishing the truth is the single most effective
defense that can be offered. If the remark is truth-
ful and it hurts, is embarrassing or subjects him
to ridicule, there is little he can do. Unless the
remark is false, he has no recourse.

If you have been defamed, you may seek both

actual damages, to recover the harm that you have
suffered, and punitive damages to punish the per-
son who made the remark (and serve as an ex-
ample to deter others).

If the defamation improperly accused you of a

crime or reflected on your profession, the court
or jury assesses the damages. For other types of
defamation you must prove some actual damage
to be able to recover.

If the statement is made about a public official—

for example, a police officer, mayor, school su-
perintendent—or a public figure who is a gener-
ally prominent person or a person who is actively
involved in a public controversy, then it must be
proven that the statement was made with knowl-
edge that it was false or with reckless disregard for
whether the statement was true or false. In other
words, the fact that the statement was false is not
enough to recover for defamation. On the other
hand, if the statement was made about a private

226
 CHAPTER 8

person, then it must be proven that the false state-

ment was made without reasonable care as to
whether the statement was true or false.

Whether a statement is deemed an expression of

opinion as opposed to a statement of fact is not
always an easy question to answer. For example,
the mere fact that a statement is found in an edito-
rial is not enough to qualify for the opinion privi-
lege if the particular statement contained in the
editorial is factual in nature.

There is also a privilege known as neutral report-

ing. For example, if a newspaper reports on news-
worthy statements made about someone, the
newspaper is generally protected if it makes a dis-
interested report of those statements. In some
cases, the fact that the statements were made is
newsworthy and the newspaper will not be held
responsible for the truth of what is actually said.

There are other privileges as well. For example,

where a person, such as a former employer, has a
duty to make reports to other people and makes a
report in good faith without any malicious intent,
that report is protected even though it may not
be totally accurate.

Another example of a privilege is a report on a

judicial proceeding. News organizations and oth-
ers reporting on activities that take place in a court-
room are protected from defamation actions if
they have accurately reported what took place.

If you think you have been defamed by a newspa-

per, magazine, radio or television station, you

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DEFAMATION, EMOTIONAL DISTRESS...

must make a demand for retraction before a law-

suit can be filed. If the newspaper, magazine, etc.
publishes a retraction, you can still file suit, but
you can only recover your actual damages. No
punitive damages can be assessed.

Libel and slander cases are often very complicated.

Before you decide to take any action in a libel or
slander case, you should consult with an attorney.
An attorney can help you decide whether you have
a case and advise you regarding the time and ex-
pense involved in bringing this type of action.

A CLASSIC CASE

The 1999 10th Circuit Appeals Court decision Dome

Corp., et al. v. Compton Kennard dealt with a
classic slander and libel case—and one man’s ef-
forts to get his insurance companies to cover the
cost of his defense against the claims.

The lawsuit was the product of an oil and gas deal

gone bad. In 1993, Gary Hermann, the owner and
operator of a Florida hardware store, purchased a
working interest in several oil and gas wells oper-
ated by Dome Corporation and Neodyne Drill-
ing. In 1995, Hermann became unhappy with
Dome’s handling of the venture. So, he contacted
a number of other investors and discussed investi-
gating Dome management’s operation of the wells.
Hermann then hired Compton Kennard to evalu-
ate management’s operation of the venture.

Kennard investigated Dome’s operations and pre-

pared a written report detailing deficiencies he
perceived in the manner of operation. The report

228
 CHAPTER 8

was mailed to other investors participating in the

venture. As a result, Hermann and the other in-
vestors filed suit seeking to oust Dome as opera-
tors of the wells. Dome management defaulted
and the investors replaced them. Dome manage-
ment then filed a lawsuit in federal district court
contending that the report and other statements
made by Hermann constituted libel and slander.

Hermann sought coverage under four separate in-

surance policies: 1) a homeowners policy issued
by Auto-Owners Insurance Company; 2) a per-
sonal liability umbrella policy issued by The Cin-
cinnati Insurance Company; 3) a businessowners
policy issued by Cincinnati; and 4) a commercial
umbrella policy issued by Cincinnati. The insur-
ance companies all denied coverage.

Cincinnati filed a third-party complaint seeking a

declaration that it had no duty to defend or in-
demnify Hermann. Cincinnati further sought a
determination of whether the homeowners policy
provided by Auto-Owners provided coverage.
Consequently, Auto-Owners entered the fray seek-
ing a determination of coverage.

The trial court held that, under the four policies,

the companies had no duty to defend and indem-
nify Hermann. Hermann appealed.

The issue before the appeals court was whether

the alleged injuries resulting from Hermann’s par-
ticipation in the oil and gas venture unambigu-
ously fell within the business exclusion to the
Auto-Owners policy.

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DEFAMATION, EMOTIONAL DISTRESS...

For various reasons, the court determined that

Michigan law governed the interpretation of the
Auto-Owners policy. In it, the policy excluded
coverage for injuries occurring “in connection with
any business, occupation, trade or profession.” The
policy defined “business” as any “full or part time
trade, profession or occupation.” Auto-Owners
reasonably argued that Hermann’s participation
in the oil and gas venture fell within this language
because the venture was continuous and profit mo-
tivated. Hermann, on the other hand, argued that
by defining “business” as a “trade, profession or
occupation,” Auto-Owners limited the exclusion
to injuries occurring in connection with the in-
sured person’s principal or primary business.

The record demonstrated that Hermann invested

in oil and gas ventures only as a sideline and that
his principal business was hardware sales. Thus,
the court found his interpretation “reasonable.”

Auto-Owners argued that a finding of coverage

would effectively read the word “any” out of and
insert the phrase “the insured’s principal” into the
policy language. The court found this a thin dis-
tinction:

If true, such a result is the product of the

company’s own creation. Instead of using
a “business pursuits” exclusion, which has
been broadly construed under Michigan
law to exclude a wide array of profit mo-
tivated activities, Auto-Owners chose to
use narrower language excluding injuries
in connection with any “business, occupa-
tion, trade or profession.” The company

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further defined business as a “full or part

time trade, profession or occupation.”
After choosing to narrowly define “busi-
ness,” Auto-Owners may not now com-
plain about the ambiguity which arises
when its narrow definition is read in con-
junction with the expansive term “any.”
Auto-Owners argued that the language was un-
ambiguous because of the phrase “in connection
with.” The court didn’t buy this argument, either:

Under the facts of this case, the phrase “any

business, occupation, trade or profession”
may reasonably be interpreted as either
including or excluding the activity giving
rise to Hermann’s claim. The words “in
connection with” do little to clear up the
meaning of trade, occupation or profes-
sion. Indeed, although no Michigan court
has squarely addressed the issue, at least
one court has found ambiguity in a policy
containing nearly identical language. The
present language is subject to more than
one reasonable interpretation. Where two
reasonable interpretations exist, the policy
must be construed in favor of coverage.
Auto-Owners essentially argued that the court
should construe the “business” exclusion in this
case as a “business pursuits” exclusion. The court
declined to do so.

Michigan law clearly distinguished between “busi-

ness” and “business pursuits” exclusions at the time
Auto-Owners issued the disputed policy. In fact,
Auto-Owners chose to use the “business pursuits”

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DEFAMATION, EMOTIONAL DISTRESS...

language in the portion of the policy covering

property damage and bodily injury. Arguably,
Auto-Owners believed that the breadth of the
“business pursuits” exclusion would impact its
ability to market its homeowners policies if the
company included such a clause in the portion of
the policy covering personal injury. Regardless of
its reasons for doing so, Auto-Owners chose not
to use the established “business pursuits” language
in the personal injury section of the policy. In
doing so, it created an ambiguity which…must be
construed in favor of the insured.

The district court also found that coverage under

Cincinnati’s umbrella policy was dependent on a
finding of coverage under Auto-Owners’
homeowners policy. Because the court found that
no coverage existed under the homeowners policy,
it concluded that no coverage existed under the
personal umbrella policy. On appeal, Hermann
argued that because the homeowners policy pro-
vided coverage, the umbrella policy provided cov-
erage as well. The appeals court agreed:

The personal umbrella policy provides

coverage for personal injuries “arising out
of business or business property” if such
injuries are covered by an underlying
policy. The personal umbrella policy de-
fines business as “[including] but not lim-
ited to a trade, occupation, profession or
other activity engaged in as a means of live-
lihood or from which you or a relative
intend to derive income (other than farm-
ing).” The record demonstrates that
Hermann intended to derive income from

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the Dome venture. Furthermore, the un-

derlying policy...; Auto-Owners’ home-
owners policy, provides coverage. Thus,
coverage exists under Cincinnati’s personal
umbrella policy.
Finally, the appeals court had to consider the
businessowners and commercial umbrella policies
issued by Cincinnati. Under Florida law, an
insurer’s duty to defend depends upon the facts
and legal theories alleged in the pleadings. The duty
arises when the facts alleged “fairly and potentially
bring the suit within policy coverage.” Any ambi-
guities must be construed in favor of the insured.

The district court had assumed that the policies

named Hermann in his individual capacity as an
insured. The district court then analyzed the
policy to determine whether Hermann’s claim was
covered. It found that the policy covered an
individual’s “business” only where such business
is solely owned by the named individual. The court
determined that because Hermann was not the sole
owner of the oil and gas venture giving rise to the
claims, the policies did not provide coverage.

On appeal, Hermann argued that the district

court’s conclusion that the businessowners and
commercial excess policies provided no coverage
was inconsistent with its finding that his oil and
gas activities were “business” activities for purposes
of the homeowners policy. The thrust of this ar-
gument was that the homeowners and business
owners’ policies are interrelated—if there is not
coverage under one, there must be coverage un-
der the other. Cincinnati argued that the district

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DEFAMATION, EMOTIONAL DISTRESS...

court correctly found no coverage because

Hermann was not the sole owner of the oil and
gas venture.

Indeed, the policies provided coverage for an in-

sured only “with respect to the conduct of a busi-
ness of which [he or she is] the sole owner.” The
record clearly showed that Hermann was not the
sole owner of the venture. The venture had nu-
merous working interest owners to whom the per-
sons operating the well were accountable. When
Hermann became unsatisfied with the operators,
he was unable to replace them without support
from the other owners. So, the district court cor-
rectly found that the businessowners and commer-
cial umbrella policies provided no coverage.

The appeals court concluded that Hermann was

entitled to coverage under the homeowners policy
issued and the personal umbrella policy. He was
not entitled to coverage under the businessowners
or commercial umbrella policies.

EMOTIONAL DISTRESS CLAIMS

Connecticut’s March 2000 Supreme Court deci-

sion in Gary C. Moore v. Continental Casualty is
a great example of an emotional distress lawsuit.
The initial claim was weak itself—but the result-
ing attempt to get the insurance company to cover
the claim was positively weird.

Gary Moore was the insured under a homeowners

policy issued by Continental. His sister, Gail Stand-
ish, filed a suit against Moore, alleging conversion,

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fraud, intentional infliction of emotional distress

and negligent infliction of emotional distress.

Standish was the joint owner of property with

her mother, Coral Moore. Standish charged that
her brother had obtained power of attorney from
Coral and herself and, together with Richard
Stapleton (their attorney), had obtained a $150,000
line of credit that was secured by the jointly-owned
property. Standish alleged that, as a result of her
brother’s actions, she had suffered financial loss in
the amount of $150,000, and also had suffered
emotional distress, stress and anxiety as a result of
that financial loss.

Four of the seven counts in the complaint filed

by Standish were directed at Moore. Three of those
counts alleged reckless or intentional acts: count
four alleged that Moore used a line of credit in
violation of Connecticut state law; count five al-
leged that Moore, acting as Standish’s fiduciary,
wantonly and recklessly or intentionally made
material omissions and misrepresentations regard-
ing her line of equity; and, count six alleged inten-
tional infliction of emotional distress. It was un-
disputed that these three counts did not trigger a
duty to defend under Moore’s homeowners policy
because they were excluded under the “expected
or intended” exclusion. Count seven, however,
alleged negligent infliction of emotional harm.

In the final count, Standish specifically charged:

[Moore and Stapleton] negligently and

carelessly caused emotional harm to
[Standish] in one or more of the follow-

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DEFAMATION, EMOTIONAL DISTRESS...

ing ways: a) In that they failed to inform

[Standish] that they were incurring sub-
stantial liabilities on her property…; b) In
that they negligently and carelessly failed
to inform [Standish] that the Will of [her]
mother had been changed and would sub-
ject her property to a large encumbrance;
c) In that they negligently and carelessly
failed to warn [Standish] of the effects of
the actions they were taking concerning
Coral Moore; d) In that even though they
knew, or in the exercise of reasonable care
should have known, that the combined
effect of their actions would serve to cre-
ate a severe financial hardship on...
Standish, they failed to take any action
which would allow her to protect herself
from the effect of their actions.
Moore brought a declaratory judgment action
against Continental, seeking a ruling that it had a
duty to defend him against the lawsuit. Continen-
tal answered with a motion of its own—seeking a
ruling that it didn’t have to defend Moore. The
court granted Continental’s motion and denied
Moore’s. Moore appealed. The state appellate court
agreed with the lower court’s ruling. Moore
pressed his case up to the state supreme court.

At this point, the Connecticut Trial Lawyers As-

sociation filed a brief supporting Moore’s claims.
There were huge legal fees to be charged if insur-
ance companies could be forced to pay defense
costs in emotional distress cases. The Connecticut
ambulance chasers must not have had much re-
spect for logic or clarity in allying with Moore.
Some of his arguments were downright strange.

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In effect, Moore claimed that Continental had a

duty to defend because the policy defined “bodily
injury” broadly enough to include emotional dis-
tress. The state supreme court didn’t agree:

Applying the appropriate standard of re-

view to the allegations of the complaint
and the language of the policy, we con-
clude that these allegations do not trigger
the defendant’s duty to defend. An allega-
tion of emotional distress arising out of
economic loss, as alleged in this case, does
not trigger a duty to defend under the
coverage for “‘[b]odily [i]njury,’” which
is defined in the insurance policy as
“bodily harm, sickness or disease....”
There were three types of personal liability cover-
age in the policy: the first, for personal injury,
involved noncorporeal torts but did not cover the
tort of negligent infliction of emotional distress;
the second, for bodily injury, used the term bodily
to describe the type of injury covered; and the
third, for property damage, used the term physi-
cal to describe the type of property damage cov-
ered. Therefore, the court concluded that, to the
extent that nonbodily or noncorporeal torts were
covered, they were specified in the personal in-
jury category. (That category explicitly excluded
emotional distress claims.) Otherwise, such a claim
would require some aspect of bodily harm, as in
the case of bodily injury, or physical damage, as
in the case of property damage. (And Standish’s
claims couldn’t show either of those predicates.)

Part of Moore’s argument for coverage was based

on some bizarre definitions of policy terms. As

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DEFAMATION, EMOTIONAL DISTRESS...

noted above, the policy defined “‘[b]odily

[i]njury’” as “bodily harm, sickness or disease.”
According to Moore, the word bodily modified
harm—but not the words sickness or disease. So,
he argued that the definition of bodily injury meant
not merely bodily harm, bodily sickness and
bodily disease, but also nonbodily sickness and
nonbodily disease. The court disagreed:

We cannot rewrite the insurance policy

by adding semicolons any more than we
can by adding words. If the policy had
referred to “green vehicles,” and defined
that term as “green cars, trucks or motor-
cycles,” it is unlikely that there would be
a reasonable dispute about whether blue
trucks and red motorcycles were intended
to be included in the definition. We de-
cline to adopt [Moore]’s idiosyncratic
grammatical interpretation of the language
in the policy.
Moore made one more weird claim. He argued
that emotional distress is within the policy’s defi-
nition of bodily injury because “modern medical
science teaches that emotional distress is accompa-
nied by some physical manifestations.” To sup-
port this theory, he pointed to the state supreme
court’s own rulings in various workers’ comp
cases. The court didn’t like having its own deci-
sions used in this way:

Although we do not question the mod-

ern medical understanding of the interre-
latedness of the mind and body, we dis-
agree that such an understanding deter-

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mines the meaning of the policy language

in question in the present case. We also
disagree…that our precedents in the areas
of tort and workers’ compensation law
appropriately inform the meaning of that
policy language. It is undoubtedly true
that emotional distress ordinarily might
be accompanied by some physical mani-
festations, such as an altered heart rate and
altered blood pressure, and perhaps other
such manifestations as changes in the size
of the pupils, and sleeplessness and head-
aches. That does not mean, however, that
“bodily harm, sickness or disease,” as used
in the insurance policy in this case, neces-
sarily includes emotional distress caused
by economic loss.
The judgment of the lower courts was affirmed.
Moore couldn’t use his policies to defend his sister’s
claims for emotional distress. The Connecticut
trial lawyers must have been crestfallen.

INTELLECTUAL PROPERTY
DISPUTES

The most valuable asset for any company is its

intellectual property—copyrights, patents, trade-
marks, trade secrets and brand names. The pro-
tection of intellectual capital, however, is one of
the most overlooked areas of risk management.

Copyright and trademark infringement is a ma-

jor area of concern for New Economy businesses.
Even if the infringement is not intentional, it can
still result in tangible diminishment of the value
of a site or service.

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DEFAMATION, EMOTIONAL DISTRESS...

A 1996 amendment made to the 53-year-old

Lanham Act, a federal law designed to protect
consumers from deception, introduced the legal
concept of “dilution.” It’s the theory that a
company’s trademark could be “watered down”
if used without permission by a person or com-
pany.

The Internet has encouraged these claims in two

ways. First, it’s easier to track infringers, especially
if they advertise on the Internet. Second, the
Internet has made it easier to bring suit anywhere
in the country against a company that runs an ac-
tive Web site where someone can make a reserva-
tion or purchase goods online. Because the site is
open to people from all over, the company is vul-
nerable to lawsuits from every jurisdiction.

Copyrights give ownership to an author’s or artist’s

work, such as a book, pamphlet or musical com-
position. A trademark is a word, short phrase or
symbol that people identify with something spe-
cific, like a company, and patents protect inven-
tions, to prohibit someone else from making an
item in exactly the same way the inventor did.1

Patent litigation is expensive. Even small patent-

infringement cases, involving a couple of million
dollars in claims, run nearly $750,000 to litigate,
according to a survey published by the American
Intellectual Property Law Association. If the suit
makes it to trial—which most don’t—and through
the appeals process, the cost could balloon to $3.5
million.
1
Simple copyright forms are available at: http://lcweb.loc.gov/
copyright. Trademark registration forms, a searchable database
and tips on searching, are at: www.uspto.gov. Filings are rela-
tively cheap: $30 for a copyright and $325 for most trademarks.

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Trademark and copyright litigation costs less but

still is expensive—averaging nearly $250,000.

As with most legal problems among businesses,

most intellectual-property lawsuits are settled by
agreement rather than by judge or jury. Often an
infringement case ends in a quick licensing agree-
ment, distribution arrangement or other resolu-
tion that allows the previously unauthorized use.

Most intellectual property disputes are resolved

with cease-and-desist letters. The owner of the
trademarked or copyrighted material will send the
letter to the person or group using the material
and—if the improper use stops immediately (or,
in legal terms, cured)—there’s not much more to
the matter. This is especially true of improper use
on Internet Web sites. Sometimes, though, the
owner seeks monetary damages from the user.

Even the music band The Grateful Dead—famous

for its generous policies toward fans recording live
performances—employs lawyers to ensure their
music or images aren’t improperly used on the
Internet. Internet users can trade Dead songs and
images only if they do not generate any revenue.
The band budgets $5,000 to $7,000 per month to
pursue Internet pirates who steal concert videos,
sell knockoff T-shirts and make money from digi-
tally-recorded songs. It even sent a cease-and-de-
sist letter to a person who was trading MP3 re-
cordings of Grateful Dead songs for free—but was
making money from banner ads on his Web site.

241
DEFAMATION, EMOTIONAL DISTRESS...

GIANTS V. SMALL FRY

Going after a competitor who has infringed upon

intellectual property is unavoidable for many
small businesses. If one finds that you—even if you
are an individual producing a Web site in your
basement—have used its material without permis-
sion, you can expect some kind of action.

Still, because these lawsuits are costly, the decision

to sue is usually a close call for most businesses.
That’s why companies making infringement
claims come on so hard initially; they’re hoping
to get a quick settlement. So, in part, a major ele-
ment in defending intellectual property is attitude.
That’s why you often see corporate giants battling
small businesses or individuals over intellectual
property. For example:

• Billionaire Richard Branson’s Virgin

Enterprises sued Virgin Chocolates, a
small Colorado company. Branson
claimed exclusive rights to the trade-
mark Virgin used with consumer
goods and wanted to prevent it from
being used for a line of adult candy.
• Polo/Ralph Lauren won a trademark
infringement suit against Westchester
Media Co., the start-up publisher of
Polo Magazine. A federal judge in
Texas ruled that the magazine could
cause consumer confusion with the
clothing, fragrance and home furnish-
ings designer.

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• Chemicals giant Monsanto Corp.

dropped its legal resources on a num-
ber of small farmers who’d used its
genetically engineered seeds without
paying proper licensing fees.
That last example makes an interesting case.

Roger Nelson and his sons farm about 8,600 acres

of soybeans and wheat in Cass County, North
Dakota. Soybeans usually make up about 70 per-
cent of their annual crop.

The Nelsons first used Roundup Ready soy-

beans—which are a patented, genetically-engi-
neered Monsanto Corp. product—as a relatively
small part of their soybean crop in 1998. Because
the co-op where they sold the beans didn’t pay
differently for conventional or engineered soy-
beans, the Nelsons didn’t distinguish between their
two kinds of beans.

Then in 1999, the Nelsons raised a much larger

crop of Roundup Ready beans. That year, they
paid $18,800 in tech fees to Monsanto for using
the new technology. But that may not have been
enough.

In mid-July 1999, a certified fraud examiner work-

ing for a company that contracted with Monsanto
to investigate potential violations of the grower
contracts arrived at their farm. “He said someone
had called Monsanto with a tip that we had taken
saved seed from 1998 and planted it in 1999,”
Rodney Nelson said. The Nelsons cooperated with
the examiner.

243
DEFAMATION, EMOTIONAL DISTRESS...

The examiner called back several days later to re-

port that there had been no irregularities. But in
November, the Nelsons received a call from an
Indiana firm that represented Monsanto, asking
to inspect their fields again. Again, the Nelsons
cooperated.

Several months later, in July 2000, a Monsanto

attorney wrote the Nelsons a letter with troubling
news. The inspectors from Indiana had found
Roundup Ready genetics in some of the fields the
Nelsons said were conventional, and lab tests
proved it. The letter went on to state:

This has revealed the presence of Roundup

Ready gene in several thousands of acres
farmed by you…. At present there is a
large discrepancy between the number of
acres which have tested positive and the
number of acres that you could have
planted with the quantity of seed that is
indicated by sales receipts that we have.
The lawyer wanted a conference with the Nelsons
and their attorneys to “evaluate [their] responses.”
A Monsanto representative would be on hand
with “full settlement authority.” The Nelsons
agreed and asked that an Agweek reporter attend.
Monsanto refused. But Monsanto did allow the
North Dakota State Seed Commissioner and the
North Dakota Department of Agriculture to have
representatives at the meeting (though, in fact, it
didn’t have much choice in that matter).

Scott Baucum, Monsanto’s U.S. manager of intel-

lectual property rights, described the conference

244
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as a “good meeting” that ended amicably. “There

was not even a discussion of settlement,” Baucum
told a local newspaper. “[We tried] to determine
if there was a violation.”

After the July 2000 lawyer letter, the Nelsons de-

cided to take no chances in accidental growth of
Monsanto product. In early August, they had a
third party inspect all of their fields. They invited
the Monsanto representatives to cooperate with
the new tests—but they declined.

By that point, the corporate giant seemed to be

backing away from its initial, harsher position.
“We haven’t even determined there is a violation,”
Baucum reiterated to a local reporter. “We’ve said,
look, we see things we didn’t understand.” He
stressed general points, noting that Monsanto’s
market research indicated that between 6 percent
and 9 percent of Roundup Ready soybeans planted
in the United States were “pirated in some way.”
The company had begun to study why spots of
their product were cropping up in groups of coun-
ties.

“I think, basically, it’s an economic issue,” he con-

cluded.

And these cases can involve individuals. In 1999, a

Massachusetts-based shoe company sued a Colo-
rado programmer for putting up a Web site at
earth.com. Mondial Trading Co. claimed that it
had an exclusive trademark on the name Earth to
sell clothing. “The EARTH trademark is famous,”
the company said in papers filed in federal court
in Boston.

245
DEFAMATION, EMOTIONAL DISTRESS...

But Tony Sanders, the Colorado Springs resident

who owned the earth.com domain, said he just
used the name for e-mail and his personal Web
site—not to hawk clothing that competes with
Mondial’s.

“I strongly feel that I [did] not [infringe] on their

rights in any way,” Sanders said in an e-mail.

The lawsuit demanded that Sanders turn over the

address to Mondial. He refused—and became a mi-
nor celebrity in the Internet community.

The Boston law firm Fausett, Gaeta & Lund agreed

to represent him for free, after word of the suit
spread online. Less than two weeks after the law
firm entered the picture (and three days before a
response to the complaint was due), Mondial
dropped its suit. The little guy won.

“PROCESS PAT E N T ” CLAIMS

Legal claims brought on the basis of patent in-

fringement—particularly patents issued for a “busi-
ness method” or “business process”—have become
a controversial topic. The patents lock up an idea
about how something can be done, rather than a
concrete invention like a machine or a chemical.
They first gained attention when several Internet
players—most notably, amazon.com and
Priceline.com—received business process patents
for the way they take or fulfill orders…and then
promptly threatened competitors with lawsuits.

The controversy was further fueled when an em-

ployee of the U.S. Patent Office admitted to one

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national newspaper that some process patents had

been issued prematurely, due to time pressures
and a lack of people who adequately understand
the technology sector.

How do process patent disputes work?

In 1997, the Irish computer software company

AllFinanz decided to market a life insurance un-
derwriting program in the United States. The small
company looked for large players in the Ameri-
can insurance industry with which it could make
agreements to distribute its software. After some
searching, AllFinanz identified several big insur-
ers as potential partners—one of these was Indi-
ana-based Lincoln National Corp.

AllFinanz’s software was pretty good. Tradition-

ally, analyzing life insurance application forms,
referencing actuarial tables and calculating risk,
took months; the software did all that in minutes.

AllFinanz talked with Lincoln National for almost

a year without signing an actual agreement. While
these negotiations went on, AllFinanz completed
deals with three other big American insurance
corporations. Then, in early 2000, Lincoln Na-
tional surprised everyone by suing AllFinanz.

The lawsuit claimed that AllFinanz—by making,

using, offering to sell and selling its suite of soft-
ware systems and components—infringed upon
Lincoln National’s risk assessment patent. The
Lincoln National patent, “Method and Apparatus
for Evaluating a Potentially Insurable Risk,” was
issued in December 1990. The patent covered,

247
DEFAMATION, EMOTIONAL DISTRESS...

among other things, Lincoln National’s “knowl-

edge-based automated life insurance underwriting
software products, i.e., the Lincoln Underwriting
System and the LincUs(TM) suite of underwriting
system products.”

Jim Maher, head of the Irish company, said Lin-

coln National was suing precisely because
AllFinanz was having some success. “If we were
somewhat on the periphery, not closing deals, we
would never have been touched,” Maher told one
newspaper.

According to Lawrence Rowland, president and

chief executive officer of Lincoln National:

Lincoln [National] was granted this patent

because we were the first to recognize the
power of technology in delivering mor-
tality risk management knowledge and
tools to our customers. Our ability to do
this through software using our own in-
tellectual property is key to our success.
That is how we are able to contribute to
our clients’ success.
AllFinanz argued two points. First, its software
didn’t violate anyone else’s patent; second, Lin-
coln National’s patent was invalid because another
party had documented the same process before
Lincoln National’s 1990 application.

Maher expected that the companies would settle

out of court, before a drawn-out trial. “I think it
makes no sense for either business to engage in
high-profile, very expensive, resource-consuming
litigation,” he said. “If it’s possible to resolve this

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commercially and legally, the chief executives of

both businesses have an obligation to their boards
and shareholders to sit down and resolve this.”

INSURANCE FOR IP LIABILITIES

During the late 1990s, the insurance industry be-

gan to offer new coverages designed to protect
people and small businesses from Internet-related
intellectual property liabilities. The key risks in
this market included some thorny issues: copy-
rights, libel and liability for advertising and links
to other pages.

The fact that it takes brainpower to make a Web

site work is a major challenge for insurance com-
panies that prefer to look at the world in terms of
hard assets and direct losses. Still, most realize they
have to move into the intellectual property risk
market.

Most e-commerce intellectual property policies are

based on older multimedia liability policies, which
were originally intended to cover the liability faced
by publishing or advertising across different forms
of media. However, unless the policy language
specified coverage for infringement of a patent,
copyright, trademark or other intellectual prop-
erty, this kind of insurance was usually not enough.

Many law firms won’t take a patent infringement

case on a full contingency-fee basis because patent
litigation is so expensive, even for them. Patent
enforcement insurance is meant to address that
problem. It is one of essentially two kinds of patent
insurance. The other is called defensive insurance.

249
DEFAMATION, EMOTIONAL DISTRESS...

Enforcement insurance covers the costs of enforc-

ing your patent against those who infringe. An
insurer may or may not cover preexisting infringe-
ment. Defensive insurance, on the other hand, pays
the legal costs of defending against a charge of in-
fringement. Some defensive policies also cover
damages incurred as a result of infringement.

In 1999, Chubb Corp. launched a policy to cover

small businesses against claims for libel or misrep-
resentation that could arise from Web sites, e-mail
and other online communications.

“As more companies disseminate information to

the public via Web sites and other media…com-
mercial businesses now have the same liability ex-
posures once reserved only for book publishers,
broadcasters and advertising agencies,” said Leib
Dodell, media and intellectual property underwrit-
ing manager at Chubb.

Dodell said that the policy offers “all-risks” cover-

age for Internet activity, avoiding the approach
some insurers had chosen of adopting coverage
for specific perils. This approach is better, “given
the uncertainty of the legal rules governing the
Internet and the types of legal claims that will be
generated by Internet activity,” said Dodell.

Chubb’s new product is built upon the Multime-

dia Liability Insurance policy the insurer intro-
duced several years earlier. It increases the avail-
able liability limits to $25 million (from $10 mil-
lion), includes liabilities assumed under insured
contracts and allows the insured to choose its own
lawyers in the event of a claim.

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In addition, the policy provides:

• Insurance for the cost to defend in-

junctive relief actions as well as de-
mands for damages;
• Insurance for plagiarism and unautho-
rized use of titles, slogans, formats,
ideas, characters, plots, performances
or performers; and
• Advertising injury/personal injury
protection broader than that available
in a standard commercial general li-
ability contract, for both publishing
and non-publishing activities.
And the claims can come from unexpected sources.
In 1999, New Jersey-based Dendrite International
sued four anonymous people who posted what
Dendrite considered libel and trade secrets on a
Yahoo! message; the suit put California-based
Yahoo! in the middle of a legal action.

In early 2000, a Florida judge ruled that a Fort

Lauderdale man had the right to know who was
posting anonymous messages about him through
Yahoo! and America Online.

CONCLUSION

This chapter has dealt with some liability issues

that might seem far-fetched to you now. But these
are fairly sure to become common personal liabil-
ity problems.

In an information age, concepts like defamation

and copyright infringement are bound to move

251
DEFAMATION, EMOTIONAL DISTRESS...

from business contexts to personal contexts. And,

judging from the number of lawyers who have
taken to focusing on intellectual property as their
speciality, there are going to be plenty of experts
helping make that move.

So, consider these small-business matters inching

into the personal liability arena. You’ll want to be
careful of that move.

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CHAPTER 9
HOLD HARMLESS
AGREEMENTS &
BANKRUPTCY

This book has talked a lot about insurance. That

only makes sense, since insurance is the tool that
most people use to handle personal liability issues.
But it’s not the only tool. This chapter considers
two common alternatives.

The first is a hold harmless agreement—a legal con-

tract that limits or transfers liabilities between two
parties. Like insurance, you usually have to make
a hold harmless agreement before a liability oc-
curs. We’ll look at the mechanics of these agree-
ments and the best strategies for using them.

The second of these alternatives is filing for bank-

ruptcy. Oftentimes, people or companies use bank-
ruptcy as a tool for avoiding financial responsi-
bilities. And, just about any person or company
can use bankruptcy in this way. In this chapter,
we’ll examine when—and how—you can do so.

HOLD HARMLESS AGREEMENTS

Every insurance policy is a contract. But there are

other contracts you can use to protect yourself

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HOLD HARMLESS AGREEMENTS & BANKRUPTCY

from personal liabilities. The most common of

these is a contract between people or corporations
stating that one side will not make or pass on legal
claims or judgments to another. This is known
generally as a hold harmless agreement.

Few people think about hold harmless agreements

in the daily routine of their lives. Asking the man-
ager of the grocery store, your visiting college
friends and the people at your work to sign legal
documents promising not to sue you is unrealis-
tic. However, you can focus on a few activities or
situations…work-related or not…that pose risks
to your financial well-being and press for such
agreements there. For example, an independent
management consultant might ask clients to sign
such agreements before she works with them. (Many
standard consulting contracts have this language.)

Another example: A hot-shot advertising execu-

tive who wants to coach his son’s Little League
team may ask the local Little League chapter to
sign a hold harmless agreement protecting him
from any complaints (the legal kind) related to
how he manages the team.

Be very careful before signing any hold harmless

agreement. Make sure you understand—clearly–
the following key points:

• the names and identities of all of the

parties (people or companies) covered
in the agreement;
• the intended goal of the agreement
(who’s being protected and who’s do-
ing the protecting);

254
 CHAPTER 9

• the specific activities or affiliations cov-

ered by the agreement;
• the circumstances, situations or events
in which the activities take place;
• the terms (locations and/or time lim-
its) that apply to the agreement; and
• the specific exclusions and exceptions
that apply to the agreement.
If you’re thinking of signing—or drafting—a hold
harmless agreement to protect yourself against li-
abilities related to a personal or business activity,
you should check with any existing insurance poli-
cies you have. Insurance policies will sometimes
have conflicts with hold harmless agreements.

In many cases, a policy will specifically exclude

coverage for liabilities that you assume in a hold
harmless agreement. So, if you plan to extend your
coverage to someone else, it may not work.

Even if a policy covers a liability assumed under a

hold harmless agreement, it will usually count any
settlements against its normal limits. Make sure
those limits are high enough to absorb any claims
you inherit through the hold harmless agreement.

Although they can take any sort of exotic shape,

most hold harmless agreements fall into one of
four categories:

• someone else holds you harmless for

things he or she does;
• someone else holds you harmless for
things you do;

255
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

• you hold someone else harmless for

things you do; or
• you hold someone else harmless for
things he or she does.
A rule of thumb: The first two categories are agree-
ments you want to sign. The third is one you want
to sign only after examining the agreement care-
fully. The fourth is one you don’t want to sign.

EXAMPLES OF AGREEMENTS

Although a well-drafted hold harmless agreement

is as effective a means of protection against liabil-
ity claims as insurance, individuals tend not to think
of the things when they get involved in risky situ-
ations. Hold harmless agreements tend to be fa-
vored by people who think about insurance and
risk for a living. For example, they are a popular
tool among local governments. Some specific cases
chosen randomly from the last few years:

• The city of Carlsbad, California, asked

a subdivision developer to draft a hold
harmless agreement, relieving the city
of any liability if an earthquake or
landslide were to hit a development
built over a dormant seismic fault. The
developer also had to make a disclo-
sure statement, which described the
fault and several ancient landslides.
Such documents protect contractors
from lawsuits.
• The village of Hanover Park (near Chi-
cago) modified its village ordinance to
allow residents to have brick mailboxes

256
 CHAPTER 9

without holding the village liable for

accidents. When the village had pro-
hibited brick mailboxes in 1995, trust-
ees allowed nine existing masonry
boxes to remain as long as the owners
signed a hold harmless agreement. The
new ordinance extended that arrange-
ment to all residents. Typically, 40 to
50 mailboxes out of 11,000 in the com-
munity were damaged each year,
mostly by village snowplows.
• School districts near Seattle had to keep
their high school swim teams out of
the pool for several weeks. Those dis-
tricts hadn’t signed new hold harm-
less agreements that shielded the
county from liability if an athlete were
injured severely. The county council
forced the matter after a multimillion-
dollar jury award to a high school
swimmer who was paralyzed in a 1995
accident at a county pool when he hit
his head diving into 5-foot-deep wa-
ter. County pool employees saw
swimmers failing to observe the “feet
first” safety principle but didn’t inter-
vene. The county council passed an
emergency ordinance banning teams
until their districts returned hold
harmless agreements. Some school of-
ficials said they were told by their in-
surance carrier not to sign.
Also, hold harmless agreements have a slight pa-
tina of corporate greed, since they are often slipped
into larger contracts or business arrangements. As

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HOLD HARMLESS AGREEMENTS & BANKRUPTCY

a result, the agreements frequently surface when

some person or group regrets a bad deal.

In late 1999, some 1,000 physicians in the Kansas

City area delayed signing new labor contracts they
say unfairly restricted their medical practices. Blue
Cross and Blue Shield of Kansas City had offered
the 3,200 doctors new contracts during the sum-
mer; of those, about one-third had not signed by
the November deadline.

Among the key issues: who defines when care is

medically necessary; how physicians are reim-
bursed for treating patients; and how much liabil-
ity insurers owe to a physician’s patients. The doc-
tors were especially upset that the hold harmless
clauses exempted insurance companies—but not
physicians—from liability if an insurer’s decision
to withhold care resulted in injury to a patient.

The Blue Cross and Blue Shield ended up agreeing

to extend more coverage to the doctors.

HOW AGREEMENTS ARE WORDED

You may have already signed hold harmless agree-

ments without realizing what you were doing. If
you use the Internet a lot, you have probably
clicked “I agree” to a few pages of text that include
such language. A March 2000, federal lawsuit be-
tween the Internet companies CoStar and LoopNet
included an example of this.

CoStar sued LoopNet (a commercial real estate

Web site) for improperly using CoStar material
on its Web site. However, LoopNet said its users

258
 CHAPTER 9

were the ones posting CoStar’s material—and that

it was merely what Internet legal types call a “third-
party service provider.” To prove this point,
LoopNet offered an excerpt from the agreement
that all users had to accept before using the site:

The submission of information to the

LoopNet Web site is subject to your ac-
ceptance of terms and conditions, includ-
ing without limitation that you agree to
(i) provide LoopNet, Inc. with full and
unrestricted rights to publish, use and re-
produce the information in connection
with the LoopNet services without in-
fringement of any third party rights, (ii)
guarantee the accuracy of the information,
and (iii) indemnify and hold harmless
LoopNet, Inc. from any cost, damages or
liability arising out of or related to your
failure to comply with the foregoing ob-
ligations.
That’s a hold harmless agreement placed smoothly
within what you might dismiss as “boilerplate”
language. It was part of the reason LoopNet was
able to win a few procedural points in the early
rounds of the lawsuit—and ultimately why the two
companies settled their differences.

An important point to make about hold harmless

agreements: Because they don’t follow any par-
ticular form, they can be written to do all kinds
of things. They can protect you from a liability
related to some activity or affiliation—but they
can also create exposures that you wouldn’t oth-
erwise face.

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HOLD HARMLESS AGREEMENTS & BANKRUPTCY

Here are two examples of hold harmless agree-

ments taken from actual events:

RELEASE AND HOLD HARMLESS AGREEMENT

The undersigned desires to use [COMPANY PRODUCTS] in

the [COVERED EVENT], an event sponsored by [SPONSORING
PARTIES] and other as yet unnamed sanctioning bodies, or
sub-divisions thereof, during the calendar year 200_.
The undersigned desires to do so all the while understand-
ing and acknowledging that [ACTIVITY] is potentially dan-
gerous and poses a risk to life and limb.

With this understanding, for himself (or herself), his (her)

personal representatives, heirs, and next of kin, the un-
dersigned:

1.Hereby releases and discharges for all time [SPONSORING

PARTIES], their officers, directors, agents and/or employ-
ees, from all liability to the undersigned, or anyone repre-
senting the undersigned, for any loss or damage, on ac-
count of injury or damage or loss sustained by the under-
signed, including his (her) death as a result of the partici-
pation by the undersigned in the [COVERED EVENT], whether
caused by the negligence of [SPONSORING PARTIES] and
whether on or off [ACTIVITY] premises, while the under-
signed is participating in any [COVERED EVENT].

2.Hereby assumes full responsibility for, and risk of, bodily

injury, death and/or property damage while participat-
ing in any [COVERED EVENT].

3.Hereby waives any claims, and does covenant not to sue

[SPONSORING PARTIES], for any claim which he (or she)

260
 CHAPTER 9

may now have or may acquire against said entities or

against any of their agents, representatives or employees
by reason of any injury or damage or loss sustained by the
undersigned, including his (her) death, as a result of the
performance of his (her) services hereunder whether on or
off activity premises, regardless of the cause thereof.

4.Hereby agrees that this release and hold harmless agree-

ment is intended to be as broad and inclusive as is permit-
ted by the law of the state in which any of its activities are
located, and if any portion of it is determined by a court of
law to be invalid, the balance shall continue in full force
and effect.

5.Hereby understands that Section 1542 of the California

Civil Code provides that a general release does not extend
to claims which the undersigned does not know or suspect
to exist in his favor at the time of signing the release,
which if he (she) knew or suspected such claims, would
have materially affected his (her) willingness to sign the
release.

6.Hereby waives his (her) rights under Section 1542 of the

California Civil Code and any similar law of any state, and
acknowledges that this waiver is an essential term of this
release without which he (she) would not have signed this
release.

THE UNDERSIGNED REPRESENTS THAT HE (SHE) HAS READ,

UNDERSTANDS, AND IS VOLUNTARILY SIGNING THIS RELEASE
AND HOLD HARMLESS AGREEMENT and, further, represents
that no verbal statements have been made to the under-
signed to induce him (her) to sign this Agreement.

261
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

INDEMNIFICATION AND HOLD HARMLESS AGREEMENT

I, the undersigned, hereby certify that my participation in

[COVERED EVENT] to be held between the months of
________ 200_ and ________ 200_, sponsored by [SPON-
SORING PARTY] is entirely voluntary I realize that [EVENT
ACTIVITY] involves risk and may result in financial or other
losses to participants.

In consideration of the risks mentioned above, I hereby

agree to indemnify and hold harmless [SPONSORING PARTY]
and its trustees, officers, appointees, agents, and em-
ployees (the “indemnified parties”), from any and all
losses, costs (including claims based in whole or in part
upon allegations of negligent acts or omissions of any of
the indemnified parties) by or on behalf of any person, or
by or on behalf of me or any of my personal representa-
tives, for any damage to person or property arising out of
my participation in [COVERED EVENT] as a result of causes
which ordinarily occur before, during or after such activ-
ity as well as those which do not ordinarily occur before,
during or after such activity.

One note: The terms “hold harmless agreement”

and “release” are often used together and some-
times interchangeably. The terms do not mean
exactly the same thing. Generally, a hold harm-
less agreement is more particularly tailored to pro-
tecting you from a personal liability.

INTERPRETING THE AGREEMENTS

How enforceable are hold harmless agreements?

The July 2000 New York (Western) District Court

262
 CHAPTER 9

decision, Francis D. and Deborah M. Szlachta v.

Norton Company, et al., dealt with a complicated
hold harmless agreement.

Francis Szlachta alleged that, due to the negligence

of Norton Company in keeping its factory
entryways and surrounding parking lot in a pass-
able, ice-free condition, he slipped and fell, suffer-
ing extensive injuries for which he sought dam-
ages in the amount of $4 million. His wife,
Deborah Szlachta, sued for loss of consortium.

Szlachta alleged that he was injured February 18,

1997 at about 6:55 a.m. when he slipped and fell
in the parking lot of Norton’s plant in Wheatfield,
N.Y. He claimed to have slipped on a patch of
“black ice” on the walkway leading to Door # 35
and fallen backwards onto the trailer hitch of a
trailer owned by H.V.E.S. Electrical, Inc.

For many years prior to the accident, Norton had

contracted with Haseley Trucking Co. (also a de-
fendant in the case) to plow and salt its Wheatfield
plant’s parking lot. A facet of that agreement is
reflected in the following excerpt from the par-
ties’ Hold Harmless Agreement:

[Haseley] hereby agrees to defend, indem-

nify and hold [Norton] harmless against
any and all suits, actions and proceedings,
legal or administrative, public or private,
and any and all claims, liabilities, judg-
ments, damages, interest, attorney’s fees,
costs and expenses of whatsoever kind or
nature which are or are alleged to be caused
by or as a result of any act, omission, fault

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HOLD HARMLESS AGREEMENTS & BANKRUPTCY

or negligence, active or passive, of

[Haseley], its sub-contractors, agents, em-
ployees, or any other third party acting
under [Haseley’s] direction or control….
As part of their snow-removal duties, Haseley em-
ployees were to plow and salt as close to the
Norton building as possible. They were similarly
responsible for getting as close as possible to any
trailers or vehicles parked near the main building.
At the same time, Norton employees—in particu-
lar, one Thomas Sawyer—were responsible for re-
moving snow from the doorways, including Door
# 35. On the night before the accident, Haseley
did five hours of plowing and two hours of salt-
ing, all of which was concluded at about midnight.

Haseley argued that, given the scope of its con-

tract with Norton—responsibility for the park-
ing lot, but not the walkways in front of the
doors—Haseley owed no duty to Szlachta. It cited
New York law, which held that a snow-removal
contractor may not be held liable in connection
with a snow-removal related injury unless the con-
tract at issue is sufficiently “comprehensive”—i.e.,
so broad as to displace the landowner’s duty to
maintain the property safely. So, Haseley argued,
because its contract with Norton was “limited,”
Haseley owed no duty to Szlachta.

In opposition, Norton argued that there were

genuine issues of material fact both as to whether
Szlachta’s alleged fall took place in the parking lot—
which area Haseley was charged to plow—and as
to whether Haseley created or contributed to the
allegedly hazardous condition. If either of those
contentions were true, Haseley would, by virtue

264
 CHAPTER 9

of its agreement with Norton, be required to in-

demnify Norton, irrespective of whether Haseley
owed a duty to Szlachta.

The court ruled:

Haseley’s motion [to dismiss the lawsuit]

must be denied because its argument turns
on a genuine issue of material fact—to wit,
where [Szlachta] fell. Haseley contends
that, because [Szlachta] fell—if he fell at
all—in a zone for which Haseley had no
responsibility, Haseley owed [him] no
duty. Haseley’s premise is that, because
Norton’s employees were responsible for
clearing snow from the area extending six
feet from Door # 35 and [Szlachta] main-
tains that he fell within two feet of Door
# 35, then, regardless of the condition of
the walkway, Haseley cannot have done
anything wrong and is not, therefore, li-
able to Norton for indemnification or con-
tribution. The difficulty with this posi-
tion is that the record as it exists today
gives rise to nothing resembling certitude
as to the site of [Szlachta]’s alleged fall.
So, the court ruled, the hold harmless agreement
meant that Haseley would have to go to trial as a
co-defendant and argue its case.

BANKRUPTCY

One good way to avoid personal liabilities is to be

“judgment proof”—that means not to have any
money or possessions that someone could take if
they sue you successfully. But, in the course of a

265
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

life, you probably have accumulated some assets

worth protecting—a home, some retirement
money, some valuables.

If you don’t have any or enough insurance to pro-

tect these things…and if you are sued and found
personally liable for someone else’s loss…you may
need to use the legal tools available for making
yourself judgment proof.

That usually means filing bankruptcy.

Of course, there are other steps that should come

first. You should try to negotiate an agreement to
resolve a personal liability with the person or com-
pany you owe. In many cases, you can negotiate
effectively in this way by merely mentioning that
you might have to file for bankruptcy protection
unless you can negotiate a private settlement.

But, frankly, negotiations don’t always work.

Bankruptcy is the final reckoning of bad decisions

and faulty planning. It doesn’t prevent or avoid
problems. And it doesn’t mitigate—directly, at least
—the financial impact of a personal liability. But
it is the mechanism for protecting yourself once
someone has established that you owe him money.

Although many people and companies file when

they have been found liable for a claim, it’s inter-
esting to note that bankruptcy laws were written
for the creditors and not the debtors.

Bankruptcy law provides for the development of

a plan that allows a debtor, who is unable to pay

266
 CHAPTER 9

his creditors, to resolve his debts through the di-

vision of his assets among his creditors. This su-
pervised division also allows the interests of all
creditors to be treated with some measure of equal-
ity. Certain bankruptcy proceedings allow a debtor
to stay in business using revenue that continues to
be generated to resolve his debts.

An additional purpose of bankruptcy law is to

allow certain debtors to free themselves (to be dis-
charged) of the financial obligations they have ac-
cumulated, after their assets are distributed, even
if their debts have not been paid in full.

THE TWO MAIN TYPES

There are two basic types of bankruptcy proceed-

ings. A filing under Chapter 7 is called liquida-
tion. It is the most common type of bankruptcy
proceeding. Liquidation involves the appointment
of a trustee who collects the non-exempt prop-
erty of the debtor, sells it and distributes the pro-
ceeds to the creditors. Under Chapters 11, 12 and
13, a bankruptcy proceeding involves the reha-
bilitation of the debtor to allow him to use his
future earnings to pay off his creditors. Under
Chapter 7, 12, 13 and some 11 proceedings, a
trustee is appointed to supervise the assets of the
debtor.

A bankruptcy proceeding can either be entered

into voluntarily by a debtor or initiated by his
creditors. After a bankruptcy proceeding is filed,
creditors may not, in most situations, seek to col-
lect their debts outside of the proceeding.

267
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

The debtor is not allowed to transfer property

that has been declared part of the estate subject to
the proceedings. Furthermore, certain pre-pro-
ceeding transfers of property, secured interests and
liens may be delayed or invalidated.

Chapter 7 of the United States Bankruptcy Code

is sometimes referred to by the legal profession as
a “straight bankruptcy.” It is used primarily by
individuals who wish to free themselves of debt
simply and inexpensively, but also may be used
by businesses that wish to liquidate and terminate.
Under the Bankruptcy Code, the court may dis-
miss a Chapter 7 case filed by a debtor whose debts
are primarily consumer rather than business debts.

A Chapter 7 case begins with the debtor filing a

petition with the bankruptcy court. In addition,
the debtor is required to file several schedules of
assets and liabilities, a schedule of income and ex-
penditures and a statement of financial affairs.

In order to complete the official bankruptcy

forms, which make up the petition and schedules,
the debtor needs to compile the following:

• a list of all creditors and the amount

and nature of their claims;
• the source, amount, and frequency of
the debtor’s income;
• a list of all the debtor’s property; and
• a detailed list of the debtor’s monthly
living expenses—food, clothing, shel-
ter, utilities, taxes, transportation,
medicine.

268
 CHAPTER 9

A “meeting of creditors” is usually held 20 to 40

days after a petition is filed. The debtor must at-
tend this meeting, at which creditors may appear
and ask questions regarding the debtor’s financial
affairs and property. In order to preserve their
independent judgment, bankruptcy judges are pro-
hibited from attending the meeting of creditors.

A discharge releases the debtor from personal li-

ability for discharged debts and prevents the credi-
tors owed those debts from taking any action
against him or his property to collect the debts.

Bankruptcy law provides that an individual debtor

can protect some property from the claims of
creditors either because it is exempt under federal
bankruptcy or because it is exempt under the laws
of the debtor’s home state. However, a bank-
ruptcy discharge does not extinguish a lien on prop-
erty, so mortgages and such things stay in place.

Even though the obligation of making the

monthly payment is extinguished in the bank-
ruptcy agreement, the lien for the remaining mort-
gage balance remains on the title—and the lender
can foreclose and force a sale. But a Chapter 7
debtor who is not in default on a loan secured by
property may be able to retain that property with-
out reaffirming the debt or redeeming the collat-
eral by continuing to make contract payments.

Usually, household furnishings, household goods,

clothing, appliances, books, animals, musical in-
struments or jewelry that are held primarily for
the personal, family or household use of the debtor
are exempt from liquidation.

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HOLD HARMLESS AGREEMENTS & BANKRUPTCY

With a Chapter 13 filing, which is more common,

the goal is to save the house. The borrower agrees
to pay the missed mortgage payments and remain
current on future ones. The person remains liable
for the entire debt.

BANKRUPTCY AND BENEFITS

Most states fail to provide regular individual re-

tirement accounts and Roth IRAs with the kind
of ironclad protection from creditors that is af-
forded pension benefits and 401(k) plans. In gen-
eral, the rules change markedly from state to state.

New Hampshire and New Mexico, for example,

have no laws specifically protecting IRA savings
from creditors. Other states, such as Texas, Ari-
zona and Washington, protect virtually everything
inside an IRA from creditors.

So, depending on where you live and how you’ve

saved, you could lose some or all of your retire-
ment money if you are sued or file for bankruptcy.

Some states do shelter money in IRAs and Roth

IRAs that is deemed necessary to support the saver
and his or her dependents in retirement. Any ex-
cess, however, is subject to creditors’ claims in a
lawsuit or bankruptcy. But exactly how much
would be protected is open to a judge’s interpre-
tation.

And these protections may not be sufficient for

high-earners, big savers and those who hope to
pass some of their retirement largess to their chil-
dren when they die.

270
 CHAPTER 9

Congress has considered bankruptcy-law reforms

that could preempt state laws and cap protection
for IRA assets to a maximum of $1 million.

If you’re close to retirement and considering a

move anyway, the size of your IRA assets could
be one of the deciding factors in where you move.
A state-by-state listing of IRA protections in bank-
ruptcy can be found at the Investment Company
Institute Web site at: www.ici.org/retirement/
99_state_ira_bnkrptcy.html.

You might consider leaving your 401(k) money

in a previous employer’s plan or transferring it
directly into a new employer’s plan rather than
rolling the money into an IRA when you change
jobs. This assumes that the employers will coop-
erate; some may want you to take your money
when you leave while others won’t accept trans-
fers from other plans.

SMALL BUSINESS ISSUES

The lines between personal and business liabilities

aren’t always clear when an entrepreneur owns a
small business. Often, these people will file bank-
ruptcy to protect their personal resources from
company problems.

In November 2000, the former owner of a small

Wisconsin publishing company filed for bank-
ruptcy protection to protect himself against a num-
ber of personal guarantees that he’d made in con-
nection with the business. The filing serves as a
good example of the personal liabilities that can
follow from owning a small business.

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HOLD HARMLESS AGREEMENTS & BANKRUPTCY

John J.T. Shinners, who owned SPI Communica-

tions, Inc. and was a member of the Shinners pub-
lishing family, filed for Chapter 7 bankruptcy in
U.S. Bankruptcy Court; he listed assets totaling
$218,393 and liabilities totaling $8,345,998. Of the
liabilities, $7,554 was owed to secured creditors
and $8,338,444 to unsecured creditors. The bank-
ruptcy would mostly affect the unsecured credi-
tors—essentially erasing the monies owed them.

Bruce Lanser, Shinners’s lawyer, said that a lot of

the debt was SPI corporate obligations that
Shinners had secured with personal guarantees. The
lawyer went on to tell a local newspaper that the
bankruptcy was “precipitated by his desire to dis-
charge his personal guarantees” and protect him-
self from personal liability down the road if SPI’s
creditors tried to hold him responsible for non-
guaranteed company debts. This approach, how-
ever, doesn’t always work.

The March 1998 U.S. Supreme Court decision

Kawaauhau v. Geiger dealt with a professional li-
ability issue that led to a bankruptcy filing.

When Margaret Kawaauhau sought treatment for

an injured foot, Paul Geiger—a medical doctor—
examined and hospitalized her to attend to the
risk of infection. Although Geiger knew that in-
travenous penicillin would have been more effec-
tive, he prescribed oral penicillin, because he knew
his patient wished to minimize treatment costs.

Geiger then departed on a business trip, leaving

Kawaauhau in the care of other physicians, who
decided to transfer her to an infectious disease spe-

272
 CHAPTER 9

cialist. When Geiger returned, he canceled the

transfer and discontinued all antibiotics because
he believed the infection had subsided.
Kawaauhau’s condition deteriorated, requiring
amputation of her leg below the knee and she sued
Geiger for malpractice.

After trial, the jury found Geiger liable and

awarded Kawaauhau and her husband approxi-
mately $355,000 in damages. Geiger, who carried
no malpractice insurance, moved to another state.
Eventually, the Kawaauhaus found him and gar-
nished his wages. Geiger then filed for bankruptcy.

The Kawaauhaus requested the Bankruptcy Court

to hold the malpractice judgment nondischarge-
able under federal bankruptcy law, which provides
that a “discharge [in bankruptcy]...does not dis-
charge an individual debtor from any debt…for
willful and malicious injury…to another.” Con-
cluding that Geiger’s treatment fell far below the
appropriate standard of care and therefore ranked
as “willful and malicious,” that court held the debt
nondischargeable. The district court affirmed, but
the circuit court reversed, holding that:

[federal bankruptcy law]’s exemption

from discharge is confined to debts for an
intentional tort, so that a debt for mal-
practice remains dischargeable because it
is based on negligent or reckless conduct.
So, the Kawaauhaus pressed the case up to the high
court, which agreed to consider their arguments.

Ruth Bader Ginsberg wrote the opinion of the

Court:

273
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

[U.S. Bankruptcy Code]’s words strongly

support the Eighth Circuit’s reading that
only acts done with the actual intent to
cause injury fall within the exception’s
scope. The section’s word “willful” modi-
fies the word “injury,” indicating that
nondischargeability takes a deliberate or
intentional injury, not merely, as the
Kawaauhaus urge, a deliberate or inten-
tional act that leads to injury.
Ginsberg went on to write that, if Congress had
meant to exempt debts resulting from uninten-
tionally inflicted injuries, it might have described
instead “willful acts that cause injury” or chosen
another word or words—like “reckless” or “negli-
gent”—to modify “injury.”

Moreover, the Bankruptcy Code’s formulation

closely resembled the legal category “intentional
torts,” which generally require that the at-fault
person intended the consequences of an action, not
simply proof that the act itself took place.

The Kawaauhaus were seeking an interpretation

that could include a wide range of situations in
which an act was intentional but the resulting in-
jury was unintended. Ginsberg and the Court
didn’t agree with that theory:

A construction so broad would be incom-

patible with the well-known guide that ex-
ceptions to discharge should be confined
to those plainly expressed, and would ren-
der superfluous the exemptions from dis-
charge set forth in [federal law]. The
Kawaauhaus’ argument that, as a policy

274
 CHAPTER 9

matter, malpractice judgments should be

excepted from discharge, at least when the
debtor acted recklessly or carried no mal-
practice insurance, should be addressed to
Congress. Debts arising from reckless or
negligently inflicted injuries do not fall
within [federal bankruptcy law]’s compass.

USING BANKRUPTCY LAW

WITHOUT FILING

Bankruptcy filings have become so commonplace

that some people who have sizable liabilities will
use bankruptcy tactics without actually filing for
protection. A good example of this was provided
by O.J. Simpson, the famous football player and
actor who was tried and acquitted on charges that
he murdered his ex-wife and her friend. After he
was acquitted of the criminal charges, his ex-wife’s
family sued him in civil court for wrongful death.

Simpson lost that case (largely because civil law-

suits have lower standards of proof than criminal
cases do). In February 1997, he was ordered to
pay the families of his ex-wife and her friend $33.5
million. He didn’t have that much cash. So, he
began to protect his assets as someone about to
file bankruptcy might—even though he didn’t ac-
tually file bankruptcy.

Among the things he did:

• Move to Miami. Florida law forbids

forcing a person out of his residence

275
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

if he owns it outright; so, many

wealthy people facing money prob-
lems dodge debts by converting liq-
uid assets into Sunshine State mansions.
• Transfer most of his remaining liquid
assets into legal, domestic havens: two
pension and retirement funds. These
funds (with millions of dollars in
them) could not be touched by out-
siders even if Simpson filed for bank-
ruptcy. The pensions were scheduled
to begin paying their annuities when
Simpson turned 55—in 2002.
• Rely on money he received from the
NFL and the Screen Actors Guild pen-
sions to cover his regular expenses.
These monies were untouchable,
again, because pension laws protect
them from legal judgments.
• Transfer half a million dollars into the
estate of his children (for expenses and
education).
• Liquidate most of the assets that could
be seized (he’d actually done this be-
fore his criminal trial had begun). He
sold real estate in New York and Cali-
fornia, property in Mexico; a 50 per-
cent interest in a string of HoneyBaked
Ham franchises, his Ferrari Mondial
and Ford Bronco. He borrowed $3
million against his Los Angeles home
and used a Warhol serigraph of him-
self as security for a loan he took from
his children’s estate. (Eventually, his

276
 CHAPTER 9

home went into foreclosure and was

sold at auction.)
• Tap into his homeowners policy to pay
for his defense in the civil trial.
• Let go of many of his personal posses-
sions. The items seized by the court
and sold at auction generated $430,000
for the families. (His 1968 Heisman
Trophy went for $255,500.)
After the civil case was concluded and Simpson
lost his Los Angeles home in foreclosure and saw
some of his personal possessions auctioned off, he
was still keeping about $16,000 a month (after taxes)
from various untouchable sources.

Lawyers for the families of his ex-wife and her

friend tried to seize Simpson’s pension funds; but
these efforts came to nothing. They were eventu-
ally dropped—the lawyers couldn’t establish that
the pension benefits could be used as payment in
the wrongful death suit.

...BUT SHOULD YOU FILE?

The question often arises: Is it ethical to file for

bankruptcy after you’ve been found liable for
someone else’s loss? Ethical is a tough word to
define in these circumstances. It probably accom-
plishes more to say that it’s legal to file bankruptcy
to discharge a liability. And many people do.

The September 1994 California Appeals Court de-

cision Main Line Pictures, Inc., v. Kim Basinger
dealt with a high-profile bankruptcy designed

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HOLD HARMLESS AGREEMENTS & BANKRUPTCY

plainly to avoid a legal liability. And it caused

many people—in Hollywood and elsewhere—to
question the ethics of a bankruptcy system that
allows someone to file explicitly to avoid paying
a particular personal liability.

Basinger was a well-known actress, having starred

in movies like Batman and 9½ Weeks. In Decem-
ber 1990, Main Line sent her a copy of the screen-
play of Boxing Helena. Main Line’s president, Carl
Mazzocone, followed with a letter to Basinger—
through her agent—offering $500,000 plus addi-
tional deferred compensation to star in the movie.

Basinger was excited about the script and inter-

ested in playing the female lead. Barbara Dreyfus,
the director of development for Mighty Wind Pro-
ductions, arranged for Basinger to meet the film’s
screenwriter and director, Jennifer Lynch.
(Mighty Wind Productions was Basinger’s
“loan-out” corporation, a company through which
the actress “loaned” her acting services. Payment
for Basinger’s services was made to Mighty Wind,
which in turn employed and paid Basinger.)

In January 1991, Lynch, Basinger and Dreyfus met

at Mighty Wind’s office. Basinger expressed an
interest in the movie, which she believed would
be a tremendous showcase for an actress. She also
stated she felt a kinship to the role because it con-
cerned a woman who was obsessed, a situation
which was familiar to Basinger.

The screenplay contained some nude scenes.

Basinger told Lynch about her concerns regard-
ing the nude scenes. Lynch explained in detail how

278
 CHAPTER 9

she expected to film the scenes, stating there would

be no gratuitous sex scenes or frontal nudity be-
low the waist. While the film would be sensual, it
would not be explicit. The meeting lasted more
than an hour and all issues involving nudity were
resolved. Basinger agreed to act in the film as it
had been presented to her in the script.

A few weeks later, Basinger met with her agents

and agreed to act in Boxing Helena. Main Line’s
attorney, Robert Wyman, discussed the contract’s
material terms with Basinger’s attorneys.

Compensation and credit were discussed at the out-

set. The parties agreed Basinger would receive her
usual fee of $3 million for the picture, consisting
of guaranteed compensation of $600,000 plus ad-
ditional deferred and contingent compensation.
Basinger agreed to accept second billing behind
Ed Harris, the male lead.

On February 27, 1991, Mazzocone, Wyman and

Basinger’s attorneys discussed each material term
of the contract. Wyman reviewed a checklist of
all terms in issue; Basinger’s attorneys agreed to
review each term as described. Wyman then sent
Basinger’s attorneys a “deal memo” dated Febru-
ary 27, 1991, setting forth the contractual terms
for Basinger’s performance in Boxing Helena.

The next day, Basinger’s attorneys sent an anno-

tated copy of the “deal memo” back to Wyman.
The annotations requested certain changes to be
included in a formal written document. For ex-
ample, she wanted to change the number of days
Basinger would work in post-production.

279
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

As soon as the agreement for Basinger’s acting ser-

vices was reached at the end of February, Main
Line received authorization to use Basinger’s photo
to promote the movie.

Republic Pictures, a foreign distribution company,

learned that Basinger had agreed to perform in
the film; it began preselling the film in foreign
markets with Basinger’s name attached. Eventu-
ally, foreign presales for the movie with Basinger’s
name attached totaled $6.8 million. Main Line rea-
sonably expected to receive approximately $3
million in domestic presales. The money obtained
from the foreign presales would secure financing
for the film.

In April 1991, Main Line began preproduction

activities including casting, wardrobe, special ef-
fects and model construction.

Because timing is critical, film industry contracts

are frequently oral agreements based on unsigned
“deal memos.” Often, actors authorize their agents
or lawyers to bind them. Although the parties may
intend their oral agreement to be binding, many
subsidiary or ancillary terms may subsequently
be agreed upon and incorporated into the written
contract. The written contract also enables parties
to formalize their understanding in legal language.

The absence of an executed written contract doesn’t

mean there is no legally binding agreement.
Basinger, for example, had entered into executed
written contracts for only two of her prior films.

In April 1991, Basinger changed agents; she replaced

Intertalent with International Creative Manage-

280
 CHAPTER 9

ment (ICM). After ICM read the screenplay for

Boxing Helena, it concluded Basinger should not
do the film.

On May 6, 1991, Basinger called Lynch and

Mazzocone and expressed reservations about the
script. Basinger stated she wanted the character to
be more sympathetic. Two days later, ICM told
Lynch and Mazzocone it had suggested that
Basinger not act in the film. Lynch attempted to
accommodate Basinger’s reservations by modify-
ing the script. Lynch met with Basinger to discuss
the proposed changes.

On May 29, 1991, Wyman sent to Basinger’s law-

yers a final execution draft of the Acting Service
Agreement and the Producer’s Standard Terms
and Conditions. The cover letter stated Wyman
was delivering an execution copy of the “Agree-
ment between Main Line Pictures, Inc. and
Mighty Wind Productions, Inc. f/s/o [for the ser-
vices of] Kim Basinger.”

The signature line called for execution by “Main

Line Pictures, Inc. By Carl Mazzocone” and
“Mighty Wind Productions, Inc. by Kim
Basinger.” There was no place for Basinger to sign
as an individual.

The Acting Service Agreement was never executed.

On June 10, 1991, Main Line learned that Basinger

was not going to act in Boxing Helena. Within
two weeks, Main Line filed a lawsuit against
Basinger and Mighty Wind, alleging that Basinger
and Mighty Wind had breached an oral and a writ-
ten contract to provide Basinger’s acting services.

281
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

The Producer’s Standard Terms and Conditions

provided, among other things, that Main Line was
entitled to sue if Basinger breached and that Mighty
Wind was to indemnify Main Line if Basinger made
any claim for compensation. The company
pointed out that, after Basinger bailed out of the
movie, its presales fell by more than half.

During trial, Basinger’s lawyers focused on a tech-

nical argument. They claimed that, because Mighty
Wind was a corporation, it was entitled to sepa-
rate jury instructions. Main Line argued no dis-
tinction existed between Basinger and Mighty
Wind for purposes of the case.

The trial court refused to instruct the jury as re-

quested by Basinger’s lawyers. It concluded that
everything done by Mighty Wind was done by
Basinger.

The jury concluded that “Basinger and/or Mighty

Wind” had entered into both an oral and a writ-
ten contract, had breached the contract and had
caused damages to Main Line in the amount of
$7,421,694. It further determined that “Basinger
and/or Mighty Wind” had denied in bad faith the
existence of the contract, and awarded an addi-
tional $1.5 million in damages. Finally, the trial
court also awarded Main Line $713,522.05 in at-
torneys’ fees and costs.

Basinger’s lawyers appealed, arguing that the ac-

tress and her loan-out corporation were distinct
entities. The case moved through appeals courts
for several years—but, in 1994, Basinger was held
liable for the damages Main Line had suffered.

282
 CHAPTER 9

She promptly filed bankruptcy, claiming less than

$4 million in assets against the more-than-$8 mil-
lion judgment. Main Line ended up collecting only
about a third of its judgment.

The bankruptcy filing raised all kinds of questions

about the role of bankruptcy law. Kim Basinger
was a wealthy actress with extensive financial as-
sets—including considerable real estate holdings in
California and her native Georgia. Perhaps she
didn’t have sufficient umbrella insurance (which
she probably should have, given her wealth and
the nature of her work) or $8 million in cash avail-
able to pay the judgment…but shouldn’t she have
worked out some arrangement with Main Line to
make good on her debt?

But the actress’s attitude—which seems fairly com-

mon these days—was to use the law as aggressively
as possible to avoid paying the damages. And U.S.
bankruptcy law allows this. Until the laws are re-
formed to limit filings intended to avoid particu-
lar liabilities, people will continue to use the Bank-
ruptcy Code as liability insurance of last resort.

CONCLUSION

In insurance circles, tools like hold harmless agree-

ments and bankruptcy are called “non-insurance
transfers of risk.” And, generally, insurance com-
panies don’t trust them. That’s why insurance
policies include so much language about what hap-
pens in the event of a bankruptcy (the
policyholder’s, not the insurance company’s) and
about contractual obligations (a legalistic way to
describe things like hold harmless agreements).

283
HOLD HARMLESS AGREEMENTS & BANKRUPTCY

This doesn’t mean that hold harmless agreements

and bankruptcy filings are problems. On the con-
trary, the distrust probably has something to do
with how effective they can be. They may be tools
of last resort; but they are tools for handling li-
abilities.

At the beginning of this book, we said that the

goal was to explain the liability mania that is grip-
ping much of the modern world. And to exam-
ine the various tools an individual can use to man-
age personal liability risks.

You can’t make a litigious world change overnight.

But you can protect yourself and—by protecting
yourself—push the world a little closer to a less
ridiculous position. In fact, as a well-informed
consumer, that’s your responsibility. We hope this
book helps you meet that challenge.

284
 INDEX

INDEX
accident 1-2, 5, 7, 13, 15-16, 21, 23-24, 28, 30, 40-42, 52,
55-56, 59, 63, 66, 70, 72-73, 79-80, 87-96, 99, 101-111,
115, 118, 123-125, 131-132, 134, 138-139, 142, 148,
156-157, 164, 174, 178-181, 186-187, 204, 206, 208,
214-215, 256-257, 263-264
accidental loss limitation 23
advertising injury 156, 164-165, 167, 169, 173, 250
agreement 13, 27-28, 30, 32-33, 44, 70, 83, 102, 134, 139,
146, 173, 240, 247, 253-266, 269, 279-281
aircraft 73, 75-76, 165, 177
arbitration 101-102
assets 3, 6, 27, 52, 110, 113-114, 122, 151-152, 155-157,
176, 182, 248, 265-268, 270-271, 275-276, 282
assignment 28, 213-214
auto liability 88, 90-91, 93, 98, 104, 146, 150

bankruptcy 29, 66, 168, 219, 253, 265-275, 277, 282-283

and benefits 269
bodily injury 6, 17, 21, 24, 28, 30, 35, 40, 53, 56, 62-63,
65, 67-68, 72, 87, 89-90, 95-96, 98, 100, 116, 118, 125,
131, 134, 136, 139, 146, 150, 158, 164-167, 171-172,
174, 180, 205, 208-209, 211-212, 214, 223, 231, 236-
238, 260
business activities 30, 69, 156-157, 166, 185
business liability 16, 159-160, 164, 169, 172, 182
business owners policy (BOP) 31, 34, 156, 160-161, 163-
164, 166, 169, 177, 183, 229
business pursuits 52-53, 123, 178, 180-182, 230-232
business umbrellas 176-177

claims tail 175

claims-made 172, 174-176
v. occurrence 174, 176

285
INDEX

collision 97-98, 103, 108, 217

combined single limit of liability 167
commercial general liability (CGL) 161, 165, 172-175,
177, 250
commercial umbrella 176, 229, 233-234
compensatory damages 14-15
condominium loss assessment 68
contractual liability 177
copyright 239-240, 248-249, 251
cost containment 104
coverage territory 34, 169
crime 13, 161, 226
criminal acts 20-21, 23, 25, 42, 80, 171

damages 1-6, 13-15, 24, 28-29, 32, 36, 38-42, 44-45, 53,
55, 57, 62-63, 65, 68, 70, 72, 74, 76, 88, 91, 94-95, 98,
101-103, 107-109, 116-117, 119, 121, 124, 126, 129-130,
136, 138-141, 145, 150, 158, 160, 164-165, 167-168,
172, 174, 181-182, 185, 187, 193, 201-204, 207-208,
210-214, 218-219, 224, 226, 228, 231, 237, 241, 249-
250, 259-260, 262-263, 273, 282-283
dead storage 52-53, 75
Declarations Page 25, 30, 32-33, 35, 38, 40-41, 43, 45, 49,
163, 167-169, 175
deductible 7, 13, 30, 33-34, 39, 41, 49, 97, 99, 115-116,
123-124, 139-140, 210
defamation of character 11, 118, 125, 223
privileges 227
defense costs 8, 28, 31, 91-92, 113, 119-122, 164, 170,
185, 236
directors and officers liability insurance 64, 171
disability benefits 91, 145, 166
discovery period 164
dog bites 185, 199, 201
statutes 201
domestic employees 68, 81-82
drop down coverage 118
duty to act 14

286
 INDEX

duty to defend 28, 34, 59-61, 81, 117, 119-120, 129, 208,
224, 229, 233, 235-237
duty to warn 186, 189-190

emotional distress 128, 217, 223, 234-239

intentional infliction of 128, 234-235
negligent infliction of emotional harm 235
employee dishonesty 163
endorsements 33-34, 159, 163, 169, 173
errors and omissions 42, 145, 171-172
exclusions 8, 13, 21, 25, 27, 33, 47, 68-69, 72, 74-75, 134,
138, 144, 161, 164-166, 171, 213-214, 231, 255

false arrest 30, 118, 125-126

financial responsibility laws 102
first aid 64-65, 67
following form excess policies 8
hold harmless agreement 253-263, 265, 283
home-based business 69, 155-160, 183
homeowners association 68
homeowners policy 20-21, 30, 43, 49, 52-58, 60, 62-64,
66, 68, 72, 74-76, 81, 83, 119-121, 142, 148, 157, 159,
178, 180-181, 185, 203-205, 207-208, 214-215, 217,
229, 232-235, 276

impaired property 166, 169

incident 13, 16, 21, 47, 58, 129, 153, 179, 202-207, 212-214
indemnification 29, 35, 262, 265
infringement of property 17
in-home business policy 159-160
insured location 36-38, 56, 75, 131, 144-145
intellectual property 223, 239-242, 244, 247-249, 251
intentional acts 12, 20-21, 66, 72, 134, 138, 213
interest 164, 195, 205, 228, 234, 263, 276, 278
postjudgment 39, 65, 92, 164
prejudgment 28, 38, 116, 205
Internet 211, 239, 241, 245-246, 248-250, 258
invasion of privacy 223-224

287
INDEX

joint obligations 21, 24-25, 214

jointly-owned property 68, 235
judgment proof 265-266

legal liability 42, 164, 167-168, 171, 185, 277

liability coverage 3, 6-9, 13, 25, 27, 29-30, 42, 49, 52-53,
55-57, 59, 64, 66-70, 76, 81, 85, 88-90, 92-94, 96-97,
107, 109-111, 113-116, 118-120, 123, 133, 138, 140,
146, 148, 151, 158-164, 168, 170-171, 176-178, 180,
209, 214
libel 3-4, 17, 30, 118, 125-128, 166
limit of liability 28, 39, 41, 88-90, 92-95, 113-117, 120-122
limitations 60, 134
liquidation 267, 269
liquor liability 34, 80, 165, 173
loss of consortium 2, 15, 87, 128, 156, 192, 194, 263
loss of earnings (or income) 4, 92, 117, 156, 160, 164
loss of use expense 97
lost coverage allowance 104
malpractice 42, 145, 171-172, 177, 272-274
medical payments or personal injury protection (PIP)
39, 46, 94, 96, 98-99, 103, 106-107, 131-132, 144-145,
147, 159, 164, 173, 180, 250
minimum retained limit 39
mobile equipment 165, 167-169
multiple claims 93

named insured 35, 38, 43, 55-56, 71-73, 163-164, 166, 168,
177, 208
negligence 2, 14, 17, 20-21, 42, 54, 56-59, 76, 78, 101, 132,
142, 164, 170-172, 180, 182, 186, 189, 191, 199, 201-
203, 211-212, 215-216
negligent infliction of emotional harm 235
no-fault coverage 97, 107
non-business pursuits 181-182
non-owned auto 36, 132, 169
non-renewal 47-48

288
 INDEX

obligations 21, 24-25, 44-45, 66-67, 95, 165, 168, 171, 213-
214
occurrence 14, 31-32, 39-41, 57, 62-63, 66-67, 117, 123-
126, 140, 167-168, 174-176, 208, 224
v. claims-made 174, 176
open and obvious 186, 188-190, 199
other insurance 47, 49, 67, 91, 131, 157

package policy 54, 159-161

pain and suffering 3-4, 15, 85, 87, 105, 107, 202
parental immunity 142-144
parental liability 73, 141, 210-212, 215, 218-219
patents 239-240, 246-249
defensive insurance 249
enforcement insurance 249
process patent 246
personal injury 17, 60, 62, 96, 99, 118, 121, 125-126, 130,
136, 138-139, 150, 164-165, 167, 169, 173, 202
personal liability 1-2, 6-8, 11, 14-17, 26-27, 34, 49, 56-57,
64, 67-69, 109, 113, 115-116, 120, 122-123, 145, 152,
160, 180, 185, 199, 217, 253, 262, 266, 268, 272, 277, 283
policy limits 32, 41, 119, 159
policy period 31, 38, 40, 48, 75, 163, 168, 174-175
premises liability 58-59, 77
privacy rights 17
professional liability 41-42, 70, 73, 129, 140, 145, 165,
170-272
property coverage 54, 158, 161, 163
property damage 14-16, 21, 24, 28, 40, 42, 52-53, 62-63,
68, 72, 87, 89-90, 95-98, 103, 116, 118, 130, 134, 136,
139, 146, 150, 158, 164-165, 167, 172, 174, 181, 208,
211, 214, 231, 237, 260
property replacement costs 15
punitive damages 15, 32, 224, 226, 228

reasonable care 136, 144, 188-189, 202, 213, 227, 236

reasonable expectations 71, 95, 214
reasonable expenses 65, 117

289
INDEX

regularly furnished autos 119

rental car liability 108
Collision Damage Waiver (CDW) 108-109
Liability Insurance Supplement (LIS) 109
Loss Damage Waiver (LDW) 108
Personal Accident Insurance (PAI) 109, 147
Personal Effects Coverage (PEC) 109
replacement costs 15, 66
residence 16, 38, 43, 54, 56, 69, 83, 100, 131, 144-147
residence employee 43, 56, 131, 144-145
residence premises 43, 100, 146
residence-related liability 16
resident 8-9, 11-12, 25, 35, 55-56, 66, 71, 91, 127-128, 131,
145-146, 207-209, 245
retained limit 39, 130-131, 150
retroactive date 172
right to sue 4, 44-45, 104, 106-107

self-insured retention 7, 34, 116, 131, 177

set-off provisions 94
severability of insurance 45
sexual harassment 10-12, 113, 224
single limit of liability 88
slander 3-4, 17, 30, 118, 121, 125-126, 166, 223, 228-229
slip and fall 166, 197
small business 5, 42, 155-156, 178, 271
smoothed limit 124
social host liability 79-81
specific damages 15
split limits of liability 90
stacking 18, 32, 175
subrogation 45-46
substantial nexus test 205
swimming pool 16, 186-187, 190

termination 47, 60
third-party liability 107
thresholds 103

290
 INDEX

tortfeasor 13-15
torts 13-14, 17, 215, 218, 237, 274
intentional 14, 17, 273-274
unintentional 14, 17
trademarks 239-240
transfer of interest 48
trip and fall 16
true umbrella policies 8

umbrella liability 3, 7, 9, 13, 28, 93, 114-116, 129, 142,

151, 153, 176, 210, 223
umbrella policy 3, 7, 8, 13, 16, 29-30, 36-37, 41, 47, 49,
60, 63, 93, 111, 113-116, 118-121, 123-125, 131-134,
138-139, 143, 145-146, 148-150, 176, 229, 232, 234
underlying policy 34, 49, 121, 124, 140, 148, 232
uninsured motorists coverage (UM) 39, 49, 98-101, 107,
146, 148-150
unregistered vehicles 74

vehicles 2, 15-16, 33, 35-36, 41, 53, 73-75, 79, 81, 90, 100-
101, 109-110, 119, 123, 133, 138, 148-151
vexatious refusal to pay 61
vicarious liability 50, 74, 210
vicarious parental liability 73
watercraft 35, 37, 55, 73, 75, 123, 133, 165, 177
willful or wanton injury 59
workers’ compensation 171
wrongful eviction 118, 127

291