¶ 1401
Overview
Scope of the chapter. Liability insurance is the first layer of every protective plan. It pays the claims that most clients will face: the automobile accident, the injury on the client's property, the professional mistake, the employment dispute and the claim against a company's directors. It also pays for the defense of those claims, which for many clients is the larger benefit. This chapter examines liability insurance as a protective tool: the coverages available to individuals, professionals and businesses; the exclusions and gaps that leave clients exposed; the duties the insurer owes and the leverage they give the insured; the effect of insurance on the creditor's strategy; and captive insurance companies, which some clients use to insure risks that commercial insurers will not cover at an acceptable price, and which the Internal Revenue Service has pursued vigorously where they were used for tax deferral.
Why insurance comes first. Insurance has four advantages that no other protective tool combines. First, it is lawful in every jurisdiction and against every creditor, and its purchase is never a voidable transfer, because the premium buys coverage of equivalent value. Second, it pays the creditor, which removes the creditor's motive to pursue the client's other assets. Third, it pays for the defense, so that the client need not spend protected or unprotected assets on lawyers. Fourth, it is inexpensive relative to the risk it covers, particularly at the umbrella and excess levels. A plan that relies on trusts and entities to protect a client against claims that insurance would have paid has used the more expensive and more contestable tool first.
The limits of insurance. Insurance has limits that the rest of the plan must address. It covers only the risks the policy describes and only up to the stated limits. It excludes intentional conduct, most contract liability, fines and penalties, and, in many states, punitive damages. It does not respond to claims by spouses, support claimants, the government as tax collector or the bankruptcy trustee. Its value depends on the insurer's solvency and its willingness to perform. And the existence of large limits may attract claims and inflate demands. The protective plan uses insurance for what it does well and builds the other layers for what it does not.
Insurance in the Threat Matrix. In the terms of chapter 2, insurance is strong against C2 tort creditors within its limits and against certain C1 claims, such as claims for professional errors, that the policy covers. It is of no use against C3 spouses, C4 support claimants or C5 sovereign creditors. It is indifferent to C6, since the trustee in a bankruptcy takes the debtor's assets and the policy proceeds pass to the injured claimants. Its strength does not depend on timing in the way that transfers do: a policy bought before the incident covers it regardless of the client's financial position. A policy cannot be bought after the incident to cover it. The ratings are summarized in ¶ 1490.
How to read the chapter. Paragraph 1410 describes the structure of a liability insurance program. Paragraph 1420 examines personal lines for individuals and families, and ¶ 1430 professional liability. Paragraph 1440 covers business coverages, and ¶ 1450 the exclusions and gaps common to all of them. Paragraph 1460 addresses the insurer's duties to defend and to settle and the insured's remedies. Paragraph 1470 considers insurance from the creditor's side. Paragraph 1480 treats captive insurance companies, and ¶ 1490 places insurance in the Threat Matrix and sets out an insurance review.