"Liability"-the responsibility for injury, death or damages to another-is a word that sends chills down people's spines. Anyone who owns a home, drives a vehicle, operates a business or engages in any number of normal pursuits faces liability exposure. If one is proved liable for an accident, the consequences can be devastating financially unless you are properly protected. Wealthy individuals face a disproportionate amount of exposure because they often own multiple homes and automobiles, investment properties, private aircraft and yachts.

Wealth management professionals are getting better at including property and casualty specialists in their practices to address such liability exposure, yet statistics show that many high-net-worth individuals still carry low liability coverage in their personal insurance. Why do successful people do this when it obviously puts their wealth at risk?

The answer may lie in three factors. One is that people hold erroneous beliefs and misconceptions that lead them to carry lower limits. Second, there is even greater confusion about how the legal system works and what happens in the majority of liability cases. And third, clients who use mass-market insurers do not get access to the higher policy limits offered by specialty insurers.

Erroneous Beliefs
Even the savviest among us sometimes get bad information, and the subject of liability is no different. Many otherwise astute high-net-worth individuals, for example, believe there's a correlation between the size of judgments in liability cases and the amount of liability insurance carried by a defendant. People think that if you have high policy limits, the courts will go after all they can. This can be a particularly dangerous belief if it leads wealthy people to seek the minimal amount of liability limits on their policies. Because even though a plaintiff's attorney might find great comfort in knowing a defendant is well insured, it will be the facts of the case that determine the amount of a judgment.

In 2005, Lane McVicker LLC conducted a study of New York personal injury cases to determine if there were indeed some correlation between judgments and insurance coverage. Although the study was small in scope and did not count medical malpractice cases or instances in which private settlements were made, two significant factors became apparent. First, a surprising number of judgments over the previous five years were in excess of $5 million. Secondly, there was no correlation between judgments rendered and the amount of liability insurance carried. In the study's view, the facts of each case and the damages incurred by the plaintiff were the key settlement factors. The amount of the defendant's insurance coverage had no bearing.

One major inference that can be drawn from the study is that, when considering how many of the judgments were over $5 million, many people are likely to be significantly underinsured for liability.

Understanding The System
Wealth managers seeking to help their clients plan for liability exposure need to look at the realities of the legal system. If one is trying to use the public record of court settlements to help them determine a possible average amount of liability insurance to carry, they will find it very difficult to gather enough usable information.

The settlement amounts of most liability cases are unknown because most cases never make it to a jury or bench trial. Law firms specializing in these cases estimate that as few as 2% of them ever go that far. After the litigation process starts, most cases are settled through mediation and the amounts agreed upon do not go in the public record. The insurance companies who pay out those settlements are not inclined to disclose the amounts themselves. Even in cases that go to a full trial, the amounts of the judgments are not always made public. The public record is not a reliable source to help clients determine the amount of liability coverage they should carry. We'll examine better methods for doing so later.

Yet even if the legal system cannot help us determine proper policy amounts, it can dispel certain myths. The biggest of these is the one about how much information a plaintiff's attorney is allowed to find out about a defendant's net worth. This is probably the most misunderstood part of the whole process. Many people believe that financial records can be subpoenaed to see if the individual is worth going after. This is typically not the case. In most states, what the attorneys can ascertain is the policy limits of the individual's liability policy.

The statute in Florida, for example, allows a plaintiff's attorney to determine if a defendant has insurance and find out what the liability limits of the policy are. The attorney may also try to learn about a defendant's net worth through public records, though that is all he can do.