Its close to a year after I started writing about it and now that my case is settled and I have a tiny bit of free time, I've decided I'm going to try to close out my mini-series on what I've been learning about insurance. Let's pick things back up and discuss a little weirdness with liability insurance.
When I introduced liability insurance, I framed it as protection for you, the policy holder, when you do something that causes damage to somebody else.We buy this insurance because, particularly in the case of driving automobiles, it is very easy to cause a lot of damage to somebody or their property. Rather than being financially obligated to directly pay for all of the damage directly out of your pocket, liability insurance comes in and covers those payments for you (up to a certain amount). Insurance companies do this in exchange for a relatively small monthly fee which, according to the big piles of data they have after doing this a long time, is big enough to allow them to make a profit even after paying out for all this destruction that people cause with their cars.
There are a few tricks they use to make this work. One, they are relatively selective about the type of people they insure. There are a bunch of people at insurance companies (or people the insurance companies contract out to) called actuaries, whose job it is to figure out what kinds of things are indicators of bad and good drivers. Past auto insurance claims? Tickets? Age? This type of information allows them to asses just how risky it would be to enter this kind of liability agreement. Furthermore, using even more data and math, they are able to make an educated guess at how much they should charge you for your monthly payment to them (your premium) in exchange for taking on this risky. The riskier a bet you are (because maybe you've told them you always drive two times the speed limit), the higher your monthly premium will be.
The second trick to making this whole insurance thing work is to insure tons of people. Lots and lots and lots of people, hopefully people who always signal, drive the speed limit, and have never gotten a ticket. By being selective and pooling all those monthly premiums together, it is possible to pay for whatever destruction is caused and still make money at it. Its all statistics, a numbers game. There are no guarantees but with a good screening process and lots of people, the actuaries can find a way to make it work.
(Until recently, health insurance worked the same way. In fact, some health insurance companies were such sticklers about only letting in healthy people that if you did end up seriously sick, they worked very hard to find a way to weasel out of the contract they made with you. This is called "recidivism"and its one the things Obamacare has been trying to fix. This sneakiness and legal legerdemain on the part of the health insurance companies would be unnecessary if we had a single-payer system where there was only one insurance company; everybody would be covered by default. Requiring everybody to have health insurance is a step in that direction but still provides some incentives for health insurance companies to try to off-load their sickest policy-holders to somebody else.)
Liability coverage is the most fundamental type of insurance and it extends to more than auto liability insurance. Ice skating rinks, home-owners, water parks, schools, fast-food restaurants, everybody has liability insurance because anybody can sue anybody at any time for causing harm or damage. Liability insurance makes it possible for businesses to not have to hoard a huge stockpile of cash just in case they get sued for damage they may or may not have caused. During the process of transferring our home and auto insurance during our move we were asked if we wanted a general liability policy, covering our whole lives, essentially. When I briefly owned my own legitimate window-washing business I had liability insurance in case, you know, I dropped a squeegee on somebody's head or something. Liability insurance gives us all the ability to sue for damages while allowing businesses to not exist one lawsuit away from bankruptcy.
So liability insurance is a good thing for us auto-drivers. But what happens if I have a $100,000 liability policy but I drive into an art museum and destroy their $100 million Van Gogh? The agreement I have with the insurance company says they will pay the first $100,000 (ignoring the deductible) and the rest is on me. Things are looking bad because, even after the my insurance company pays out the full policy limit, I will still have approximately $100 milllion to pay.
There is another catch in the law that can prevent my life from being one of poverty henceforth and this is the concept of recoverable assets. Even though I am still on the hook for $100 million and the museum can sue me to try to recover their losses due to my careless driving, they are not able to take all of my worldly wealth to do so. There are only certain assets which can be recovered by the museum in a lawsuit. In Kansas (working from memory of what my lawyer told me), the museum could not take:
When I introduced liability insurance, I framed it as protection for you, the policy holder, when you do something that causes damage to somebody else.We buy this insurance because, particularly in the case of driving automobiles, it is very easy to cause a lot of damage to somebody or their property. Rather than being financially obligated to directly pay for all of the damage directly out of your pocket, liability insurance comes in and covers those payments for you (up to a certain amount). Insurance companies do this in exchange for a relatively small monthly fee which, according to the big piles of data they have after doing this a long time, is big enough to allow them to make a profit even after paying out for all this destruction that people cause with their cars.
There are a few tricks they use to make this work. One, they are relatively selective about the type of people they insure. There are a bunch of people at insurance companies (or people the insurance companies contract out to) called actuaries, whose job it is to figure out what kinds of things are indicators of bad and good drivers. Past auto insurance claims? Tickets? Age? This type of information allows them to asses just how risky it would be to enter this kind of liability agreement. Furthermore, using even more data and math, they are able to make an educated guess at how much they should charge you for your monthly payment to them (your premium) in exchange for taking on this risky. The riskier a bet you are (because maybe you've told them you always drive two times the speed limit), the higher your monthly premium will be.
The second trick to making this whole insurance thing work is to insure tons of people. Lots and lots and lots of people, hopefully people who always signal, drive the speed limit, and have never gotten a ticket. By being selective and pooling all those monthly premiums together, it is possible to pay for whatever destruction is caused and still make money at it. Its all statistics, a numbers game. There are no guarantees but with a good screening process and lots of people, the actuaries can find a way to make it work.
(Until recently, health insurance worked the same way. In fact, some health insurance companies were such sticklers about only letting in healthy people that if you did end up seriously sick, they worked very hard to find a way to weasel out of the contract they made with you. This is called "recidivism"and its one the things Obamacare has been trying to fix. This sneakiness and legal legerdemain on the part of the health insurance companies would be unnecessary if we had a single-payer system where there was only one insurance company; everybody would be covered by default. Requiring everybody to have health insurance is a step in that direction but still provides some incentives for health insurance companies to try to off-load their sickest policy-holders to somebody else.)
Liability coverage is the most fundamental type of insurance and it extends to more than auto liability insurance. Ice skating rinks, home-owners, water parks, schools, fast-food restaurants, everybody has liability insurance because anybody can sue anybody at any time for causing harm or damage. Liability insurance makes it possible for businesses to not have to hoard a huge stockpile of cash just in case they get sued for damage they may or may not have caused. During the process of transferring our home and auto insurance during our move we were asked if we wanted a general liability policy, covering our whole lives, essentially. When I briefly owned my own legitimate window-washing business I had liability insurance in case, you know, I dropped a squeegee on somebody's head or something. Liability insurance gives us all the ability to sue for damages while allowing businesses to not exist one lawsuit away from bankruptcy.
So liability insurance is a good thing for us auto-drivers. But what happens if I have a $100,000 liability policy but I drive into an art museum and destroy their $100 million Van Gogh? The agreement I have with the insurance company says they will pay the first $100,000 (ignoring the deductible) and the rest is on me. Things are looking bad because, even after the my insurance company pays out the full policy limit, I will still have approximately $100 milllion to pay.
There is another catch in the law that can prevent my life from being one of poverty henceforth and this is the concept of recoverable assets. Even though I am still on the hook for $100 million and the museum can sue me to try to recover their losses due to my careless driving, they are not able to take all of my worldly wealth to do so. There are only certain assets which can be recovered by the museum in a lawsuit. In Kansas (working from memory of what my lawyer told me), the museum could not take:
- My home (primary residence)
- One car per adult in my household
- My retirement savings
For most adults, most of their earthly treasure falls into these categories. If the museum were to sue me, the amount of money they might win is probably going to be relatively small, even by the standards of a typical household. If the museum has some reason to believe I have a bunch of money, they can search the public records and find out what property I own and how many cars I have registered in my name but they can't look at my bank accounts or ask to go through my house to see if I happen to have any Van Goghs. Based on whatever information is publicly available, they have to decide if it would be worth the time and expense to sue me.
In the the case of the person who hit me, though I don't believe we did a public records search, we had good reason to believe she was a normal person that probably didn't have piles of cash laying around, at least not $100,000 worth. What about her salary? There is a possibility of garnishing wages (legally forcing part of her future income to be sent to me) but enforcement is tricky. Its a lot like child support in that even though I might be legally obligated to that income, enforcing those payments can literally be more expensive than they are worth. Even though she was 100% at fault, the cost of personally suing here would in all likelihood result in lower compensation for me.
It kind of stinks. The combination of a Kansas' low liability requirement ($25,000) and the lack of recoverable assets most of us have means that it is very easy to be completely without fault in a collision and still receive very little compensation for the damage caused. I could have lost much more than the ability to walk pain-free and the payment I would have received in compensation for my losses (and to pay for future medical care) would have been unaffected. This is why having uninsured and underinsured policies are so important, particularly in Kansas. They set a lower limit to the payment amount regardless of the other party's insurance policy.
To be clear, I really like the idea of protecting what you might call "essential assets" from lawsuits. Even if I had been able to, I would not have felt good about taking a house, car, or life savings from the gal who hit me. I am very convinced that there was no negligence on her part and that this was entirely an accident. Unfortunately for me, I am bearing most of the consequence for her mistake but this is exactly why liability insurance should exist. And this is also why requiring so little liability coverage in Kansas is such a tragedy. The people who really make out well in this situation are the insurance companies. They are only on the hook for $25,000, assuming their client buys the state minimum. If it weren't for the under-insured policy with MY insurance company, everybody but me would have been happy with how things turned out. That policy made the pool of money in play big enough that lawyers and insurance companies paid attention.
In case it is not clear, here are my recommendations for buying auto insurance:
- Be responsible and buy a lot of liability insurance. You may be able to skate by with less but this is the primary mechanism by which people are made whole by the damage you cause. The amount of havoc that can be wrought by a car is tremendous and as such, your liability coverage should be high. You don't want to be responsible for any unpaid moral debt.
- Buy as much uninsured/under-insured coverage as you can afford. With my insurance company, this was less than 10% of the yearly premium I pay. This extra policy ensures that you won't be left out to dry when somebody else makes a mistake and doesn't have the appropriate amount of insurance.
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