When you buy liability insurance, you expect that the insurance company will protect you from lawsuits. You pay your premiums, thinking that if something goes wrong, the insurer will cover the damages. But there’s a catch that many policyholders don’t realize until it’s too late. If a court awards more than your policy limits, you could be personally responsible for the difference.
That’s called an excess judgment, and it can be financially devastating. Below, our friends at Warner & Fitzmartin – Personal Injury Lawyers explain more about excess judgment liability.
The Basic Concept
An excess judgment happens when a lawsuit results in damages that exceed your insurance policy limits. Let’s say you cause a car accident that seriously injures someone. Your auto insurance policy has a limit of $100,000. The injured person sues you, and the court awards them $250,000. Your insurance company will pay the $100,000 policy limit, but you’re personally responsible for the remaining $150,000.
That excess amount doesn’t just disappear. The injured party can pursue your personal assets to collect it. We’re talking about your home, your savings, your wages, even your future earnings. According to the Bureau of Justice Statistics, only about 4% of personal injury cases actually go to trial, but when they do, plaintiffs win approximately 52% of the time. Those wins can result in significant judgments that easily exceed standard policy limits.
How Excess Judgments Happen
Excess judgments typically occur in cases involving serious injuries where damages far exceed what the average person carries in insurance. Motor vehicle accidents are the most common type of personal injury case, representing about 52% of all personal injury lawsuits. When these accidents result in catastrophic injuries like spinal cord damage, traumatic brain injuries, or permanent disabilities, the medical bills alone can reach hundreds of thousands or even millions of dollars.
Medical malpractice cases present another major risk. These cases have a median payout of around $679,000, well above most standard policy limits. Product liability cases are even higher, with median payouts around $748,000. If your insurance coverage is limited to $100,000 or $300,000, you’re exposed to substantial excess liability.
The situation becomes particularly dangerous when insurance companies make poor decisions about settling cases. Here’s where things get interesting. Insurance companies have what’s called a duty of good faith to their policyholders. When someone offers to settle a case within your policy limits, the insurer is supposed to seriously consider that offer. If they refuse a reasonable settlement offer and the case goes to trial, they could be responsible for the excess judgment, not you.
When Insurance Companies Get It Wrong
Insurance companies sometimes prioritize their own financial interests over protecting their policyholders. They might refuse to settle a case for $100,000 when your policy limit is $100,000, thinking they can get away with paying less at trial. But if the jury awards $300,000, the insurer can be held liable for the full amount, including the excess, if they acted in bad faith.
Bad faith can include refusing reasonable settlement offers, failing to properly investigate claims, unnecessarily delaying settlement negotiations, or failing to keep the policyholder informed about the risks of excess judgment. The key question courts ask is whether the insurance company acted as if it would be personally liable for the excess judgment. If the answer is no, the insurer may have to pay the full amount.
The Real-world Impact
The consequences of an excess judgment can follow you for years. Creditors can garnish your wages, place liens on your property, or force the sale of assets to satisfy the judgment. Your credit score takes a hit. In some states, you can lose your home, though many states protect a primary residence up to a certain value. Your car, investment accounts, and other valuable property are generally fair game.
Some defendants facing excess judgments enter into agreements with the injured party where they assign their bad faith claims against the insurance company in exchange for an agreement not to pursue their personal assets. This can shift the financial burden back to the insurer if bad faith can be proven.
Protection Strategies
The best protection against excess judgment is adequate insurance coverage. Many people carry only the minimum required by law, which in most states is far too low. A single serious accident can generate damages that blow through those minimums in a heartbeat. Umbrella policies, which provide additional coverage above your standard liability limits, offer protection at relatively low cost. They typically provide an extra $1 million to $5 million in coverage.
If you’re ever notified that a claim against you could exceed your policy limits, don’t ignore it. Your insurance company has a duty to inform you of this risk and keep you updated on settlement opportunities. You have the right to hire your own attorney to protect your interests, separate from the lawyer the insurance company provides for the defense.
The Bottom Line
Excess judgments represent the gap between what your insurance covers and what a court says you owe. That gap can destroy your financial security if you’re not prepared. Experienced slip and fall lawyers know that understanding your coverage limits, buying adequate insurance, and knowing your rights when facing a serious claim can help protect you from personal liability that extends beyond your policy limits. If your insurance company refuses a reasonable settlement offer and puts you at risk of excess judgment, you may have legal recourse against them.