Collecting More Than the Policy Maximum

LIABILITY Collecting More Than the Maximum When a person buys liability insurance, the company agrees to pay dam age awards against him -- but only up to the amount specified in his policy.

The rest comes out of his own pocket.

Recently, however, state courts across the U.S. have ordered insurance companies to pay far more than the policy's face value. In one remarkable California case, a company that had issued a policy with a $10,000 limit was ordered to pay more than $150,000.

Iffy Chances. At issue is a conflict of interest between the company and the insured--both represented by the same lawyer, whose loyalties may be divided. Example: an accident victim sues for $20,000, but offers to settle for the policy limit of $10,000. In that case, the company may have good reason to refuse the offer. A jury might find for the policyholder, so that the company would need to pay nothing at all, or the decision might be for a lower award, also saving money for the company. But even if the insured loses and the jury awards the full $20,000, the most that the company will have to shell out is still only the $10,000 stated in the policy. So why not take a chance on a trial?

The angry policyholder can answer why not: because he has to pay the extra $10,000, whereas, if the company had chosen to settle, he would have had to pay little or nothing.

In many such cases, policyholders have been suing to recover from the insurance companies, and they have been winning. The Maryland Court of Appeals recently upheld such a judgment on the grounds that the insurance company involved, State Farm Mutual, had "an obligation not merely to exercise good faith, but to use due care" in looking out for the interests of the insured. State Farm had passed up three chances to settle an auto-accident case for a total that was less than the eventual jury verdict--even though its lawyer had indicated that the company's chances of winning in court were somewhat iffy and had actually predicted the size of the verdict if the jury found for the plaintiff.

A Simple Rule. In the California case, Security Insurance Co. of New Haven had refused to settle the claim of a tenant who had fallen through a faulty wooden staircase. The victim later developed a severe psychosis. The landlady, who had to pay up as a result of the insurance company's refusal, was forced to sell off her assets. She became indigent, eventually lost her health and attempted suicide. She sued Security, and the California Supreme Court finally upheld an award that covered the excess she had had to pay over the insurance limit, plus damages for the mental suffering she had endured. The total tab to Security, including interest, was $164,453; at one time, the company could have settled for $9,000.

In finding against Security, the California court noted that it was more than a little impressed by a formula proposed in one of the appeal briefs: in any case where an insurance company refuses to accept a settlement within the policy limits and subsequently loses the suit, it shall be liable for the entire judgment--no matter what the stated maximum. The California court did not for the present impose such an absolute rule--nor has any other court so far--but it clearly implied that the simplicity of the test made it an extremely attractive solution and one possessed of "more than a small amount of elementary justice."

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