Public Liability Insurance

Legal liability insurance provides protection against the financial impact of lawsuits. Students studying this material, however, often do not grasp liability losses as easily as property losses. You cannot see the loss a lawsuit represents in the same sense as you can see a burned home or a damaged car. Yet a $100 million loss resulting from a negligent act is a very substantial direct loss of property Consider the following quote on the size of legal liability losses.

The U.S. tort system cost $205 billion in 2001, or $721 per US. citizen, representing a 14.3 % increase in tort costs since the year 2000. At current levels, U.S. tort costs are equivalent to a 5 % tax on wages. These findings were reported by Tillinghast Towers Perrin (Tillinghast) in US Tort Costs: 2002 Update the only study that tracks the cost of the U.S. tort system from 1950 to 2001 and compares the growth of tort costs with increases in various U.S. economic indicators .p align="justify"> To put liability loss costs in context, the U.S. Fire Administration, a division of the Federal Emergency Management Agency (FEMA), reported direct property losses due to fires was estimated at $11 billion in 2000 (http//www.usfa.fema.gov/dhtmtl inside usfa/nfdc data. cfm).

America is a litigious society. When we have disagreements that are not quickly resolved to our satisfaction, we sue. We sue our friends, enemies, social clubs, babysitter3, physicians, insurers, churches, government, teachers, school boards, butchers, bakers, candlestick makers, and our parents. Using the courts to resolve our differences is better than the alternative of personal vengeance, but it has its own drawbacks. If nothing else, it is costly. Direct costs include attorney fees and court costs. Indirect costs include higher costs for goods and services, elimination of products and services (like vaccines and closed beaches), and a hostile environment where fear of lawsuits inhibits business and personal activity.

Where does insurance fit in this picture? Can insurance transform a hostile environment into a friendly one? Or does insurance merely transfer the costs of our hostility, making the costs so apparent we become uncomfortable? Also, examining in some depth the peril of legal liability allows us further insight into the central question presented in this chapter, "What is an insurable event?" In following chapters covering homeowners, automobile, and commercial insurance, we shall see that liability losses are not only insurable, but that liability insurance is essential coverage.