What are my insurance company’s obligations if I get sued?

When we purchase auto insurance, it is not just to protect us if we’re involved in a collision caused by someone else.  It is also to protect us in the event that we cause an accident. 

When an insured motorist is at fault for an automobile accident in which another party is injured, the motorist’s insurance company has certain duties and responsibilities that it owes to its insured, the at-fault driver. 

Insurance companies and their duty to protect you

First, the insurance company has a duty to indemnify its insured, or to protect them from the legal consequences of their conduct.  The concept of indemnity shifts legal responsibility for payment of damages related to the accident to the insurance company. 

Under the insurance contract, the insurer promises to make the policyholder whole for any covered loss.  In other words, the insurer agrees to put the policyholder back in the same financial position as they were before the covered event. 

The insurance company’s obligation to indemnify does not arise unless there is an adverse claim, such as a monetary judgment, against the policyholder.  When a monetary judgment is entered against the policyholder, the insurance company assumes responsibility for payment of the judgment, up to the monetary limit of the policyholder’s policy.

Your insurance company also has a duty to defend you

The insurance company also has a duty to defend its policyholder in the event a claim is made arising out of an accident caused by the insured.  The duty to defend is broader than the insurer’s duty to indemnify. 

Where the duty to indemnify only arises when the insured is liable for an accident, the duty to defend arises when a claim has been made that could potentially result in liability against the policyholder. 

Sometimes, an insurance company will contend that a particular event or occurrence is not covered under a specific policy.  In this situation, the insurer has a couple of options.  It can choose not to defend the policyholder based on its decision that there is no coverage.  However, this may expose the insurance company to a bad faith claim under certain circumstances. 

You May Receive a “Reservation of Rights” Letter from Your Insurance Company

The other option available to insurers in many jurisdictions is to write a “reservation of rights” letter to the policyholder. This letter explains that while the insurance company will provide a defense of the claim for the policyholder, it is still reserving its right to dispute whether the claim is covered under the policy. 

When this occurs, the insurer must inform the policyholder of their right to independent counsel, separate from the insurance company lawyers.  In some states, the insurance company is required to pay for the plaintiff’s independent lawyer. 

Let’s say that an injured claimant presents an offer of settlement to the insurance company that could possibly expose the policyholder’s personal assets. These potential damages in the case will exceed the limits of the policy. In this scenario, the insurance company is obligated to inform the policyholder of the offer, the potential exposure, and of their right to obtain independent counsel. 

With an insurance policy, policyholders are purchasing the security and peace-of-mind of knowing that they will be protected if they are involved in an accident, regardless of who is at fault. 

Did your insurance company fail to protect you?

If you have been involved in a situation where your insurance company did not properly protect your rights after an accident, even an accident you may have caused, or you have questions about an insurer’s obligations after an accident, you should call SLG at (312) 578-9501.