An insurance policy is a contract.
It’s a contract between a person and her insurance company.
So, insurance being a contract, the buyer gets what she paid for—no more, no less.
What she would have paid for—for purposes of this discussion—is one or both of the following flavors of auto insurance: Liability or Uninsured Motorists (UM).
The first type, Liability Insurance, is not optional.
All—yes all—auto insurance policies provide Liability Insurance. It is the basic form of car insurance that jurisdictions (Georgia being one) require cars to carry.
UM, on the other hand, is different: The buyer has this type of insurance only if she wanted it. (Or, more likely, only if she did not notice she was agreeing to buy it…) So, only some—yes some—auto insurance policies provide UM Insurance.
Time for a quick refresher.
The universe of auto insurance can be divided into two types: Liability and UM.
All insured cars carry Liability Insurance.
Some insured cars also carry UM Insurance.
But what is auto Liability Insurance?
Liability Insurance is the defendant’s insurance. That is to say, it is the type of insurance that protects a person when they are defending a lawsuit (i.e., when somebody else sued them).
Liability insurance guards against blame; it kicks in to rescue its people (its insureds) when someone tries to blame them for an accident or tries to sue them for money.
In a lawsuit, liability insurance protects the defendant.
It is “Liability” insurance because it cloaks the insured with protection against having to pay a judgment out of their own assets—it protects them against liability.
Depending on the number and nature of the auto insurance policies that a defendant, or people connected to a defendant, may have taken out, the defendant can find himself protected by multiple cloaks of Liability Insurance.
So Liability Insurance protects the defendant. But how?
Well, in a few ways.
But to understand how, you have to start by accepting as a general proposition, that in our system of civil justice, a defendant is liable for a judgment entered against him.
By liable I mean if a person is sued and a judgment is entered against him—whether by a default judgment or following a trial, or even by agreement of the parties—his assets
can will be used to pay that judgment.
So, in a plain ole suit for money damages from a car accident, (in Georgia) a plaintiff does not sue the insurance company.
This bears repeating.
In Georgia, the plaintiff does not sue the defendant’s insurer. The plaintiff sues the person or business he claims caused his injuries.
If Plaintiff wins, a judgment is then entered against Defendant.
And, legally the defendant is the one responsible for the judgment; technically, he’s the one on the hook for making sure the judgment is paid. Even if that means his personal assets (savings, paycheck, kids’ college funds) are tapped.
Stated differently, the defendant is personally liable.
And if you have taken nothing else away from this, just remember: there is no “judge” in judgment.
In personam v. In rem judgment
What the what? Yes, I’m taking it there. . . .
Now, you may vaguely recall hearing mention of these in law school.
For now, suffice it to say that the type of judgment we are talking about here—i.e., the kind that makes a defendant personally liable—is an in personam judgment.
This tidbit matters because, as stated earlier, the defendant must be personally liable—or, at the very least, must be at risk of being personally liable—in order for Liability Insurance to kick in.
For now, just remember this: To hold a defendant personally liable—and, by extension, to ensure that Liability Insurance will come into play—the plaintiff must secure an in personam judgment against the defendant.
In personam judgment requires personal service of process.
Tuck this away in spare part of your brain—you’ll need it later when it comes time to think about serving the Complaint.
Back to Liability Insurance.
So, the defendant is facing personal liability in the form of an actual or threatened in personam judgment against him.
How does Liability Insurance come into play?
Liability Insurance is used to pay the judgment.
Let’s assume the defendant—back before the accident, lawsuit, and all this messy business got started—purchased car insurance.
As you know, the car insurance policy provides Liability Insurance. Always.
This notion—that is, the concept of Liability Insurance—is really just shorthand for “The insurance company agrees to take care of its people if they sued for a car accident.”
So, the Liability Insurer will pay an in personam judgment entered against its people.
Up to a certain point.
That certain point is determined by the amount of coverage the defendant bought.
Liability Insurance pays the judgment up to the coverage limit.
If the defendant purchased $25,000 in liability coverage, then the liability carrier must pay the judgment; but only up to $25,000.
If, under this same scenario, the defendant ends up with a judgment against him in the amount of $25,000.01, then that additional penny is not the responsibility of the Liability Insurer.
By default, therefore, that penny remains the defendant’s problem.
Because (remember) the defendant is the one who is personally liable for the judgment.
Liability Insurance supplies a lawyer.
Remember that insurance policy the defendant bought back before the accident happened? By the terms of that contract, in addition to agreeing to pay the judgment (up to the policy limits), the insurance company also agreed to supply a lawyer to defend its insured (the defendant) in the lawsuit.
That was part of the product that the Insurer sold.
That’s right. An auto policy is, in part, like a contract for pre-paid legal services.
So, by issuing a policy to the defendant (or someone connected in the right way to the defendant) the Liability Insurer agreed to defend the defendant against a lawsuit. . . .
. . . AND it agreed to pay the judgment (up to the policy limits).
Not bad, huh?
But this, of course, assumes the defendant is, in fact, covered by the auto insurance policy.
Hmmm.. Is the Defendant covered by the Liability Insurance policy?
That’s a good thing to find out because figuring out whether a defendant is ‘covered’ by liability insurance is a two-for-one. As we just discussed, it will tell you:
Whether the insurer will supply a lawyer to defend him.
(here’s the one you really care about) Whether the Liability Insurer will pay a judgment on his behalf.
Well, it will tell you that most of the time. . . .
Sometimes it kinda won’t. Because sometimes the Liability Insurer will issue what’s called a Reservation of Rights.
A Reservation of Rights means “We’ll defend, but we might not pay.”
When a defendant is sued—or faces the threat of being sued—a Liability Insurer must move quickly.
As you already know, investigating, gathering evidence, and filing pleadings often starts soon after an accident; and doing these things on time can make or break a case.
As such, oftentimes a Liability Insurer cannot spend too long trying to determine whether the defendant is really covered under a policy. The Insurer must often move first—and ask questions later.
In these situations, the Liability Insurer may be willing to supply a lawyer to immediately get to work protecting the defendant, but may first send the defendant a ‘Reservation of Rights’ letter.
The letter strikes a deal with the defendant. What a Reservation of Rights letter says is that the Liability Insurer is willing, for now, to assume that the defendant is entitled to Liability Insurance protection, but it needs to look into it some more—so even though it is stepping up and putting up a defense for the defendant, it is nonetheless reserving the right not to pay the judgment.
If the defendant agrees to this deal, wha he is saying is: “Yes, yes, we can battle that question out later, whatever! But for now, please, PLEASE help me…!”
You are now probably thinking: “What does this mean for me?”
The answer: Probably nothing.
Knowing this, however, enables you to understand what may be going on behind the scenes, should it crop up in conversation.
Plus rarely, maybe even very rarely, it may come to affect you in that you may succeed in getting a judgment against a defendant . . . only to find that the Liability Insurer—who had been defending the insured until this point—is now refusing to pay the judgment on behalf of its insured.
But more on that later.