530 Chapter 13 Insurance and Risk Management
but no insurer will offer a policy that will provide unlimited coverage. Liability policies specify
a maximum amount that the insurer will pay regardless of the size of the claim.Example 13.1.6 Tr enyce owns a clothing boutique. She carries a $1,000,000 liability
insurance policy for the business. A customer slips and falls over a power cord while
shopping in the store and sues for $125,000 in damages. Will the coverage limit be an
issue for Trenyce?Her insurer will cover claims up to $1,000,000. The coverage limit will not be an issue.While unlimited coverage is not generally available, it is usually possible to purchase
insurance up to a limit that is more than adequate to cover any reasonably imaginable
liability. For obvious reasons, though, higher coverage limits mean higher premiums. Cov-
erage limits are more often an issue when someone tries to save money by buying a lower
limit policy. Having insurance does not guarantee that you are protected from having to
deal with a large financial obligation if the coverage limits are too low.Example 13.1.7 Rick runs a tree service business. He carries a $50,000 liability
policy. When cutting down a tree from a residential property, the tree falls onto a
neighbor’s house, leading to $135,000 in damages. How much of this liability will Rick
be responsible for?Rick’s insurance will only cover $50,000 of the claim. Rick is left with $135,000 $50,000
$85,000 in responsibility.Limits of coverage can be a bit tricky with motor vehicle liability insurance. A motor vehi-
cle liability policy will usually have a coverage limit expressed in a form such as “25/75.”
The first number indicates the limit of liability for harm done to any one individual (in
thousands), the second number states the overall limit of liability. This is sometimes further
extended to the form “25/75/50,” where the last number indicates the limit of coverage for
damage to property (as opposed to people).Example 13.1.8 Kelsi has a 25/75/50 motor vehicle liability policy. Kelsi caused a
car accident in which she injured two people and caused $18,500 in property damage.
A court awarded one of the victims a $35,000 judgment, and $15,000 to the other.
How much will her insurance company pay?The property damage falls under the limit, so it is covered in full. Also, the $15,000 judgment
falls under the per person limit, so that is also covered. The $35,000 judgment, though, will
be covered only up to $25,000. So the insurance company will pay only $25,000. In total,
she is covered for $18,500 $25,000 $15,000 $58,500 of the claim. Kelsi herself will
be responsible for the $10,000 that was over the limit.Each state has its own minimum requirements of how much liability insurance a driver
must carry, but these limits are usually quite low in comparison to the damages that can
result from even a fairly modest accident. It really isn’t all that hard to do a few hundred
thousand dollars of damage with a car. In Kelsi’s case, even though she had insurance, she
is left with a major financial responsibility to bear. This is a problem for her, but it is also
a concern for the accident victim. If Kelsi doesn’t have the resources to come up with that
$10,000, it is unlikely that the victim will actually be able to collect. If Kelsi had caused
a million dollar accident, it is nearly certain that the damages will put Kelsi in bankruptcy
court and the full damages will never actually get paid. For this reason, many insurers
offer uninsured/underinsured motorist coverage, which protects the policyholder (and
her passengers) in case of injuries caused by another motorist who does not have adequate
liability insurance coverage. Some states have attempted to deal with this issue by requir-
ing no-fault insurance. When an accident happens, each policyholder’s insurance pays
the policyholder’s claim, regardless of who was at fault, making the amount of insurance
carried by the other party in an accident irrelevant.
In some cases, an insurance policy will offer coverage only for a certain percent of the
dollar amount of a claim. This is called coinsurance because the financial risk of the claim