Insurance is confusing to lawyers and non-lawyers alike. When you apply for insurance, a homeowner's insurance policy for example, the insurance agent will ask you anywhere from what your roof is made of to whether you have a fire extinguisher to what type of breed your dog Spike is. After compiling that information, he gives you what your insurance will cost and sends you a packet full of numbers, information, and language that appears to come from another planet. It is at this moment that you ask yourself: What exactly is it that I'm buying? Why did he have to ask me all of those questions? What are all of these numbers? Is this policy language in English? It is in this stream of blogs, “Understanding Insurance Policies,” that I will attempt to answer these questions.
What are the Policy Limits?
As discussed last week, it is important to be aware of the amount of coverage you need to adequately protect yourself, your family and your property so that you know what you are purchasing. Buying a policy with the cheapest premium often means the least amount of protection. A low amount of protection can put you on the hook for personal financial responsibility if something bad happens.
Oftentimes, however, you will notice on the declaration page of your insurance policy that a certain type of coverage has more than one amount next to it. For example, you might notice that the policy limits of the "liability" coverage of your automobile insurance policy says something like $15,000/30,000, $50,000/100,000 or $100,000/300,000. So why are there two numbers? Which one should you be concerned about?
The answer is both. The first number indicates the policy limits per person injured and the second number indicates the policy limits per occurrence.
Lets take our unfortunate friend Joe Bloe as an example. Joe Bloe is running late to work again and blows a stop sign, injuring an old lady. The old lady suffers $20,000 in damages. Joe Bloe has $15,000/30,000 policy limits on the liability coverage of his automobile policy.
This means that the most Joe Bloe's insurance company will pay for any one occurrence is $30,000, but the most it will pay each person that is injured during that occurrence is $15,000. In this example, even though the old lady has $20,000 in damages, the insurance company will only pay the old lady $15,000 because that is Joe Bloe's "per person" policy limits.
Let's take the same example, but let's add a fact: the old lady (who still suffered $20,000 in damages) had a passenger who suffered $10,000 of damages. The insurance company will pay the injured passenger the full $10,000 (it falls within Joe's "per person" limits), but the old lady will still receive only $15,000. In other words, the insurance company will not take any leftover funds that were not used for the passenger and apply it to the old lady.
Now, let's say that Joe Bloe injured the old lady and two passengers, and that each injured person suffered at least $15,000 in damages (at least $45,000 total). In this complicated scenario, the insurance company will pay out the $30,000 "per occurrence" policy limits, but nothing more. The three injured parties-- likely with assistance from some lawyers or the court--will have to find a way to fairly distribute the limited funds.
How about one final example for grins? Joe Bloe injures the old lady and two passengers, and each injured person suffers $10,000 in damages. Mr. Bloe will be fully covered on this one: the insurance company will pay each person $10,000 (it falls within Joe's $15,000 "per person" limits) for a total payment of $30,000 (which falls within Joe's $30,000 "per occurrence" limits).