As CEO of the most trusted claims servicing company in America, I probably have the broadest perspective on the legal liability topic among most brokers. In my professional experience, I believe liability insurance is perhaps one of the most important aspects of an insurance portfolio, yet often the most overlooked and underrated. While liability claims are less frequent and tangible than things like water damage, they are on the rise and can cause severe financial distress when they happen. Comprehensive liability insurance is a necessity for most people and businesses, not an optional coverage.
Water Damage and a Liability Insurance Scenario
- It is the holiday season, and you are going away to visit family for 2 weeks.
- While you were away, you had a water event in your apartment on the 23rd floor.
- It ripped through 10 apartments below you. Merry Christmas!
- In addition to your own damaged apartment, you now have a multimillion-dollar legal liability issue.
- You are liable for the damages to 10 neighbors, plus the building itself!
This is a simple scenario that is relatable to many. Unfortunately, most people are not adequately protected. But it gets far, far more complex.
Legal Liabilities Examples
Another scenario is that you are simply a “target.” You are a doctor, lawyer, entrepreneur, etc. Heck, you can be a target simply based on your address. There are people who will intentionally come after you for a “money grab.” If you are a business owner (or high- net- worth target), it is highly likely you will have multiple lawsuit risks in your lifetime.
Imagine a New York City resident getting sued for smoke from a friendly fire that went to the upstairs neighbor. The neighbor claimed their newborn baby was permanently brain-damaged. Yikes! Was this real or a money grab? Hard to say. The good news is, this resident had enough personal liability insurance to settle with the other party, so they “go away.”Another case involved someone who had a battery explode, which damaged many, many neighbors. This resident did not have enough liability limits to cover the entire loss and lacked adequate legal liability coverage. Bankruptcy. Ouch!
Lack of Liability Insurance: A Top Cause of Bankruptcy
In the United States, we live in the most litigious society in the world, and a lack of liability insurance is one of the top causes of bankruptcy for both individuals and businesses. We live in a society where anyone can sue anyone for anything! Think “Oops, I slipped, and now it is your fault…”
All of this gets magnified if you own a business. You can be on the hook for a wide range of legal liability stemming from your operations, products, environmental damage, errors & omissions, or malpractice. If you have high-value assets or operate multiple ventures, reviewing your legal liability risk exposure annually with an expert broker ensures your protection stays aligned with your growing responsibilities and lifestyle.
Use Liability Insurance to Manage Tail Risk
I often advise my clients to think about why they are buying liability insurance. In my professional experience, personal liability insurance is best designed to transfer what is called “tail risk.” Tail risk, in layman’s terms, is a legal liability risk that can wipe you out, force you into bankruptcy, or cause you extreme distress. While smaller losses can cause some pain, most people and businesses will recover if they self-insure these losses. Hence, I suggest my clients be intentional about self-insuring smaller losses and transferring tail legal liability losses to the insurance markets. Simply put, most people and businesses need a few million dollars of liability insurance, often called excess liability or umbrella insurance, , with sufficient liability limits to protect against catastrophic exposure.
-Seth Patel
April 20, 2025
Wall Street, NYC
Founder & CEO of Prana Risk
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