Liability Insurance: Legal Requirement or Moral Imperative?

Journal of Financial Planning: January 2021


David M. Cordell, Ph.D., CFA, CFP®, CLU®, is director of finance programs at the University of Texas at Dallas.

One of the comforting aspects about being a baby boomer (and believe it or not, there are some) is attaining perspective.

There are many good movies about investing, and one of the most successful was Oliver Stone’s Wall Street, the 1987 film starring Michael Douglas as Gordon Gekko, a wealthy corporate raider of, shall we say, questionable ethics.

A famous (mis)quotation from Gekko: “Greed is good.” Of course, Stone was actually saying the opposite. His caricature of the moral depravity of the players in high finance reinforced the views of many viewers and shaped the views many more.

(A note for millennials and Gen-Xers—Wall Street was part of pop culture in its day, but tempus fugit. What was once pop culture is now considered Pop’s culture. Just wait. One day songs by Cardi B will be considered geezer music. But I digress.)

Time Flies and Times Change

The message in Wall Street was just a portent of things to come. A new generation brings a new set of sensibilities and expectations. In recent years, we have seen increasing interest in environmental, social, and corporate governance (ESG) investing, three factors used in evaluating a company’s impact on the sustainability and society, in general. Investment advisory services like Morningstar rate companies on these factors.

It isn’t clear that this emphasis on doing good is, or will eventually be, beneficial to portfolio performance, but it is clear that companies are more and more aware of the impact of their actions beyond their financial performance. Revelations of company activities that are harmful to society or the environment can be devastating to public relations. A new generation of managers brings a new set of expectations, and the new generation eventually occupies the executive suite.

I thought about this sea change when I assigned an automobile insurance case to my graduate class in personal finance.

Liability—Bad Stuff Happens

In the past five years, two individuals in my business/social circle have been involved in fatal auto-pedestrian accidents. In one of the two cases, the son of a friend of mine (I’ll call him Bill) got off a bus, and while looking at his phone, walked in front of the stopped bus and directly into the path of a pickup truck. The driver of the pickup fled the scene. The young man suffered terrible head injuries and was in a coma for 30 days before his parents made the painful and unimaginable decision to remove him from life support.

I don’t know much more about Bill’s situation, but I suspect that the pickup driver—who was eventually apprehended—was uninsured, or at least underinsured. As one who has lost a son, I am unwilling to ask my colleague about any details.

The second case involved a friend of my son (I’ll call him James) who lived at our house for almost a year, splitting time between my city and a large city in another state in which his father is somewhat prominent. James is in his late 20s and drove a fancy late-model Mercedes convertible.

In the spring of 2017, James was driving at the posted speed limit along a busy street in his hometown at 7 p.m. A woman attempted to walk across the street in the middle of the block, apparently to get to the bus stop. Without enough reaction time, James’s car hit the woman, throwing her a great distance, and her head hit the pavement. James stopped immediately and rushed to her to check her condition, but she was already dead.

No alcohol or drugs were involved. There were multiple witnesses who corroborated James’s story, but one witness, incredibly, claimed that James sped up, as if trying to run over the victim. The skid marks belied this contention, but family members of the victim pressed the issue with the prosecutor.

James had recently reduced his liability coverage for injury to $100,000 from $500,000 to save a few dollars. His insurance company immediately cut a check for $100,000 to the family of the deceased woman. Meanwhile, the insurance company totaled his Mercedes because the high cost of potential repairs. Since he was ‘under water’—owing more than the car was worth—he still owed money to the finance company on a car that he no longer owned.

James didn’t have an umbrella liability policy.

The family of the deceased woman seized on the testimony of the single witness to insist on the prosecution of James. Under political pressure, the district attorney filed charges. The unresolved issue still hangs over James’s life.

My understanding is that the deceased woman had minimal life insurance. The family’s loss was not only personal, it was financial—a lost income stream. I suspect that the woman’s family wouldn’t have lashed out at James if they had felt adequately compensated for that lost income stream. The personal tragedy for the family is overwhelming, and nothing can be done about it. But what about the financial aspect?

Regardless of James’s innocence in this tragic death, he will carry this memory for the rest of his life. And much, much worse, of course, the woman has no more life on this earth. That said, I wonder what would have happened if James had had more liability coverage and an umbrella liability policy.

We never know what a jury might do. But if your client is involved in an accident, is potentially at fault, and has substantial coverage, his/her company is likely to settle the claim with a condition that the injured party agree not to pursue the claim further.

Of course, an umbrella liability policy would have picked up when the auto policy ran out of coverage. Typically, the insurer requires auto liability coverage far in excess of the state minimum—perhaps 100/300/100 or even higher. The premium for a million dollar umbrella is a few hundred dollars per year, much less than the cost of auto liability by itself since the umbrella only pays if the rather high liability limit of the required auto policy is reached, which is very infrequent.

Back to School

The insurance case I assigned to my students included getting quotes for auto policies. I didn’t provide very much direction, leaving it to the students to make decisions about how much coverage to seek. The key word here is ‘students.’ Although some part-time graduate students earn more than their professor, most graduate students are, well, poor.

In seeking their quotes, what sort of liability limits do you suppose poor students would seek? Right. The state minimums, which in Texas are (1) $30,000 for any injury; (2) $60,000 for all injuries; and (3) $25,000 for property damage.

Is $30,000 sufficient? Eighteen years ago, my late son was in a wreck at 3 a.m. and was taken to the hospital. They kept him for the rest of the night and the next night. Lots of tests, but his only injury was a bruise from the car’s shoulder harness: 36 hours, $24,000. And there’s been plenty of inflation in medical services since then. People who are seriously injured can incur medical expenses into the millions.

What about property damage? I can look out my office window and see lots of cars in the parking lot that are worth more than $25,000, the state minimum for property liability.

What if your client’s 17-year-old daughter were responsible for an accident in which a victim was seriously and permanently incapacitated? Would your client’s auto liability insurance policy be sufficient to cover the victim’s maintenance? Remember, liability doesn’t stop at the limit of liability insurance coverage. After the insurance is exhausted, your client’s wealth is at risk.

Imagine that Jeff Bezos and I have auto accidents on the same day, and both of us are at fault and injured someone. Bezos can afford to pay a million dollars out of pocket if he is responsible for injuring Guy One. I can’t come out of pocket for a million dollars in cash to compensate Guy Two. Should Guy Two be compensated less than Guy One? Forget that Bezos is rich. Forget that a jury might think it’s just fine to reach into Bezos’s deep pockets. In a fair judgment, am I less responsible than Bezos?

Liability Insurance: Legal Obligation or Moral Imperative?

Recall the movement toward ESG investing that I mentioned earlier and also the movements for environmentalism and social justice. Times change and, maybe, it’s time to look differently at liability.

What is our moral obligation if we cause serious injury or death to someone else?

I think we should consider liability insurance as something more than a legal requirement or as financial CYA. My belief is that we have a responsibility to society and to our fellow travelers on this earth to do our best to make sure that, if we are at fault, we have the financial wherewithal, through our own assets or insurance, to ‘make them whole’ financially. In the case of a fatal accident, I want to make the victim’s survivors whole financially. I would feel terribly guilty about depriving them of their loved one, but I would at least be reassured that they won’t suffer financially.

Bottom line: I look at my potential liability as a moral issue, not as a function of meeting an artificially low standard set by the state government.

Something occurred to me while reading my students’ comments about auto liability insurance, specifically, that no amount of money can compensate for loss of life. While that is true, we buy life insurance for exactly that purpose, although it is usually based on replacing lost income.

I am normally not one who looks for new possibilities for government intrusion, but what if there were a standard, mandatory auto liability coverage that included X dollars for loss of life? Let’s say $500,000, for example. No questions asked. No differentiation by age, health, etc. No calculation of ‘human life value.’ Just a flat payment. It would not provide for payment to someone’s heirs for his/her own loss of life if he/she were at fault. The death benefit could be much larger than for the other coverages because the probability of causing a death-related accident is so small.

I have no idea how much this would cost, of course. Maybe it isn’t a practical idea. But in the absence of a mandate, we as individuals owe it to society to provide some degree of reparation to those who might suffer because of our unintentional acts that have potentially catastrophic outcomes.

To me, that means a high auto liability coverage and a large umbrella policy. I consider it a moral imperative