What Happens If Someone Sues You Beyond Your Insurance Coverage?

Being sued is stressful enough, but discovering that your insurance limits might not cover the full judgment can be genuinely terrifying. When a lawsuit exceeds your insurance coverage, you face personal financial exposure that can impact your assets, savings, and future income. At Setareh Law, we understand the anxiety this situation creates and believe knowledge is the first step toward protection.

Insurance policies have specific coverage limits—typically between $25,000 and $500,000 for standard liability policies. However, with personal injury jury awards averaging around $1 million and approximately 10% of litigated claims resulting in damages exceeding policy limits, this gap creates significant vulnerability for many Americans. Understanding what happens when you’re sued beyond your coverage is crucial for protecting your financial future.

How Courts Handle Claims That Exceed Your Insurance

When a lawsuit results in a judgment exceeding your insurance limits, courts don’t simply reduce the award to match your coverage. Instead, they issue a judgment for the full amount of damages determined appropriate, regardless of your insurance situation. Your insurance company will pay up to your policy limits, but you become personally responsible for the remainder.

The judgment collection process typically begins with the plaintiff’s attorney investigating your assets and income sources. They may require you to complete financial disclosure forms listing bank accounts, property, investments, and income. This information helps them determine the most effective collection methods to pursue against you personally.

When Can Plaintiffs Collect Beyond Insurance Limits?

Plaintiffs can pursue collection beyond your insurance in several key situations:

1. When you have accessible assets: If you own property, investments, or have cash savings that aren’t protected by exemption laws, these assets become vulnerable to collection efforts.
2. When you earn wages: Future income can be garnished to satisfy an excess judgment, creating ongoing financial hardship.
3. In cases of insurance bad faith: If your insurance company unreasonably rejects settlement offers within policy limits, they may become liable for the entire judgment amount, including the portion exceeding your coverage. This “bad faith” situation could potentially protect you while shifting liability to your insurer.
4. When you have future earning potential: Even if you lack current assets, plaintiffs may pursue collection based on your anticipated future income or inheritance.

Most Common Cases Where Insurance Falls Short

Certain situations create higher risks for excess judgments:

1. Catastrophic injuries: Cases involving permanent disability, brain injury, or wrongful death frequently result in damages exceeding standard policy limits.
2. Multi-party accidents: When an incident injures multiple people, your per-occurrence limit might be insufficient to compensate all victims adequately.
3. Professional liability issues: For professionals like doctors or business owners, specialized liability claims can quickly exceed standard coverage.
4. Property damage combined with injury: When both significant property damage and serious injuries occur from the same incident, the combined damages often exceed policy limits.

Financial Consequences When You’re Personally Liable

The financial impact of personal liability extends far beyond the initial judgment. When you’re responsible for damages exceeding your insurance, the consequences can affect your financial stability for years or even decades.

Immediate consequences include depleting savings to satisfy the judgment and potential legal fees for post-judgment proceedings. Long-term effects may include credit score damage making future loans difficult or expensive, loss of assets you’ve spent years accumulating, and ongoing wage garnishment limiting your ability to meet other financial obligations.

What Personal Assets Are At Risk

Without proper protection, various personal assets become vulnerable to collection:

• Bank accounts and cash: These are typically first targets, as they’re easily accessible to judgment creditors.
• Non-exempt real estate: While primary residences receive some protection in many states, investment properties and vacation homes often lack similar safeguards.
• Vehicles: Transportation beyond modest exempt amounts may be seized or forced to be sold.
• Investments and brokerage accounts: Stocks, bonds, and non-retirement investments typically lack protection.
• Business interests: Your ownership in businesses might be attached, potentially forcing liquidation.

Some assets generally receive protection under federal or state law, including qualified retirement accounts (401(k)s, IRAs), certain life insurance proceeds, and assets held in properly structured trusts created before the incident.

How Wage Garnishment Works After a Judgment

Wage garnishment represents one of the most common collection methods for excess judgments. This process allows creditors to legally require your employer to withhold a portion of your earnings to satisfy the debt.

Federal law generally limits garnishment to 25% of disposable income (earnings after mandatory deductions), though some states provide more restrictive limits to protect debtors. The garnishment continues until the judgment is fully satisfied or expires under state law—typically 7-20 years, though judgments can often be renewed.

The garnishment process begins with a court order sent to your employer, who must comply with legal withholding requirements. Certain types of income, including Social Security benefits, disability payments, and veterans’ benefits, typically receive protection from garnishment for most types of debt.

Protecting Your Assets Before and During a Lawsuit

At Setareh Law, we recommend both preventative and responsive strategies to protect yourself from excess judgment liability. The most effective protection combines adequate insurance coverage with appropriate legal structures.

Timing matters significantly—asset protection strategies implemented before any incident or claim occurs provide the strongest protection. Actions taken after an incident but before a lawsuit may still offer some protection, while transfers after a lawsuit begins face greater scrutiny and potential reversal as fraudulent conveyances.

How Umbrella Insurance Provides Additional Protection

Umbrella insurance represents one of the most cost-effective protections against excess judgments. These policies provide supplemental liability coverage beyond your standard auto, homeowners, or business insurance limits.

Typical umbrella policies offer: – Coverage amounts from $1 million to $5 million or more – Protection across multiple liability scenarios (auto, home, personal injury) – Relatively affordable premiums ($150-$300 annually for $1 million in coverage) – Additional legal defense costs beyond your primary policy’s limits

This supplemental coverage activates once your underlying policy limits are exhausted, providing an additional layer of protection before your personal assets become vulnerable. For the relatively modest cost, umbrella insurance offers substantial peace of mind against catastrophic liability exposure.

Legal Structures to Shield Your Assets

Beyond insurance, various legal structures can create barriers between your assets and potential creditors:

1. Irrevocable trusts: Assets transferred to properly structured irrevocable trusts generally become unavailable to future creditors, though timing and control limitations apply.
2. Domestic Asset Protection Trusts (DAPTs): Available in states like Nevada, Alaska, Delaware, and South Dakota, these specialized trusts can provide significant asset protection while maintaining some access to the assets.
3. Family Limited Partnerships: These structures can protect business and investment assets while allowing continued management control.
4. Limited Liability Companies (LLCs): When properly maintained, LLCs can shield personal assets from business liabilities and provide charging order protection in many states.

The effectiveness of these strategies depends on proper creation and maintenance well before claims arise. Working with qualified legal and financial professionals to implement these structures correctly is essential for maximizing protection.

When Are You Considered “Judgment-Proof”?

Being “judgment-proof” means you have limited income and assets that fall under legal exemptions, making collection efforts impractical or impossible. While not an ideal financial position, this status effectively shields you from collection efforts.

Judgment-proof individuals typically have: – Income derived primarily from exempt sources (Social Security, disability benefits) – Few assets beyond those protected by state exemption laws – Limited non-exempt income or property worth pursuing

This status isn’t permanent—future increases in income or assets could make you vulnerable to collection efforts throughout the judgment’s lifespan. Additionally, being judgment-proof doesn’t prevent lawsuits or eliminate the debt; it simply makes collection difficult or impossible under your current circumstances.

State-Specific Exemption Laws

Asset protection varies dramatically by state, creating significant differences in vulnerability depending on residence:

• Strong homestead protection states: Florida and Texas offer unlimited homestead exemptions, protecting primary residences regardless of value, while California limits protection to approximately $600,000.
• Favorable trust states: Nevada, Alaska, and South Dakota have strong asset protection trust laws with features like shorter challenge periods (two years in Nevada versus four years in many states).
• Retirement account protection: While federal law protects qualified retirement accounts in all states, protection for IRAs varies, with some states offering unlimited protection and others imposing caps.

Understanding your state’s specific exemptions allows strategic asset allocation to maximize protection. For clients facing significant liability exposure, establishing residence in states with favorable protection laws may sometimes be advisable before claims arise.

Can Bankruptcy Protect You From Excess Judgments?

Bankruptcy represents a last-resort option for addressing excess judgments but can effectively discharge certain debts while providing a structured approach to resolving financial obligations.

The two most common personal bankruptcy options offer different approaches:

• Chapter 7 (liquidation): Non-exempt assets are sold to pay creditors, with remaining qualified debts discharged. This option provides a fresh start but requires meeting income qualifications and potentially sacrificing non-exempt property.
• Chapter 13 (reorganization): Creates a 3-5 year repayment plan based on income and expenses, potentially allowing you to keep more assets while addressing the judgment through partial payment.

However, bankruptcy comes with significant disadvantages, including long-term credit impact (7-10 years), public disclosure, and potential loss of assets. Additionally, certain judgments—particularly those involving fraud, willful misconduct, or intentional harm—may remain non-dischargeable even through bankruptcy.

Get Expert Guidance for Your Financial Protection

Understanding what happens when a lawsuit exceeds your insurance is essential for protecting your financial future. At Setareh Law, we’ve seen firsthand how proper planning can make the difference between financial security and devastating consequences. With over 60 years of combined experience and more than $250 million recovered for our clients, we understand both sides of complex liability situations.

Don’t wait until you’re facing a lawsuit to consider your protection strategy. Whether you need guidance on appropriate insurance coverage, asset protection structures, or representation in an existing lawsuit, our experienced team can help you navigate these challenging circumstances. Contact Setareh Law today at (310) 356-0023 or through our online contact form to schedule a free consultation and take proactive steps to protect what you’ve worked so hard to build.