Most states’ laws require drivers to buy two types of liability car insurance coverage in order to operate a vehicle on the roadway.
- Property damage liability car insurance pays to repair or replace cars or other property that you hit with your vehicle.
Details on both types of liability car insurance are below.
What does liability car insurance cover?
Bodily injury liability (BI) pays, up to your policy limits, for injuries or death that you (the policyholder), or other drivers covered by your car insurance policy, are found responsible for after a motor vehicle accident. Policy terms vary but typically bodily injury liability coverage will pay, up to your policy limits, for:
- Medical expenses
- Funeral expenses
- Loss of income
- Pain and suffering
- Legal defense if a lawsuit results from the auto accident
Policy limits for bodily injury liability are per person and per accident and coverage is written as such. For example, $25,000/$50,000 means that the maximum payout per person is $25,000, and the maximum payout for all people injured in one accident is $50,000. This coverage may also be simply written as 25/50.
Bodily injury liability does NOT cover your injuries, only the injuries of others that you are liable for. For your personal injuries to be covered, you would need coverages such as personal injury protection (PIP) or medical payments coverage (MedPay).
Property damage liability (PD) pays, up to your policy limits, for damages to someone else’s property that you (the policyholder), or other drivers covered by your car insurance policy, are found responsible for after a motor vehicle accident.
Property damage typically is damage to another car, but property damage liability also covers damages you may cause to someone’s house, tree, fence, guardrail, pole, etc.
Property damage liability provides you with legal defense if another party files a lawsuit against you regarding property damage that resulted from an auto accident.
Is liability car insurance mandatory?
Yes, in most states bodily injury liability and property damage liability are required as part of the minimum auto insurance coverages you must carry as a car owner. Each state has its own state car insurance requirements.
Car insurance companies normally require that you carry the same level of liability coverage on each vehicle listed on your policy. In some states, you must carry the same liability limits on all cars that you own. Even if the state does not require this, some insurance companies will.
A few states do not require bodily injury liability coverage because they have what are known as no-fault laws. Under those rules, drivers must carry what is known as personal injury protection to pay for their own injuries or those of their passengers. Once those limits are exceeded, you are personally liable for the costs of treating the injuries you cause.
Even in states with no-fault laws, most people buy bodily injury liability insurance.
Recommended limits for liability car insurance
In many states the legal minimum is not enough to pay for serious injuries or to replace a late-model car. It is only enough to drive legally. Buy the minimum only if you have no savings or home to shield from lawsuits.
The Insurance Information Institute (III) and other insurance industry experts recommend motorists carry bodily injury liability coverage of $100,000 per person and $300,000 per accident (referred to as 100/300 coverage). For property damage liability coverage, $50,000 or above is suggested. If you can afford higher limits, that is even better for the protection of your assets. Liability insurance beyond these amounts tends to be very inexpensive.
What happens if I don’t have liability car insurance?
If you don’t carry liability and the state requires it, then penalties can be handed out, such as fines and suspension of your license, and/or vehicle registration.
Also, without bodily injury liability and property damage liability coverage on your car insurance policy, you will be held personally responsible for any injuries or damages you cause to others in an auto accident. This could mean you will be forced to liquidate property, savings and other assets in order to pay for a judgment against you.
If you do carry bodily injury liability coverage, but with low limits, you still could be putting yourself at risk financially, since if you cause a serious accident where injury expenses exceed your limits you can be held responsible for the amount above your limits.
The same applies to property damage liability insurance. Every state requires that you take financial responsibility in the event of an accident. If you have very low limits on your property damage liability coverage, you are personally liable for the amount over and above what your insurance pays.
Can you use your liability car insurance on your own car?
Your own liability coverage cannot ever be used to pay for damages to your own vehicle or to recoup its actual cash value (ACV) if your car is totaled in an accident.
You can’t make a property damage liability claim against yourself for your own property. For instance, if you backed into your mailbox with your car, you can’t make a liability claim with your car insurance company for the damaged mailbox or your car since both are your property.
Or, if your spouse runs into your vehicle with his car, you normally can’t make a claim against the liability coverage on his car. Car insurance policies are usually written so that liability coverage protects members of your household against claims brought by people who are not part of your household.
If you have only liability insurance, your vehicle isn’t covered in any way. If you’re in an accident but not at-fault, then you can use the at-fault party’s property damage liability to make a claim for your vehicle’s damages, or its ACV, if your car is a total loss.
To have coverage for your vehicle when you’re the one at-fault in an auto accident, you must have collision and comprehensive coverage.
For accidents with other vehicles or objects, you’d use collision coverage to pay for your damages or ACV. Comprehensive insurance covers damage to your car from fire, floods, hail, vandalism, animal strikes and also covers theft.
Determining a liability claim from a collision claim
Both property damage liability and collision insurance pay for damages to cars damaged in an auto accident but are claimed differently.
Your liability coverages – property damage and bodily injury – protect you when someone files a claim against you for an accident you caused.
Your collision covers your car for damages it receives when it hits, or is hit by, another vehicle or object, regardless of fault.
So, you can file a claim against your collision coverage for any damages your own car sustains, but the other driver in an accident you caused would file a claim against you that would be covered by your liability insurance.
Collision also differs from property damage coverage because it comes with a deductible. A deductible is the amount you must pay out of pocket before your insurance benefits kick in.
Thus, if your car’s damages are $1,000 and your deductible is $500, your collision coverage will only pay $500 toward the cost of repairs – and only after you first pay out your $500.
Your car insurance company will pay for the other party’s repairs through your liability coverage without a deductible being due.
Will my full coverage car insurance cover an accident I had while I was driving a car owned by a friend, who only had liability insurance?
Car insurance follows the car, not the driver. Your comprehensive, collision and liability insurance covers only your own car; they don’t extend to other vehicles and will not cover your friend’s vehicle or become secondary insurance behind another vehicle’s primary insurance. Your friend’s liability coverage would be ‘primary,’ and your liability coverage would be ‘excess or secondary’ to the liability coverages.
Bodily Injury Liability (BI or BIL) insurance is one of the two forms of liabilty car insurance coverage that drivers are required to have in most states. While each state has its own minimum requirements for coverage, consumers can pay more and opt for greater coverage.
How Does Bodily Injury Liabilty Coverage Work?
You are required to have bodily injury coverage so that you can demonstrate financial responsibility if you are at fault in a motor vehicle accident that causes bodily harm to someone else. As a form of liability insurance, bodily injury does not cover the medical costs of injuries that you personally sustain, but rather, pays for the expenses that third parties may incur from any harm they sustain (for your own injuries, Personal Injury Protection provides coverage for your personal costs).
While shopping for auto insurance, your bodily injury coverage is generally stated using a range of coverage levels in a split limit format. The split limits will be described using either two or three numbers in the form of 25/50/10 or 25/50. In the three number format, the first two numbers correspond to the bodily injury coverage limits and the third is for property damage a separate type of coverage. These numbers indicate the:
Maximum $ for each person injured in an accident / Maximum $ covered per accident
The limits are generally in the thousands, so if you’re being quoted a 25/50 limit for bodily injury, it means that the insurance policy will cover up to a maximum of $25,000 per person injured in an accident and a total of $50,000 in claims for a single accident. It’s important to understand the distinctions between these individual components can have a material impact in what you may have to pay out of pocket in an accident. We’ll look at two examples to explain how bodily injury liability would work.
- You were deemed at fault for an accident in which two people in the other vehicle were injured. Person A had medical expenses of $30,000 while Person B had medical expenses of $10,000. While the combined medical bills are within the $50,000 limit per accident, your auto insurance policy will only pay Person A $25,000, and Person B $10,000. That’s because Person A’s expenses exceeded the per person limit, leaving you liable for the $5,000 of the unpaid claim.
- You were at fault for an accident in which two people were injured. Both made medical expense claims of $25,000 each. Because both the individual claims were within the $25,000 and the combined claim was less than or equal to $50,000 the insurance policy would cover these expenses.
Combined Single Limit (CSL) is another – and less common – type of limit consumers may purchase. Compared to the split limit, CSL has one limit that applies to the whole accident, and can pay out to the total coverage amount and is not constrained the number of injured people. The flexibility of CSL limits make this type of limit more costly to insure for, and not every car insurance company provides this option.
What Can A Third Party Claim As Bodily Injury?
While the direct costs of treatment for injuries are the most obvious costs, a number of other types of expenses can be paid out as well. The types of expenses covered by bodily injury can include:
- Bills for the other party’s hospitalization, follow-up care, and related medical or health care
- Lost Wages: If the harmed party was seriously injured and therefore unable to work, your bodily injury liability coverage makes up for their lost income. This amount will be based upon the amount of time they are unable to work as a result of the injury, and subject to various limits based on the state you reside in
- Legal Fees: This is the one item where bodily injury pays for your expenses instead of the third party. Your insurer will usually provide legal defense for you if you are sued by the other party, and that’s paid for under your own bodily injury coverage
Minimum Liability Requirements for Bodily Injury Coverage
Regulations in each state govern the minimum amount of coverage you are required to have as part of your auto insurance in order operate a vehicle legally. The most common BIL limit is $25,000, but the range can vary quite significantly, from the lowest of $10,000 per person in Florida to the highest requirement of $50,000 per person in Alaska. State minimums for bodily injury liability are displayed in the following table.
Choosing a Bodily Injury Liability Coverage Limit
Given the many different limits you can choose from, how should you decide what limit works best for you? To help you decide, we think it’s appropriate to look at it from two perspectives. The first is based on the likelihood of bodily injury claims and the exposure of your assets, and the second is the cost of premiums and how they differ when picking higher coverage amounts.
In selecting their bodily injury limit, consumers should keep in mind the assets they have at risk should they cause an accident. While the likelihood of having a claim filed against safe drivers for bodily injury is low, the purpose of having the insurance is to protect you in such an event. If you have limited assets, its likely that the other party will be willing to settle a claim for what the insurance company pays out. You don’t have much risk in a lawsuit when there are comparatively less assets to spare.
On the other hand if you are wealthy or have sizeable savings or investments, your financial risk and exposure in an accident increase. With low limits, more of your assets are exposed when a potential accident costs more than the low amount of protection your BIL insurance provides. As a result of this higher risk, it makes more sense to opt for a much higher coverage limit, so that more of the claims brought against your bodily injury protection will be covered directly by your insurer. As we’ll show show, the increase in premiums for greater coverage is relatively small so as to be affordable even at these higher limits. For more information on our liability limits, refer to our guide here.
How Does Changing Your Bodily Injury Limits Affect Your Premiums?
We researched auto insurance quotes across various bodily injury limits for our sample driver, a 34 year-old married man living in Indiana to illustrate how premiums can change based on coverage amounts. However, as car insurance premiums are highly tailored to individual drivers, and determined by their profile, driving records, credit score, as well as location, these numbers are only for consumers’ reference. We’ll focus on how much it costs our driver to adjust from one limit to the next.
As the table below illustrates, the amount of bodily injury premiums won’t scale 1:1 with the coverage limits. For instance, our sample Indiana driver looking to increase his limits from 25/50 to 250/500 would pay an increase of 74% in premiums for a 900% increase in protection limits. Put another way, that’s $9 more a month, or $109 more altogether a year, for 10x the protection in Indiana. As drivers increase the amount of liability insurance protection, their premiums will increase at lower rates. For example, going from the state minimum of 25/50 to the next available limit results in a 34% increase in premiums for twice the protection. But once you have moderate levels of bodily injury coverage, getting more protection will cost comparatively less – our driver would only have to pay 15% more moving from a 50/100 limit to a 100/300 limit. The relatively low change in premium may well worth the jump in protection should you cause an accident in the future.
Average Bodily Injury Claims
Unlike property damage liability claims, which average around $3,000 per incident, bodily injury claims tend to be significantly higher. In 2013, the average bodily injury claim was $15,443 as reported by ISO. Bodily injury claims tend to be relatively infrequent however, with only 0.94% of policies experiencing a claim. Based on this data, most bodily injury claims fall within reach of the minimum coverage limits required by the states, with a few exceptions, such as Florida. This should not be used as the sole piece of information in determining your limit, however. There are a wide range of claim amounts that aren’t indicated by these numbers, ranging from the fortunate low ones to catastrophically high claims.
Filing a Bodily Injury Liability Claim
Bodily Injury Liability claims are classified as Third Party Claims, which means you are filing a claim against the at-fault driver’s insurance company. In order to make sure a reasonable amount of your expenses are paid for, you will be required to document and keep record of the accident.
Before making a claim, you should be prepared to provide:
- Records of what happened
- Photos of the scene and any injuries you sustain
- Records of medical examinations and any bills from doctors and health care providers
- Receipts of all related expenses
- Proof of lost wages: If the injuries you sustain cause you to miss work and potential income, documentation of this from your employer is necesssary
After making a claim:
- You should hear back within a set time frame, as determined by your state and policy, or get an explanation for any delay
- Be prepared to discuss the incident. There may be conversations with a liability claim examiner or adjuster who may want clarification in order to assess the sustained injuries as well as the cost of the claim
- Your right to collect compensation for your claim may have a time limit as well: you may be required to accept a settlement within the required time frame as regulated by state law. You can either accept the offer or file a lawsuit if you do not agree with the settlement
- Sign the release form only if you are ready: As part of the process the insurance company will ask you to waive all future rights to pursue the person and company for further payments after settlement. You should take into account future medical bills and any expenses that might arise. Ask an attorney to review the settlement and release.
For information on state laws implemented prior to federal reform, click here
September 23, 2010; material added March 2015
Approximately 30 percent of Americans between the ages of 19 and 29 have no health insurance. This age group makes up 13 million of the 47 million Americans currently living without health insurance. The Affordable Care Act allows young adults to remain on their parents’ or guardians’ health plan until age 26. The U.S. Department of Health and Human Services estimates that approximately 2.37 million young adults will be affected by the new law, out of which 1.83 million are currently uninsured.
- What is required and who is responsible?
The Patient Protection and Affordable Care Act extends health care coverage for young adult children under their parent’s health plan up to the age of 26.
The Affordable Care Act requires plans and issuers that offer coverage to children on their parents’ plan to make the coverage available until the adult child reaches the age of 26. The issued regulations state that young adults are eligible for this coverage regardless of any, or a combination of any, of the following factors: financial dependency, residency with parent, student status, employment and marital status. This applies to all plans in the individual market and to employer plans created after the date of enactment (March 23, 2010). For employer plans that were in existence prior to the date of enactment, young adults can qualify for dependent coverage only if they are not eligible for an employment-based health insurance plan until 2014. Beginning in 2014, young adults can choose to stay on their parent’s health plan until age 26, even if they are eligible for their own employer-sponsored insurance plan.
This law does not require that a plan or issuer offer dependent coverage but that if coverage is offered it must be extended to young adults up to age 26.
What is the state role?
The new law will apply in all states. States may continue with current state law requirements for extended dependent coverage unless they prevent the application of the Patient Protection and Affordable Care Act. State and local governments, as sponsors of coverage plans, will be required to notify those under the age of 26 whose coverage has ended or who were denied coverage under their plans before turning 26, of enrollment opportunities.
When did it happen?
Coverage for young adults up to age 26 became effective on Sept. 23, 2010.
What will it cost and who will pay?
The cost of notifying families about new enrollment opportunities will be shared between insurance providers and employers. The cost of covering the young adults who take advantage of the extension will be shared between employers and the families of newly covered young adults. States, as sponsors of coverage plans for state employees, will also share the costs with families. The qualified young adult cannot be required to pay more for coverage than similarly situated individuals who did not lose coverage due to the loss of dependent status.
IRS Notice 2010-38 provides guidance to extend the general exclusion from gross income for the reimbursements for medical care under an employer provided accident or health plan to any employee’s child who has not yet attained age 27 as of the end of the taxable year–making the benefit tax-free.
The new federal law applies to young adults in all states.
As of June 2012, the following 37 states extended the age that young adults can remain on their parents’ health insurance plan: Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
There is considerable variation among state laws in terms of eligibility requirements. At least 30 states have extended dependent coverage, regardless of student status. Most states require that a young adult be unmarried and financially dependent on their parents in order to qualify for extended dependent coverage. States may continue to apply current state law requirements for extended dependent coverage except to the extent that the requirements prevent the application of the Patient Protection and Affordable Care Act.
Coverage Beyond the Federal ACA (2015 update)
The following states’ statutes were written prior to the signing of the ACA to cover adult dependents beyond the standard ‘up to age 26’ that is now uniform in federal law. These remain enforceable under state law:
- Florida Fla Stat. 627.6562 (up to age 30, who are also unmarried and have no dependent child of their own)
- Illinois (veterans only: up to age 30; other up to age 26)
- New Jersey (up to age 31)
- New York (up to age 30)
- Ohio (up to age 28)
- Pennsylvania (up to age 30)
- Wisconsin (up to age 27)
Table of State Laws
C.G.S.A. § 38a-497 requires that group comprehensive and health insurance policies extend coverage to unwed children until the age of 26 provided they remain residents of Connecticut or are full-time students.
Florida 627.6562 allows for dependent children up to 25, who live with their parent or are a student, and up to 30 years old, who are also unmarried and have no dependent child of their own, to remain on their parents’ insurance.
Mass. Gen. Laws Ann. Ch. 175 § 108 allows dependents to stay on their parent’s coverage for two years past the age of dependency or until age 26, whichever occurs first, or without regard to age if they are incapable of self-sustaining employment due to disability.
Young adults ages 19-26 are eligible for lower-cost insurance coverage, tailored to meet their needs, offered through the Commonwealth Health Insurance Connector. Reform summary and fact sheet, PowerPoint presentation.
MCA 33-22-140 provides insurance coverage under a parent’s policy for unmarried children up to age 25.
N.J.S.A. 17B:27-30.5 states that, at the option of the insured person, a dependent may be covered up to the age of 31, as long as they are unmarried and have no dependents of their own.
N.Y. Insurance Code, sec. 3216. ( 2009 AB 9038) allows an unmarried adult child to remain on parent’s insurance through age 29 (up to age 30) if they are a resident of New York. [link updated 4/2015]
N.D. Cent. Code § 26.1-36-22 allows an unmarried, dependent child to remain on parent’s insurance up to age 22 if they live with parents. If they are a full-time student, they can remain on parent’s insurance from age 22 up to age 26.
Ohio Rev. Code § 1751.14, as amended by 2009 OH H 1 allows an unmarried, dependent child that is an Ohio resident or a full-time student to remain on parent’s insurance up to age 28, or without regard to age if they are incapable of self-sustaining employment due to disability.
2009 SB 189 states that an unmarried child may remain on parent’s insurance up to age 30 if they have no dependents and are residents of PA or are enrolled as full-time students.
51 Pa.C.S.A. § 7309 states that full-time students whose studies are interrupted by service in the reserves or the National Guard must be extended health care benefits as a dependent of their parent beyond the terminating age equal to the length of their deployment..
S.C. Code Ann. § 38-71-1330 allows an unmarried, dependent child who is a full-time student to remain on parent’s insurance up to age 22 if parent is covered by small group policy.
S.C. Code Ann. § 38-71-350 requires that a dependent child who is not capable of self-sustaining employment be allowed to remain on his or her parent’s insurance, without regard to age.
Wis. Stat. § 632.885 requires that coverage for unmarried dependents through a parent’s insurance be offered up to age 27 if they are not offered insurance through an employer. Full-time students called to active duty in the armed forces can be covered beyond age 26 depending on various factors.
Source: State Health Facts and NCSL, 2009. Back to Access to Health Care Overview Page
The Duty To Defend: What Insurers, Insureds And Their Counsel Need To Know When Faced With A Liability Coverage Dispute – ABA YLD 101 Practice Series
Practically every business and homeowner obtains insurance to protect against losses, i.e., direct damage to property or business caused by an unforeseen event. However, many policyholders do not realize that perhaps the most important aspect of their insurance policy can be the liability section, which protects them from certain damages sought in third-party claims asserted against them. For business owners, this coverage is typically obtained under a commercial general liability (‘CGL’) policy, which provides protection against certain risks that may arise during the course of conducting business. For homeowners, their liability protection against a lawsuit or other claim is contained in the liability section of their homeowner’s policy.
The Insurer’s Duties to Indemnify and to Defend
Most policies, regardless of whether it’s a CGL or homeowners policy, include at least two liability-related promises by the insurer. The first promise, which is commonly referred to as the duty to indemnify, is the insurer’s agreement to pay for the insured’s legal liability up to the stated policy limits. The second promise, which is broader than the first promise, is referred to as the promise to defend, and it means that the insurer agrees to hire legal counsel to defend the insured against a covered suit. The duty to defend also includes a promise to cover all legal fees and costs. Therefore, if a policyholder is faced with a covered third-party claim, the insurer has a duty to defend against the claim, in addition to a duty to pay any monetary award entered against the insured for covered claims.
Of course, the practical application of these rules is not so straightforward. The rights and obligations of the insurer and insured in this context are controlled by numerous rules and exceptions, only some of which are explicitly stated in the applicable insurance policy. Disputes over whether a civil lawsuit, or other legal proceeding, triggers an insurer’s duty to defend are common. These disputes are unique in that two parties, jointly defending against a third-party lawsuit, are directly adverse to each other in a separate lawsuit regarding which one of them is responsible for covering the costs of the third-party lawsuit, as well as any resulting judgment. Below is an overview of common issues that can arise during such disputes.
Analysis Of Whether The Claim Falls Under The Policy
When determining whether a liability insurer has a duty to defend, the first inquiry is whether a ‘suit’ exists. The term ‘suit,’ which became a defined term under most CGL policies in 1986, means a civil proceeding, such as the filing of a complaint. Though most commonly thought of as a civil lawsuit, most liability policies contain a broad definition of ‘suit’ that could be interpreted to include other claims against an insured, such as arbitration demands or other alternative dispute resolution proceedings, as well as administrative challenges and petitions. In certain circumstances, the term ‘suit’ may even include a governmental agency proceeding. For example, governmental agencies sometimes issue a potentially responsible party (‘PRP’) letter to an entity that it suspects is causing, or at least contributing to, an environmental contamination. While the Courts are mixed so far as to whether this constitutes a ‘suit,’ some Courts have found that such a demand falls under the usual meaning of ‘suit’ in the context of a CGL policy. 1 Conversely, an example of a proceeding that is generally not considered a ‘suit’ is a criminal complaint for trespassing or negligent homicide, which would not trigger a duty to defend as the relief sought is a criminal penalty, not necessarily monetary damages.
Assuming the definition of ‘suit’ is satisfied, the next hurdle is determining whether the ‘suit’ seeks damages caused by an ‘occurrence,’ which is typically defined as an ‘accident,’ and includes the continuous or repeated exposure to the same harmful condition. The term ‘accident’ generally is defined as a fortuitous circumstance, event, or happening that is neither expected nor intended by the insured. To clarify the definition of ‘occurrence,’ insurance policies typically contain a specific exclusion for damages caused by intentional acts. However, many courts have broadly construed the terms ‘occurrence’ and ‘accident.’ For example, the Texas Supreme Court recently ruled that unintended construction defects may constitute an ‘occurrence’ or ‘accident’ under a CGL policy even if the act causing the defects was deliberate, so long as the act was also negligent and, ‘the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly.’ 2
Conversely, a suit may not involve an ‘accident’ or ‘occurrence’ when the insured intended the injury, or when the resulting damage was the natural and expected result of the insured’s actions, regardless of whether the insured was negligent. 3 Under this analysis, the inquiry is focused on whether the insured intended to cause the damage, and not whether the damage resulted from the intentional act.
Another major issue to arise is whether the damages sought in the ‘suit’ are the types of damages covered under the policy. For example, it is common for ‘property damage’ and ‘personal injury’ to be covered under most policies, but issues arise as to the appropriate interpretation of these claims. Also, because most insurance policies provide broad coverage subject to a myriad of limitations and exclusions that restrict coverage to certain circumstances, questions regarding coverage for certain claims, but not others, often cannot be resolved by simply reviewing the policy and the Complaint. This issue is discussed more fully below. Moreover, it is important to have a solid understanding of the specific exclusionary language contained in the policy, as well as sufficient knowledge of how the applicable policy language has been previously interpreted by courts in the relevant jurisdiction, in order to properly determine whether the insurer’s duty to defend is triggered by the Complaint.
You also must determine if the ‘suit’ occurred during the effective period of the policy. If the claims arose outside of the policy period, the insurer has no duty to defend. Common issues in this context arise when the policy has been cancelled and/or reinstated repeatedly, either for nonpayment or late payment of policy premiums. Another context where these issues arise is when the claimed damage is progressive and ongoing over a series of years. It is important to review the policy language to determine if the policy covers suits based on when they occur or when the claim is made. For ‘occurrence-based’ policies, there may be coverage for suits brought years after the underlying events occurred, provided that the covered ‘damage’ and events occurred during the policy period. For ‘claims-made’ policies, coverage is only available if the claim is brought or reported during the policy period. 4 Therefore, it is important for all policyholders and insurers to understand the policy period and how it applies to the asserted claims to determine if the ‘suit’ falls outside the policy period.
Review Of Materials Beyond The Complaint
The insurer’s duty to defend is controlled by the allegations contained in the Complaint. Thus, the first step is a careful reading of the Complaint to determine the nature of the underlying allegations. Most jurisdictions require that even if only one claim in a suit is potentially covered by the policy, the insurer has a duty to defend the entire suit. Therefore, all allegations in the Complaint must be analyzed for potential coverage, even if clearly non-covered claims are included.
Because most jurisdictions allow notice pleadings, which require only a short and plain statement of the facts supporting the relief requested, the allegations in the Complaint sometimes do not, by themselves, provide sufficient information to determine the full extent of the claims being made. Therefore, the next step is looking outside the Complaint when evaluating whether there is a duty to defend. There are two common approaches to this issue, and certain jurisdictions may follow one, or even both, of these approaches depending on the circumstances involved.
Under the ‘Four Corners’ test, 5 Courts will look only at the allegations contained in the Complaint initiating the suit to determine if the allegations are covered under the policy. Under this test, a jury will be asked to examine only the allegations in the underlying Complaint, as well as the insurance policy, to determine whether the allegations are covered under the policy. An important rule to remember in this context is that the jury will not usually see the pleadings or discovery from the underlying suit. In addition, the jury will likely be instructed to assume that all of the allegations in the Complaint are true when deciding if the claims are covered under the policy.
The second test allows ‘extrinsic evidence’ to be considered during a coverage evaluation. Evidence outside the Complaint may include evidence obtained during the pre-suit investigation by the insured and/or the coverage investigation by the insurer. Oftentimes, an insurer will attempt to resolve coverage issues prior to the filing of a suit, but the admissibility of evidence obtained during pre-suit investigation will depend on the jurisdiction and the circumstances involved. Some Courts have recently allowed ‘extrinsic evidence’ to evaluate coverage when the case contains readily ascertainable facts, relevant to coverage, that do not overlap with the merits of, or engage the truth or falsity of, any facts alleged in the underlying case. 6 Admitting such evidence at trial allows a jury to more closely approximate the insurer’s knowledge at the time it decided to accept or deny defense of the underlying suit. Admission of this additional evidence is important not only as it relates to the actual dispute, but also as to any claims of bad faith based on an insurer’s denial of coverage. The ‘extrinsic evidence’ test also avoids providing coverage for claims that are clearly not covered under the insurance policy despite the allegations that appear on the face of the Complaint. For example, a Complaint that merely contains the word ‘negligence’ will not change a generally noncovered breach of contract action into a generally covered tort action.
Reimbursement of Defense Costs
An insurer will generally not be able to recover from an insured the cost of defending any claim. Therefore, even after defending the insured, and later proving that the allegations against the insured were not covered by the policy, the insurer still is unlikely to recover from the insured any money already paid for the insured’s defense.
This is significant when the cost to defend a claim may equal, or even exceed, the policy limits under the policy. In other words, the insurer may pay over $1 million dollars to defend against a lawsuit where the policy limits are only $500,000. Thus, for the insured, the value of appointed defense counsel could far outweigh the value of indemnity from any monetary award entered against it. Not only does this illustrate the potential value of a liability insurance policy to the insured, it also demonstrates the insurer’s potential risks of not diligently conducting a pre-suit coverage investigation to resolve coverage issues before it assumes defense of a suit.
There are exceptions to this general rule, one of which is where a Complaint contains arguably covered allegations and undisputedly non-covered allegations. In this context, insurers have successfully sought reimbursement from an insured for defense costs paid to defend against non-covered allegations. 7 It should be noted that reimbursement is unlikely as a practical matter because the burden is on the insurer to demonstrate the specific defense costs allocated to the covered versus non-covered claims. Conversely, there are an increasing number of insureds successfully obtaining reimbursement for ‘pre-tender’ defense costs, i.e., costs the insured incurs before the insurer becomes involved in the defense. 8
Termination Of The Duty To Defend
It is a common misconception that the duty to defend lasts only until the limits of the insurance policy have been exhausted. In other words, many people tend to agree that an insurance company can simply tender the policy limits up front to avoid paying the defense costs. One common example of this issue arising is when the policy limits are clearly insufficient to cover the potential liability. For example, if an insured has only $1 million in liability coverage, but is faced with liability for a catastrophic injury or massive environmental cleanup, the settlement or judgment will almost certainly exceed the policy limits; however, the insurer may still have a duty to defend the insured even after it tenders the policy limits to satisfy the claim.
Simply tendering the policy limits without retaining defense counsel runs counter to the concept of separate duties to defend and indemnify. In fact, numerous Courts have repeatedly found this practice in violation of the insurer’s duty to defend, and consequently the insurer’s duty of good faith. 9 Therefore, insurers must be cautious when denying or withdrawing defense of an insured before the underlying action is resolved or there is a showing of no coverage for the claim. 10
Of course, an insurer is free to deny or withdraw defense of a previously accepted claim. As a practical matter, only a fraction of claims actually result in the payment of damages. Thus, if the damages being sought are clearly not covered by the policy, the insurer has no duty to defend. However, the potential consequences for refusing to defend an insured for even an arguably covered claim can be severe. It must also be noted that any doubt regarding the duty to defend will likely be resolved in favor of the insured. Insurers should be aware that a denial of coverage could cause a breach of the insurance contract, which, as discussed below, can also lead to a bad faith claim against the insurer.
Bad Faith Claims
Generally, bad faith occurs when the insurer unreasonably breaches the insurance policy, i.e., fails to defend its insured without a reasonable belief that the underlying suit is not covered. However, if a claim is even arguably covered under the policy, the insurer may act in bad faith even if it has a reasonable basis for denying the claim. In a recent case, an insurer was found to have acted in bad faith when it refused to defend a dentist for claims arising from a practical joke during surgery. 11 While performing a dental procedure, the dentist inserted flippers shaped like boar tusks into the patient’s mouth and took pictures. After the successful surgery, the patient learned of the photographs and filed suit against the dentist for various claims including outrage, medical negligence, and negligent infliction of emotional distress. The dentist tendered the claim to his professional insurance carrier, who denied coverage finding that the claims were not covered under the policy. The Washington Supreme Court found that the claims were potentially covered as ‘dental services’ and stated the following: ‘[t]he acts that comprised the practical joke were integrated into and inseparable from the overall [dental] procedure.’ 12
The Woo case also illustrates the severity of the risks for breaching the duty to defend. Because of its bad faith conduct, the insurer had to pay $250,000 to the dentist as reimbursement for the underlying settlement with the patient. In addition, the insurer had to pay the dentist $750,000 as bad faith damages. Therefore, the result of the case is that the insurer was ordered to pay the dentist and his attorneys ‘a million dollars more than the amount that his traumatized ex-employee was compensated for this cruel ‘joke.” 13
When faced with defending against a non-covered claim, the insurer appears to be faced with two choices: (1) accept defense of a dubious claim and pay the defense costs; or (2) deny the claim and risk losing the coverage determination, which would inevitably lead to a bad faith claim. As discussed below, there are alternative options available to the insurer, however.
Reservation of Rights and Declaratory Judgment Actions
An insurer’s first option is to disclaim its duty to defend and reserve all of its rights. This must be done at the outset to avoid potential waiver and estoppel effect of its coverage defenses. An effective reservation of rights letter (often referred to as a ‘ROR’ letter) should include all of the insurer’s potential coverage defenses, including whether the claim meets the definitions of ‘suit,’ ‘occurrence,’ and ‘accident’ under the policy, as well as whether the suit seeks appropriate damages, typically ‘personal injury’ or ‘property damage.’ The ROR letter should also include a notation regarding the policy limits, and any other applicable limitations or exclusions to coverage. An insurer that fails to assert all potential defenses in the ROR letter may be viewed as having waived these defenses during a subsequent coverage dispute.
To avoid confusion, the ROR letter should clearly state that the insurer is disputing coverage for the claim, but is still providing a defense for the insured subject to any and all policy defenses, regardless of whether they are specifically included in the ROR letter or not. This may prevent waiver and estoppel of any other coverage defenses. It is also important to advise the insured that it has the right to retain its own coverage counsel, and in some states, retain separate defense counsel as well. 14
Either in lieu of, or in addition to, submitting the ROR letter, the insurer can file a declaratory judgment action. This is a separate lawsuit requesting a determination as to coverage for the underlying suit. Essentially, a declaratory judgment is a court order declaring the rights and liabilities of the parties under the insurance policy. A policyholder may also file a declaratory judgment action.
Filing a declaratory judgment action is not without risks for the insurer, however. There is the potential that if the insurer loses the declaratory judgment action on its merits, the insurer could be held liable not only for defense costs of the underlying lawsuit (assuming the insurer continues to provide defense after commencing the declaratory judgment action), but also for the cost incurred by the insured in the declaratory judgment action. Courts have awarded costs to the insured in the declaratory judgment actions regardless of whether the declaratory judgment action was filed in good faith or was the subject of a legitimate dispute. 15
In sum, given the potential pitfalls for both insurers and insureds in duty-to-defend disputes, it is critical that both sides research the applicable law in the relevant jurisidiction before taking a position that could affect their rights and responsibilities to each other if a coverage dispute arises. Given the broad coverage afforded under many liability policies, issues involving the duty to defend could potentially arise in almost any area of litigation. Thus, it is important that potential litigants and liability insurers protect their rights from the outset of the underlying litigation, and if necessary, take steps to protect their rights and defenses under the relevant insurance policies.
1 R.T. Vanderbilt Co. v. Continental Cas. Co., 462, 870 A.2d 1048 (Conn. 2005) (finding that policies providing coverage for ‘suits’ will always be construed to cover Environmental Protection Agency administrative actions initiated by a PRP letter).
2 Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007).
4 Claims-made policies, however, may also cover claims arising from events that occurred prior to the effective date of the policy when they contain what is commonly called ‘prior acts coverage.’
5 This is also referred to as the ‘Eight Corners’ or the ‘Complaint Allegation’ rule.
6 See Ooida Risk Retention Group, Inc v. Williams, No. 08-10381, 2009 WL 2461850 (5th Cir. Aug. 12, 2009).
7 See Buss v. Superior Court, 16 Cal.4th 35 (1997); see also Aerojet-General Corp. v. Transport Indem. Co., 17 Cal.4th 38 (1997).
8 See, e.g., Sherwood Brands, Inc. v. Hartford Acc. & Indem. Co., 698 A.2d 1078, 1083 (Md. 1997).
9 See Viking Ins. Co. v. Hill, 787 P.2d 1385 (Wash. Ct. App. 1990). Other jurisdictions are in accord. See, e.g., Samply v. Integrity Ins. Co., 476 So.2d 79 (Ala. 1985); Conway v. Country Cas. Ins. Co., 442 N.E.2d 245 (Ill. 1982); Delaney v. Vardine Paratransit, Inc., 504 N.Y.S.2d 70 (1986).
10 In some jurisdictions, an insurer may even have a further duty to appeal if there are reasonable grounds for an appeal. See, e.g., Truck Ins. Exch. v. Century Indem. Co., 887 P.2d 455 (Wash. Ct. App. 1995).
11 Woo v. Fireman’s Fund Ins. Co., 164 P.3d 454 (Wash. 2007).
12 Id. at 57. The Court also refused to adopt a ‘reasonable expectations’ test, under which an insurer has a duty to defend if the insured would reasonably expect coverage under the policy. Id. at 53, n.5.
13 Id. at 73.
14 See San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 385 (1984). Some states view the issuance of a ROR letter as creating a possible conflict of interest between the insurer and the insured. Thus, under these circumstances, the insured may have the right to appoint separate independent counsel to represent the insured.
15 See, e.g., Rubenstein v. Royal Ins. Co. of America, 708 N.E.2d 639 (Mass. 1999).
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About the Author
About the AuthorEliot M. Harris is an attorney in the Seattle office of Williams Kastner & Gibbs, PLLC. Mr. Harris has represented residential and commercial insurers, as well as businesses and individual insureds, involved in insurance coverage disputes throughout the Pacific Northwest. He practices in the areas of insurance coverage, mass torts, product liability, and catastrophic personal injury. He can be reached at firstname.lastname@example.org.
I was at a stop light in heavy traffic, had been being tailgated by an SUV, I was in a civic. When the light turned green I began going forward along with the cars in front of me but the car behind me lagged.
Then the SUV gunned it and went up on the median on the left of me to pass, was driving with 2 wheels in the grass when she had to jerk the wheel to the right to avoid hitting a sign, slammed into the left side of my car and continued to flip her car over on its side from the impact in the middle of the road.
It whipped out the left side of my car but worse, I was shifting into 2nd gear when she hit me which caused a torn rotator cuff and shredded bicep tendons.
I had surgery and that was the most painful thing I have ever been through, the PT was excruciating and I still have pain over a year later. The thing is her father is the Lt. in the fire department and the state cop only gave her a warning.
Her insurance coverage is $100,000/$300,000 and after all the bills, missed time from work 6 months and no pay, the lawyer gets 1/3 plus costs. I walk away with less than my expenses?
I mean why can’t I get more than the $100,000? My pain and suffering aren’t even being addressed at this point, oh and she has nothing, a big mortgage on a little house, doesn’t own her own car, the bank does, how do I get more from the insurance company? Can I sue my own insurance? Please help.
Disclaimer: Information provided in our response is NOT formal legal advice. It is generic legal information based on the very limited information provided. Under no circumstances should the information in our response, or anywhere else on this site be relied upon when deciding the proper course of a legal matter. Our response does NOT create an attorney-client relationship. Always get a formal case review from a licensed attorney in your area.
ANSWER for ‘Can I sue for more than the defendant’s insurance policy limits?’:
Your injury sounds extremely painful and in such a situation, it seems as though you will not truly be made whole which is the goal of the personal injury claims system.
If the driver has nothing, unfortunately suing her personally will not help you because you would have nothing to which you could attach a judgment. Depending on the type of insurance you have, you may be able to submit a claim there.
If you have a provision for under-insured motorist (UM policy), you can submit a claim to your own insurance company for the remainder of your claim that is not covered. Depending on your policy limits, this coverage may help to make you whole.
Since laws change frequently, and across jurisdictions, you should get a personalized case evaluation from an attorney licensed in your state. Find an experienced local attorney to give you a free case review here, or call (866) 484-9115.
Best of luck,
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Insurance Coverage Locate Requests
If you know an insurance carrier name and policy number
but not the policy limits…. Contact us for the policy limits
of your known policy!
If you have a case where you do not know the insurance
carrier name, policy number or policy limits…. Contact us,
we will work to develop that missing information!
Northwest Investigative Services, Inc., now has the resources to attempt to locate homeowner, business, renter, vehicle, vessel, trucking, professional malpractice, premise liability, product liability, E&O, and umbrella type insurance coverage. If we accept the request then all research will be performed on a no hit / no fee basis.Our mission is to provide you insurance coverage and/or limits information as of your date of loss, not as of the date of our research. We have the ability to find coverages from up to fifteen years ago but the more time that has lapsed since your date of loss the more costly this research will become and at the same time, the chances of success will slide downwards.
Serving the Legal Community Since 1974 from Offices Near Seattle and Wenatchee, WA
Situation 1 / Policy Limits Request: In a normal circumstance where we accept your request… If you are aware of the target liability insurance carrier name AND you have a policy and/or claim number and you request insurance limits information then the fee will be $295.00, if we are successful. There will be no fee if we are not successful. Note: This price is valid if your client’s date of loss (DOL) is less than one year from your request date. We can go back up to 15 years post DOL but it gets more expensive as time passes as we are looking for policy limits as of your date of loss, not the date of research. If your date of loss is more than one year post research request date then please ask us for a quote that would correspond to your DOL. Note: A hit would be us providing the insurance coverage limits that we believe to be in force on your date of loss. If this information proves to be incorrect then our liability would be limited to a refund of the hit fee that was charged. (Please read the ‘fine print’ explanations listed below.)
Situation 2 / Liability Insurance Carrier Request: In a normal situation where we accept your request… If you have no idea of who a liability insurance carrier might be that would cover your incident, and we are successful in finding a liability insurance carrier for your accident, then our hit fee would be $495.00. There would be no fee if we are not successful. This price is valid if your client’s date of loss (DOL) is less than one year from your request date. We can go back up to 15 years post DOL but it gets more expensive as time passes as we are looking for insurance as of your date of loss, not the date of research. If your date of loss is more than one year post research date then ask us for a quote that would correspond to your DOL. Note: A hit would be us providing the insurance company name, address and usually a phone number. You can contact them when knowing that info. If for any reasons our returned information was not the liability carrier that we stated for your date of loss then our liability would be limited to a full refund of the hit fee that was originally charged. (Please read the ‘fine print’ explanations listed below. If your action is from a motor vehicle action then please note the section below titled ‘C) Motor Vehicle Accidents’.)
Situation 3 / Umbrella Insurance Carrier Request: In a normal situation where we accept your request… 3A: If you have an umbrella carrier name AND claim and/or policy number and you request umbrella coverage limits then the costs and conditions would be the same as Situation 1 above. 3B) If you are aware of the underlying liability insurance carrier, policy / claim number, and limits and you request a research for umbrella coverage and then if we are successful the same prices and conditions apply as in Situation 2, above. Note: We will not research for umbrella policy coverage on a no hit / no fee basis unless the underlying coverage is known and confirmed to be a number that is at least in the general area a 250/500 or single limit 300 policy. It is our experience that if the underlying coverages are less than these figures then most if not all insurance companies will not allow an umbrella coverage to be purchased. In these scenarios a no-hit fee of at least 50% of the hit fee would be apply (Please read the ‘fine print’ explanations listed below.)
The following is the ‘fine print’ concerning the above explanations:
A) Liability / Refund Information: A hit for any of the above situations would be us providing you what we feel to be accurate information as of your date of loss. If this information proves to be incorrect then you agree that our liability is limited to only the refund of the amount charged as our hit fee.
B) Exclusions: We do not find out about and as such do not deal with any possible policy exclusions. We are looking for a liability or umbrella coverage that would cover your incident and it would be a hit if we find it, regardless of any policy exclusions. As example: If we find insurance coverage on the defendant vehicle and as it turns out the defendant driver was excluded from the policy then a full hit fee would still apply. Or, in a dog bite case we find insurance coverage for the defendant residence but as it turns out that the target dog was already excluded from the policy then a full hit fee would still apply.
C) Motor Vehicle Accidents: If the defendant driver was cited for no insurance then we will not look for insurance on a no hit / no fee basis until the ‘no insurance’ court case is adjudicated. The reason is that when a person receives a no insurance ticket in Washington they are also advised that if they show up with proof of insurance on the accident date then no court action is required and the court clerk can dismiss the $550.00 ticket on the spot in exchange for a $25.00 administrative fee. If the defendant then has the fee knocked down to $25.00 then your office or mine can go to the court to determine insurance for a much less fee than we would charge going the long way as described above. But, if the defendant does not exercise the option of having the fine reduced over $500 then we would assume that they truly did not have insurance on the date of loss and we will not perform our insurance coverage research on a no hit / no fee basis. If you still want us to go forward in this type of situation then we would have a no-hit fee of 50% of the usual hit fee. We will request a copy of the basic accident report for all traffic accidents. Note: Washington law does not require motorcycles to be insured so no citation would be issued to their drivers for lack of insurance coverage at the time of the accident.
D) Turnaround Time: It can take up to one month, sometimes a little longer, for us to develop insurance coverage information. Actually, the hits usually come faster than that, it is when we can’t find coverage that we take a while before we finally give up and say that we could not find coverage. We will perform a rush search for an additional $100 fee.
E) Request Cancelation: You should exhaust all other means such as letters to the defendant(s), discussions with the adjuster, etc., before asking us to research an insurance request. You will still be charged a research fee even if you stumble upon your answer from another direction before we have completed our task, the case settles in the meantime, etc.
F) No Hit Response: If our return is that we cannot find coverage as of your date of loss, this does not mean that there is no coverage. It might just mean that we could not find the coverage that may actually exist.
Liability is one of the fundamental forms of coverage addressed in most automobile insurance policies. Understanding the purpose of liability insurance will help you decide how much coverage is needed to cover losses for which you are legally liable.
Legally Liable: Liability Insurance Coverage
Auto insurance can include liability insurance coverage for accidents involving bodily injury and/or property damage for which the policyholder is legally liable. In other words, liability protection is the coverage that pays for injuries and damage sustained by a third party and/or their property for which you are responsible.
Insurance that Covers Bodily Injury (BI)
If you cause an accident and someone is injured, your liability coverage as part of your automobile insurance will pay for their injuries. Minimum amounts of liability insurance are often required by state law, however higher limits are usually available. Policies with split limits (i.e. 25/50/10) of liability separate the amount of insurance coverage available for each injured person and the amount of coverage available for the accident. For example, an insurance policy with split limits of 25/50/10 means $25,000 is the maximum amount payable by the policy for the bodily injury per person; $50,000 is the maximum payable by the policy per accident; the third number deals with property damage, which is discussed below. Other insurance policies have a combined single limit (e.g. $100,000). Combined single-limit policies offer a single amount that is the maximum amount payable by the policy for bodily injury and property damage.
Insurance that Covers Property Damage (PD)
If you cause an accident and someone else’s property is damaged, your automobile insurance liability coverage will pay for the damage. In an accident, damaged property often includes the other driver’s vehicle. However, property damage insurance coverage will also pay for damage to other types of property, such as a sign or light pole.
In insurance policies with split limits (i.e. 25/50/10), the third number indicates the maximum amount payable by the policy for property damage per accident. Combined single-limit policies offer a single amount that is the maximum amount payable by the insurance policy for bodily injury and property damage.
Required Minimums for Liability Insurance Coverage
Some states require drivers to carry a minimum amount of liability insurance for property damage. Higher limits are usually available.
Is there any way to predict the severity of an accident or how many people may be involved before it happens? Because the answer to this question is ‘no,’ higher limits of liability insurance coverage are always recommended.
Should You Save Money on Liability Insurance Coverage?
Liability limits are one way to save money on your insurance policy, but you always need to be very careful about how low you choose to go. First, you need to find out if your state has a required minimum for liability insurance coverage and what that minimum is. Then you need to decide if you want more liability insurance coverage than your state requires.
The Risk Involved with Saving on Insurance Liability Limits
Paying less on your liability limits works like this: the lower your limits, the lower your insurance premium will be. Your first instinct, then, is to make those insurance liability limits as low as possible. But you need to remember that means you will be covered by your insurance for less money in case an accident does happen. So you need to figure out, realistically, how much you can cover out of your own pocket. Paying more on your insurance premium now may feel unnecessary, but paying thousands if an accident does happen will feel much worse.
See how much you could save today on your car insurance. Get your free auto insurance quotes today!
Q1: How does the Affordable Care Act help young adults?
Before the Affordable Care Act, many health plans and issuers could remove adult children from their parents’ coverage because of their age, whether or not they were a student or where they lived. The Affordable Care Act requires plans and issuers that offer dependent child coverage to make the coverage available until the adult child reaches the age of 26. Many parents and their children who worried about losing health coverage after they graduated from college no longer have to worry.
Q2: What plans are required to extend dependent child coverage up to age 26?
The Affordable Care Act requires plans and issuers that offer dependent child coverage to make the coverage available until a child reaches the age of 26. Both married and unmarried children qualify for this coverage. This rule applies to all plans in the individual market and to all employer plans.
Q3: Will young adults have to pay more for coverage or accept a different benefit package?
Any qualified individual must be offered all of the benefit packages and cannot be required to pay more for coverage than similarly situated individuals.
Q4: Can plans or issuers who offer dependent child coverage impose limits on who qualifies based upon financial dependency, marital status, enrollment in school, residency or other factors?
No. Plans and issuers that offer dependent child coverage must provide coverage until a child reaches the age of 26.
Q5: Does the adult child have to purchase an individual policy?
No. Eligible adult children wishing to take advantage of the coverage up to age 26 will be included in the parents’ family coverage.
Q6: Does Medicare cover adult children in the same way that private health coverage does?
No. Medicare does not provide coverage for dependents. Dependents must be individually eligible in order to have Medicare coverage. This provision, therefore, does not apply to Medicare.
Q7: Are both married and unmarried young adults covered?
Q8: Are plans or issuers required to provide coverage for children of children receiving the extended coverage?
Q9: I understand that there are tax benefits related to the extension of dependent child coverage. Can you explain these benefits?
Under a change in tax law included in the Affordable Care Act, the value of any employer-provided health coverage for an employee’s child is excluded from the employee’s income through the end of the taxable year in which the child turns 26.
Q10: When did this tax benefit go into effect?
The tax benefit became effective March 30, 2010. Consequently, the exclusion applies to any coverage that is provided to an adult child from March 30, 2010 through the end of the taxable year in which the child turns 26.
Q11: Who benefits from this tax treatment?
This expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Q12: May employees purchase health care coverage for their adult child on a pre-tax basis through the employer’s cafeteria plan, if an employer chooses to offer a cafeteria plan?
Yes. In addition to the exclusion from income of any employer contribution towards qualifying adult child coverage, employees may pay the employee portion of the health care coverage for an adult child on a pre-tax basis through the employer’s cafeteria plan – a plan that allows employees to choose from a menu of tax-free benefit options and cash or taxable benefits. The IRS provided in guidance Notice 2010-38 that the cafeteria plan could be amended retroactively up until December 31, 2010 to permit these pre-tax salary reduction contributions.
Q13: It seems like plans and insurers can terminate dependent child coverage after a child turns 26, but employers are allowed to exclude from the employee’s income the value of any employer-provided health coverage through the end of the calendar year in which the child turns age 26. This is confusing.
Under the law, the requirement to make adult coverage available applies only until the date that the child turns 26. However, if coverage extends beyond the 26th birthday, the value of the coverage can continue to be excluded from the employee’s income for the full tax year (generally the calendar year) in which the child had turned 26. For example, if a child turns 26 in March but is covered under the employer plan of his parent through December 31st (the end of most people’s taxable year), the value of the health care coverage through December 31st is excluded from the employee’s income for tax purposes. If the child stops coverage before December 31st, then the premiums paid by the employee up to the time the plan was stopped will be excluded from the employee’s income.
Q14: I’m a young adult currently covered on my parents’ health plan. What are my options for health coverage once I reach age 26?
Once you reach 26 and ‘age out’ of your parents’ coverage, you may have several options. If you (or your spouse) are employed and that employer offers a health plan, ask whether you are eligible for coverage under that plan. Losing coverage under your parents’ plan may qualify you for special enrollment in any other employer plan for which you are eligible. Special enrollment in another employer plan must be requested within 30 days of your loss of coverage.
If your parents’ plan is sponsored by an employer with 20 or more employees, you also may be eligible to purchase temporary extended health coverage for up to 36 months under the Consolidated Omnibus Budget Reconciliation Act (COBRA). To elect COBRA coverage, notify your parents’ employer in writing within 60 days of reaching age 26. In turn, your plan should notify you of the right to extend health care benefits under COBRA. You will have 60 days from the date the notice was sent to elect COBRA coverage. If your parents’ plan is sponsored by an employer with 20 or fewer employees, you may have similar rights under State law, instead of under COBRA. You should ask your parents’ employer, or your State Insurance Department if this applies, and if so, how you would request the extended coverage.
You may be eligible for special enrollment in individual coverage purchased through the Health Insurance Marketplace. To special enroll in Marketplace coverage, you must enroll within 60 days of aging out of your plan. For more information or to enroll, visit HealthCare.gov.