Protecting Your Home From Potential Lawsuits
By TERRI CULLEN
Staff Reporter of The Wall Street Journal

It's amazing how many people are willing to risk their financial security on an assumption.

Take homeowners, for example. Most blissfully presume their homeowners insurance policies provide more-than-adequate protection in the event they are sued for negligence or injury. Unfortunately, many are wrong -- and the price of their ignorance could be as high as losing their home.

Consider Truman Lawson, who was smacked with a lawsuit when a tree-service worker was injured on his property. Mr. Lawson contracted Eliseo Lascano, owner of Anthony's Tree Service of West Covina, Calif., to trim a 50-foot palm tree in Mr. Lawson's yard. Mr. Lawson did the prudent thing and asked to see the contractor's workers' compensation insurance policy before allowing work to begin.

Unfortunately, that wasn't enough to protect him; Mr. Lawson discovered too late that the insurance policy had expired. One of the tree-service employees, Miguel Fernandez, was injured in a fall on his property and sued Mr. Lawson, whose insurer said the accident wasn't covered under his homeowners policy. A California appellate court decided that Mr. Lawson was financially liable. (The case is now on its way to the state Supreme Court.)

"The homeowner got burned because the contractor showed him an expired copy of his insurance policy, and the homeowner never followed up to make sure he had a current one," says Paul Berning, a partner at the law firm of Thelen Reid & Priest LLP in San Francisco.

Homeowners often are targeted with personal-injury claims because real-estate ownership implies wealth, and "plaintiffs go after the deepest pockets first," says Mr. Berning. A survey of jury cases in 2000 found that the biggest increase in all jury awards occurred in personal-injury cases, where the median amount awarded to plaintiffs jumped 26% from the previous year, according to Jury Verdict Research, which maintains a nationwide database of more than 202,000 plaintiff and defense verdicts and settlements resulting from personal-injury claims.

Few homeowners are aware of the legal implications involved in something as simple as paying a neighbor's college kid to clean out the gutters, or letting children shovel out a driveway for a couple of bucks. And when it comes to independent contractors that work on such hazardous tasks as roofing, tree removal, and electrical work, the danger grows exponentially -- unless you have proof the workers are covered by their own business's insurance.

Have a dog? Invest in a fence and a muzzle. Kenneth Phillips, a Los Angeles attorney, says there are nearly five million dog-bite victims annually: Some 800,000 need medical attention, and as many as 20 die each year. Depending on which breed you own, a homeowners policy may not cover the damage.

How much of your assets are up for grabs in the event of a lawsuit depends largely on the state in which you live. "Every state has a list of property that is considered exempt from creditors, and that's really the starting place for what you can keep and what you can't with a summary judgment," says Stephen R. Elias, an attorney and associate publisher at law-publishing group Nolo.com.

This list of local exemptions by jurisdiction published by bankruptcy-information Web site Bankruptcyaction.com provides a rough idea of what is and isn't off-limits in an award settlement. What you can and can't keep can be surprising: In Idaho a creditor can take off with all but $500 of your furniture, but you get to keep one firearm!

If you're sued and lose, here's a general a rundown of which assets may be most vulnerable.

Your Home. It's the first thing creditors come gunning for -- no pun intended. "In Florida and Texas, you can retain an unlimited amount of the value in your homestead, whereas in New York the amount you're allowed to keep out of creditors hands is just $10,000," Mr. Elias says. If your state has extremely unfavorable bankruptcy-protection laws, discuss what protections your insurer might provide in the form of an umbrella policy to help you retain as much of your homestead as possible.

Cash and Valuables: Next on the list: Any cash savings accounts, certificates of deposit, taxable investment accounts, jewelry, automobiles -- if it can be liquidated, creditors will want a piece of it. Again, depending on state law you may be able to keep a limited amount of your cash accounts and valuables, with "limited" being the operative word. Many states allow you to shield less than $1,000 worth of cash assets and valuables in the event of a summary judgment.

Retirement Savings. Uncle Sam protects corporate pensions, annuities and defined contribution plans like 401(k)s, and 403(b)s from summary judgments. Unfortunately, individual retirement accounts and Roth IRAs don't fall under the same federal blanket protection. Some states, such as Minnesota and Indiana, protect a portion of your IRA assets, but not all. One way to make sure your retirement savings are safe from creditors is to leave them in your 401(k), even if you leave your employer. Annuity plans also provide some level of protection in many states, but not all. You may be permitted to keep a small monthly payout.

College Savings. Special provisions are usually provided for state-sponsored college-savings plans such as prepaid-tuition plans and 529 plans -- but not always. States typically provide specific protections for 529 college plans, mainly to protect the accounts from creditors after students have abused their credit cards. If you're uncertain whether your state-sponsored plan provides adequate protection, contact the plan's administrators. The College Savings Plan Network provides a list of contact information by state.

Life insurance: Most homeowners who carry insurance own simple term insurance, where the beneficiary receives a death payout and the policy owner receives no other benefit. These types of policies aren't typically subject to seizure, but other policies may be, depending on the state.

Spouse's Assets. In a community-property state, there's no distinction made when it comes to marital property -- it's yours, mine and ours. In the event of a lawsuit in a community-property state, your partner's assets are at risk even if you were the only one sued. Community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. On the opposite side of the spectrum, in states that are "tenancy by entirety" or "common-law," creditors generally are prohibited from taking a spouse's entire assets to cover the other person's debts. Check with your attorney to determine where your state stands.

If you're unsure whether you'd be adequately covered in case of a lawsuit, it's best to review your homeowners policy now, and consult with your insurance agent if you think you might not have enough insurance.

Homeowners often discover too late that they don't have enough insurance to protect their assets. Swiftly escalating home values and income levels add to the problem, since few people revisit their homeowners policies over the years and increase their coverage.

"Homes appreciate, and you probably have many other financial assets -- expensive automobiles and very nice things you've purchased for your home," says Mary Ann Avnet, marketing manager for Chubb Group of Insurance Cos. in Warren, N.J. "As your net worth increases, so should your insurance coverage."

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