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Here is an extreme, hypothetical scenario that will hopefully explain what I mean by my question: Let’s say a court finds that Bob’s negligence somehow caused an explosion that destroyed Bob’s house and injured Mary. Bob’s homeowner’s insurance covers damage to his house up to a total rebuild costing 100k and covers personal liability up to another 100k. However, a court finds Bob liable for paying Mary’s medical bills, which are more than 200k. Can the court order that the insurance payout all go to Mary and none of it go to rebuilding Bob’s house? Or would the house necessarily have to be rebuilt and Mary would only be able to put a lien on it?

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Insurance doesn't work the way you think it does

Insurance indemnifies Bob from any liability he has towards Mary up to the value of the insurance. So, if a court finds that Bob must pay Mary $200k then Bob must pay Mary $200k. Bob can then turn to his insurer to indemnify him and, under the terms of the policy, they will pay out $100k for personal liability leaving Bob to find the other $100k wherever he can.

The insurance company would not be a party to the litigation (although it would handle the defence on behalf of the insured) so a court cannot order it to do anything. Further there are many, many cases where the insured is found liable for something which the policy (allegedly) doesn’t cover - this often leads to litigation between the insured and the insurer.

In parallel, the policy will cover the property damage in accordance with its terms. Assuming the house is adequately insured then the insurer will pay for the demolition, design & reconstruction. It is possible that by agreement or at the insurer's discretion that the insurance can cut Bob a check and leave him to do what he likes with the money: rebuild the home, go on a holiday, or pay a debt he might owe to someone.

If the house is not adequately insured then Bob is a co-insurer and the cost of rebuilding is split. For example, if the cost of rebuilding is actually $150k and the total damage amounts to $90k then the insurer will pay $60k and Bob will have to pay the remaining $30k. Co-insurance terms usually have an error factor built in.

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That will depend on the language of Bob's policy. But by far the usual case is that the policy mandates that the company pay Bob an amount determined by a formula, in this case an amount which would be sufficient to rebuild the house. It will not normally require it to be so used. As far as the insurance company is concerned, Bob can take the money and move to Florida, or blow it gambling. Mary's suit (if she has made one) or settlement may require Bob to use all available resources to compensate her, up to whatever damages she is entitled to.

  • This. Although I think clearer language around the fact that the insured liability limit and any court award are completely divorced from each other. The insurance may cover the court award up to a certain value, but that doesn't preclude the insured from being required by the court to cover the remaining costs by other means. If Bob has no obligation to a third party regarding his house (mortgage company et al), the money for rebuild is actually his to do with as he wishes, and he may very well "wish" to remain out of debt with the court and as such pay off the uninsured liability amount. – user4210 May 22 at 4:08
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I think the court cannot order the insurance company what to do. The court can only order Bob to pay $200,000 for damages; how Bob gets that money is his problem. His insurance will pay for $100,000 of the damages, and separately they will either rebuild Bob's house or give Bob cash if that's what he prefers.

Now let's say it would be possible instead of rebuilding the house for $500,000, to build a smaller house for $400,000, so Bob would get a check for $100,000 that he can use to pay Mary. Depending on Bob's financial situation, that might be a clever thing to do for Bob. I don't think the court could order him to do this; the court can only tell him to pay Mary $200,000, I don't think he can be ordered to act in such a specific way to make sure he has the $200,000 available.

PS. I can't actually see a reason why the judge would know about the home insurance at all.

PS. If this is not a decision by the court, but based on settlement, then the settlement can include anything that Bob and Mary agree on. So the settlement could have terms that force Bob to have his $100k of the damage available to pay to Mary (if Bob agreed to those terms).

  • what i guess i was getting at was since the liability was incurred at the same time that Bob got money to rebuild his house, would the homestead exception still apply. In a state like Texas or Florida, Mary would not be able to go after Bob's house if was built before he incurred the liability (she would only be able to put a lien on it). But in this situation the liability is incurred at the same time rebuilding begins. – resplaine May 23 at 2:09

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