The Role of Insurance in Lawsuit Settlements and the Power of Asset Protection

When facing a lawsuit, one of the most critical factors influencing settlement negotiations is insurance coverage. Both plaintiffs and their attorneys—especially those working on a contingency fee—generally view insurance as the primary source of payment. Understanding how insurance interacts with asset protection strategies can be crucial for defendants looking to limit personal financial exposure while navigating a settlement.

Insurance as the Primary Payout Source

Most lawsuits that result in financial settlements or judgments are resolved within the defendant’s insurance policy limits. This is because:

• Insurance companies have a duty to defend their policyholders.
• Attorneys working on contingency fees prefer to secure payment from an insurer, as it guarantees a payout.
• Plaintiffs generally do not want to pursue hard-to-collect personal assets when an insurance check is readily available.

However, when a claim exceeds policy limits, or when coverage is disputed, the plaintiff may look beyond insurance for payment—this is where personal assets become a target.

Policy Limits Offers & Voluntary Financial Disclosures

A key moment in many high-stakes lawsuits is when the insurance company offers to pay its policy limits to settle the case. If the plaintiff believes the defendant has significant unprotected assets, they may refuse the settlement offer and push for a higher judgment at trial.

To assess whether it’s worth going to trial, plaintiffs may request a voluntary financial disclosure from the defendant before accepting the settlement. This allows them to evaluate:

• Does the defendant have significant assets beyond insurance?
• Are those assets reachable in the event of a larger judgment?
• Would it be financially worth the risk of trial to pursue a bigger award?

If the plaintiff believes the defendant is asset-rich and exposed, they may be incentivized to reject the policy limits offer and pursue the case further. This is where asset protection becomes a game-changer.

How Asset Protection Strengthens Settlement Positioning

A well-structured asset protection plan allows a defendant to make a financial disclosure while ensuring that their wealth is not easily accessible to creditors. Key strategies include:

1. Holding Assets in Legal Structures
   • Limited Liability Companies (LLCs)
   • Limited Partnerships (LPs)
   • Asset Protection Trusts (domestic or offshore)
2. Homestead Protections & Exemptions
   • Many states offer strong homestead exemptions, making primary residences harder to seize.
3. Retirement Accounts & Protected Investments
   • ERISA-qualified retirement accounts often have strong creditor protections.
4. Minimizing Equity & Encumbrances
   • Using legal debt obligations, such as mortgages or liens, can make assets less attractive to potential creditors since there is both less equity as well as bonafide creditors in front of any claim to the assets they may have.

By structuring assets correctly, a defendant can disclose their financial situation in a way that demonstrates limited collectible wealth, making it less appealing for the plaintiff to reject the policy limits settlement and gamble on a trial.

For individuals with substantial assets, proper pre-litigation planning is essential. Waiting until after a lawsuit is filed is often too late. Consulting with an experienced asset protection attorney before any legal trouble arises can make the difference between settling within policy limits and facing a drawn-out legal battle over personal wealth.

Lodmell & Lodmell, PC is one of the nations leading Asset Protection Law Firms and the creators of The Bridge Trust®.  L&L serves clients nationwide and may be reached at [e-mail] or 602-230-2014.