It's not my fault.

• Author: Seebaran, Mark
• Position: Special Report on Insurance - How does liability insurance work when insured is not at fault

"It's not my fault!" This common response to any accusation, from the serious to the trivial, reflects the human instinct for self-defence, especially when wrongly attacked. If we really believed ourselves guilty, we might apologize and hope for the best. If we doubt our accusers, we insist that they prove their charges. In law, whether we are charged with a crime or sued civilly, the reflex is the same.

Most of us carry liability insurance to protect us from civil lawsuits. We tend to consider this protection in proportion to our policy limits --for example, one million dollars on many automobile policies. We tend to think the insurance attaches to our possessions, not to us.

What we don't often consider is that liability insurance doesn't protect our reputation or guarantee the vindication of our conduct. In deciding the premium we pay, our insurance company assesses the risk that we will act negligently or incur some other liability. In responding to a lawsuit that someone files against us, our insurer considers, at every step in the litigation, whether we actually did act negligently or were otherwise at fault.

How can we best protect ourselves in the face of this different interest of our insurer? The answer begins with an understanding of how the courts make liability insurance walk a line between our right to justice and the right of victims to compensation.

The premise that only those at fault should pay compensation remains fundamental to our common law. Usually, though, it's our insurer that pays. If we injure someone while driving, the liability insurance required of every Canadian driver responds. If someone slips and falls off our steps, they'll probably check whether we have home liability insurance. If we don't, they may not even bother to sue.

In return, most liability policies give our insurer, not us, the right to decide which lawyer will defend us in the lawsuit, as well as whether and when to settle out of court, on the assumption that we were at fault.

In effect, we bargain away part of our autonomy for the financial security of insurance. In making this bargain, we should recognize that insurance makes lawsuits less about us and more about compensating deserving victims.

When fewer people had insurance, courts used to focus more on the private interests of the individual litigants, often with harsh results. Plaintiffs, even if genuinely injured, had to prove themselves completely blameless to recover anything; even...