Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Joint and Several Liability

What it is:

Joint and several liability means an obligation to make a payment either together or individually.

How it works (Example):

For example, let's say John and Jane Doe buy a car. They take out a loan from Company XYZ for the purchase. The loan agreement states that John and Jane have joint and several liability for the car payments, meaning that even though Company XYZ made the loan based on their combined income and even though John is the only one driving the car, both he and Jane are responsible for making the payments. If John loses his job, for example, Jane must still make the loan payments. If Jane dies and her income ceases, John must still make the loan payments. If John runs off with another woman, isn't even around to drive the car and then declares bankruptcy, Jane is still responsible for the payments.

Many partnership agreements have joint and several liability clauses, meaning that all the partners are responsible for the debts of the partnership. If one partner becomes insolvent, for example, the other partners become responsible for that person's share of the partnership's debts.

In another example, if Sara Smith goes to a local safety fair and falls and breaks her leg while she's there, she may use the concept of joint and several liability to hold multiple parties at fault for the damage. She might sue the fair organizer for not clearing the path appropriately, as well as the owner of the building in which the fair is held, the promotions company that advertised the safety fair and the contractor that originally installed the slippery linoleum in the entryway. If a judge finds these parties liable and awards Sara $1 million for her medical bills and pain and suffering, she may be free to collect the whole amount from one or all of the defendants if the court allows or joint and several liability.

Why it Matters:

Joint and several liability protects lenders by ensuring that they are able to collect from anyone involved in borrowing money from them. As the Sara Smith example shows, joint and several liability also protects people who win judgments by giving them more ways to collect the money due to them. Sometimes the court will assign a percentage of negligence for each defendant. In our example in which John runs off with another woman, the court might say that John owes 75% of the car payments and Jane owes the rest.

Often, however, the court will refuse to do this and simply tells the lender to pursue the defendant with the most money. If that happens to be Jane, in our example, she will have to pay for the car and then pursue John for reimbursement in a separate lawsuit. Many states limit or prohibit joint and several liability.