Liability Coverage: How Much Should You Have?

Legally, the most important coverage to carry on your auto policy is liability. In terms of consumer understanding, however, I find that many people can’t quite grasp the concept of what this coverage is designed to do and how important it can be. When I have conversations with new customers regarding coverage’s they’re shopping for, oftentimes, they realize they’ve never paid much attention – if any - to liability. Their main concern is making sure their own car will be repaired if there’s an accident. This approach to buying auto insurance is ill-considered and imprudent. If limits are chosen properly, liability coverage can be the difference between being well protected and potential financial disaster. 

Liability is the coverage you carry on your car that will pay for someone else’s bodily injury and / or property damage in an accident if you’re responsible. The concept of liability, in our current society, is based on fault. The person who’s at fault is liable to another because of his or her actions or failure to act, whether intentional or not. Regarding auto insurance, the person who’s found to be at fault for the accident, whether by action or omission, is financially responsible to the party that has suffered an injury or property damage as a result. Liability insurance is designed to cover these obligations for the policyholder, to the limits of the coverage’s only. Once the limits are reached, or surpassed, the insurance company has no more commitment to the responsible party (you), under the language of the contract. This means you’re on the hook to make up the difference out of pocket.

In most states, there’s a minimum amount of liability coverage that’s required on your auto policy. Failure to carry this minimum amount of coverage could result in such consequences as inability to register your car and, possibly, losing your driver’s license. Due to this, in most states, when you purchase an auto policy, the contract will automatically come with at least the required minimum limits of liability coverage. For example, in California the State requires that auto policies carry no less than $15,000 per person for bodily injury liability, $30,000 bodily injury coverage per accident and $5,000 for property damage liability. This means that, if you’re at fault, this policy will only pay up to $15,000 for someone else’s medical expenses or death and up to $30,000 if multiple people are hurt and / or killed. That’s the most the insurance company will pay to cover you. Unless you’ve lived in a cave for the last 25 years, this isn’t much coverage, even for minor injury / property damage accidents. Interestingly, or maybe disturbingly, these are the same limits of liability that the State of California required in 1967. Clearly, since 1967, the cost of everything has increased tremendously, yet the required limits remain the same. This is why it’s important to understand the concept of liability. It’s crucial to pick the right limits or run the risk of being underinsured and having to pony up the money yourself to pay what you owe.

From an insurance standpoint, one should carry the same amount of liability coverage as they could stand to lose if they were to be tried in a court of law. For example, if you’re in an accident, where you’re found to be at fault, and someone is killed or seriously injured, you’re responsible to make reparations to that person or to their survivors. This is serious business. If your insurance liability coverage’s are insufficient, and your insurance company can’t settle the claim, it’s possible the surviving family can sue you for restitution. As is often the case, the plaintiff’s attorney will investigate who you are, how much money you have and what sort of assets they can go after. Without proper liability limits on your auto policy, you’d have to settle on your own and / or hire your own attorney to defend you in court. Without sufficient coverage’s you could potentially have to liquidate your assets and lose everything. This is why, before the accident, it’s best to obtain an amount of liability coverage that’s equal to, or close, to the value of your assets. Talk to your financial adviser about the right amount of liability coverage for you.  Also, have a discussion with your insurance agent about a liability umbrella policy and make sure to review all of your policies with your agent every year or so, particularly if you’ve had life changes. 

Something to consider are inexperienced household operators, such as your kids. For obvious reasons, generally (but not always), people become better drivers with age and experience. If your child has recently received their driver’s license, the odds of them getting into a serious at-fault accident behind the wheel skyrockets. According to an April, 2008 study by AAA, in 2006, teen drivers ages 15 – 17 cost American society more than $34 billion annually in medical expenses, lost work, property damage, quality of life losses and other related costs. This means, if your inexperienced son or daughter gets behind the wheel, the risk they (and you) face could be huge. Again, a liability umbrella policy can be a cost effective way to provide a lot of protection.

Liability coverage’s often seem to be little more than additional costs placed upon us by the Motor Vehicle Department. However, in today’s society, where money settles your debts, having the right coverage’s can make things a lot easier for you and your family down the road.