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What is Liability Insurance and Do I Really Need It?

What is Liability Insurance

When you buy auto insurance, you’re actually buying auto liability insurance. In fact, generally speaking, the liability coverage of your policy is the only form of car insurance that is required. For the most part, the other coverages are optional. So, what is liability insurance? Well, auto liability insurance is the coverage that protects you if you’re are determined to be legally responsible for injuries or property damage as a result of a car accident.

Auto liability insurance transfers your risk to the insurance company, so instead of paying out of pocket to cover another person’s medical bills or repair costs, your insurance steps in to pay the injured party’s claimed damage expenses.

Liability insurance coverage is included with every car insurance policy, and as a result of what is called the “public good” is required if you drive a car in almost every state.

How does auto liability insurance work?

First, before you get into how liability insurance works, you first have to understand the way it’s sold. When you purchase liability insurance for your car, you are essentially buying a limit of liability protection. The limit of liability will normally range from your state’s minimum limit of liability up to $500,000. However, what you need to understand is how your liability insurance will actually determine how to pay out $500,000 or your selected per accident limit.

When shopping for auto insurance you’ll usually see your liability coverage broken into three separate numbers that indicate your liability limits for bodily injury and property damage. This is called a split-limit.

The minimum limit you’ll be allowed to select will vary from state-to-state. For example, the minimum limits for auto liability in California are only $15,000/$30,000/$5,000 while a Arizona is $25,000/$50,000/$15,000. Here’s what those numbers mean (Arizona Example):

  • Bodily injury per person: $25,000 is the maximum amount your insurance company will pay out for injuries to any one person.
  • Bodily injury per accident: $50,000 is the maximum amount your insurance company will pay out for injuries for any single accident.
  • Property damage per accident: $15,000 is the maximum amount your insurer will pay out for damage to a third-party’s vehicle or property per accident.

To better understand how these limits are applied when you are determined to be at-fault for an auto accident, consider the two scenarios below (Arizona example):

SCENARIO ONE:

You accidentally collide with another driver and cause them $25,000 in injuries and $15,000 in damage to their car. Your auto insurance should pay both amounts because all injuries and property damage are within your coverage limits.

SCENARIO TWO:

You run a red light and collide with with another vehicle. In the accident you injured the other driver and the two passengers in their car. This is more complex because all three have $25,000 in injury damages for a total of $75,000 for the accident. In this scenario, you might think you’re covered because you have $25,000 in bodily injury per person coverage. However, the maximum per accident is only $50,000 based on your selection of a $25,000/$50,000 bodily injury limit. While your insurance company will pay the $50,000 at a rate of $25,000 per person, you may now be responsible for the balance of $25,000.

What does auto liability insurance cover?

If you are ultimately determined to be at fault for a traffic accident, your auto insurance liability limits generally pay for damages and injuries you cause to other people. There other people are typically called the third-party because they are not part of your insurance coverage or policy. The types of damages liability insurance is designed for includes:

  • Damage to other peoples cars
  • Damage to property (mailbox, house, street sign, light poles, signs, etc.)
  • Injuries to other drivers/passengers/pedestrians
  • Lawsuits and attorney/court fees

Do I need auto liability insurance?

Absolutely yes, and not just because auto liability coverage is required in nearly every state. There can be sever and devastating financial consequences of you are not adequately protected when you are adjudicated to be liable for another person’s injury or property damages. You should not rely on a sense that you don’t have much, so the other party won’t pursue you for recovery. Sure, you are legally bound to purchase liability insurance if you intend to drive a car, but you also owe yourself the peace of mind that you have insulation from the worst case scenario.

How much auto liability insurance do I need?

The answer to this question is different for everyone. What you need to remember is if you’re found liable in an accident, a court judgment could ultimately cost you your life savings or put you into unimaginable debt. Your goal is to make sure you’re well-covered.

When you’re preparing to buy auto insurance, the first step should be to assess your assets, and determine your net worth. This will include bank balances, brokerage accounts, and retirement savings, as well as equity in real property or a business. Then, subtract your debts. Now you know what is at risk. Consider choosing at least that amount for bodily injury liability, and note that your net worth can grow, so you will want to review this periodically. 

The cost of bodily injury liability will vary by coverage limit you select, so you may have to be prepared to pay a little more to get the proper protection. The most frequently purchased limit is $100,000/$300,000 and the difference between the state minimum price and may be less than you thought, so make sure you consider the increased limit before you make your final selection.

PRO TIP:

Choosing more than your state’s minimum limit requirement is a good idea. In fact, it’s the most popular selection of our customers with over 80% of policyholders choosing to purchase $100,000/$300,000 or higher. The same is true for Property Damage limits, with over 80% selecting $50,000 or more.

High net worth? Consider a combined-single limit

We spent a lot of time above discussing split-limit because they are the most frequently purchased auto liability limits. However, if you are a high net worth individual, it might be better to purchase your limit as a combined-single limit or CSL. A CSL provides both both bodily injury and property damage in one limit of liability. Just like the split-limit, CSL’s are offered in different amounts ranging from $300,000 and $500,000.

Because CSL’s offer more flexible uses of the purchased coverage, the premium for an auto insurance policy with a CSL is typically more expensive. CSL’s are more flexible because your coverage limit can be divided in the best way necessary to settle a claim against you.

EXAMPLE:

Let’s assume you purchased the most popular split-limit that covers bodily injury up to $100,000 per person and $300,000 per accident. While driving to work you cause an accident in which you’re determined to be liable for $120,000 in medical expenses for one individual, leaving you on the hook for $20,000. With a combined single limit of $300,000, your insurance would cover the full $120,000, since your maximum limit of $300,000 applies to any type of liability claim.

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IronPoint Insurance Services, LLC is an independent insurance agency licensed (#0G87821) with the California Department of Insurance. We are authorized agents for many A+ rated Arizona, California, Colorado, Nevada and Utah insurance companies. We provide consumers with online, phone, and in-person insurance services through our insurance company relationships.

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