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Every state requires drivers to be financially responsible for injuries and damage caused to someone else in the event of an accident. Nearly every state requires this responsibility to be in the form of liability insurance purchased from an insurance company.
Whether you’re a new driver shopping for car insurance for the first time or you just want to fully grasp what car insurance covers, understanding liability insurance is a good place to start. It’s one of the only coverages required by most states, and it tends to be one of the costliest coverages in an auto policy as well.
Let’s start by taking a look at what liability insurance is and what it covers. Then we’ll look at where it fits in your policy and why it’s a coverage you typically can’t do without.
In this article
- What is liability insurance coverage?
- What does liability insurance cover?
- Do you need liability insurance?
- Liability auto insurance for business owners
- When you may need an umbrella policy
- FAQs about liability insurance coverage
- Bottom line
What is liability insurance coverage?
Liability insurance is a type of car insurance coverage that ensures policyholders can cover the cost of injuries and property damage they cause to someone else. Liability insurance is actually a blanket term for two different types of liability coverage in an auto policy: bodily injury liability and property damage liability.
Bodily injury liability
Bodily injury liability insurance pays for medical bills and other costs related to injuries or death that you or a covered driver on your policy cause to someone else. Although mandatory in most states, each state sets the minimum amount of coverage drivers are required to purchase.
Property damage liability
The other state-required car insurance coverage is property damage liability. Property damage coverage pays for costs that result from you or someone on your policy causing damage to someone else’s property. Although this usually means damage to someone else’s vehicle, it can also include damage you cause to fences, light posts, trees, buildings, and other structures.
What does liability insurance cover?
In general, liability insurance is meant to protect others from something you do as a driver. Whether it’s to pay for medical expenses or to repair damaged property, liability insurance pays for damage to someone else when you’re found to be at fault.
According to the Insurance Information Institute (III), the average bodily injury claim in 2018 was $15,785. The average property damage claim was $3,841. These numbers reflect the average liability costs of an at-fault accident, but there’s no saying exactly the extent of injuries or property damage someone can receive from a car accident. And even if we just look at those averages, that’s a lot of money to potentially have to pay out of pocket.
We live in a litigious society, and if you’re at fault in a serious accident, a lawsuit could be filed against you. For this reason, you may choose to purchase more than the mandated state minimum coverage to protect your personal assets such as your home and savings. Additionally, liability car insurance can help pay for your legal costs if the injured party does file a lawsuit. All of this is important to keep in mind when you’re choosing your auto coverage limits.
When choosing your coverage amounts for liability insurance, your policy will either show a combined single limit or split limits.
For bodily injury liability, split limits represent per person and per accident limits, usually in that order. For example, a bodily injury limit of $100,000/$300,000 means the most your insurer will pay to any one injured person as a result of a covered loss is $100,000. The total amount of damages your insurer will pay to all injured persons from this one accident will not exceed $300,000.
Property damage liability limits will typically be shown as an additional number under a split limit policy. Your policy may show this number separately or alongside your bodily injury liability limits. For example, your policy may show $100,000/$300,000/$50,000, with the first two numbers representing the maximums for bodily injury liability and the last representing the maximum payable for property damage. This number will be the maximum amount your insurer will pay for all damaged property that results from any one accident.
With a combined single limit, only one number is used to describe all your bodily injury and property damage liability coverage limits. This number is the maximum that will be paid for all injuries and property damage that you cause from a single accident. For example, if you choose a combined single limit of $500,000, the most your insurance company will pay for all injuries and property damage combined that you cause from one accident is $500,000.
Bodily injury and property damage liability tend to be the costliest coverages on a car insurance policy. Exactly how much these coverages cost depend on the provider and limits you choose. In general, the more coverage you select, the higher your insurance premium and vice versa.
What doesn’t liability insurance cover?
Your liability insurance pays for damages you cause to other people, not injuries or property damage you receive in an accident. The other components of your car insurance policy — such as uninsured and underinsured motorist coverage, personal injury protection (PIP), comprehensive coverage, and collision coverage — are designed to protect you and your passengers in the event of an accident.
Do you need liability insurance?
Anyone who drives a vehicle can benefit from having liability insurance. In most states, it’s required by law, though there are some exceptions. Neither New Hampshire nor Virginia requires drivers to purchase liability insurance:
- In New Hampshire, you must be able to show you have sufficient funds to meet New Hampshire Motor Vehicle Financial Responsibility Requirements to forgo purchasing insurance. These requirements are the same as the minimum liability requirements for those who carry insurance coverage — $25,000 for any one person, $50,000 total for any one accident, and $25,000 for property damage.
- In Virginia, drivers are able to pay a $500 Uninsured Motor Vehicle fee. This allows motorists to drive an uninsured vehicle at their own risk. They’re still held responsible in the event of an at-fault accident.
Even if your state doesn’t require that you carry liability insurance coverage, it’s a good idea to have it. Accidents can be costly, especially if you’re held personally responsible. Having sufficient liability insurance can help protect you from financial ruin if a lawsuit is brought against you for negligence. This could mean purchasing more than your state’s minimum required amount. If you’re wondering how much liability insurance coverage your state requires, you can check with your state insurance department.
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In general, you should always purchase as much car insurance as you can afford. In terms of liability coverage, you should purchase enough insurance to protect your assets.
Liability auto insurance for business owners
As a business owner, you need much of the same auto insurance coverage for business vehicles as you do for vehicles used for personal use. This includes state-required bodily injury and property damage liability insurance.
Even if you run a small business, your business vehicles must be covered by commercial auto insurance (also sometimes called business vehicle insurance). Although state-required minimums for liability insurance are typically the same for both commercial and personal auto liability policies, recommended coverage limits tend to be higher under a commercial auto policy. This is because business vehicles usually need more protection in case of accidents, as they’re typically exposed to more risk.
This type of insurance coverage is vital in protecting your business and income. According to the III, the recommended amount of liability coverage for business vehicles is $1 million with a minimum of $500,000. Unlike personal auto policies that use split limits, liability insurance for business vehicles usually comes as a combined single limit.
The III also points out that a higher coverage limit does not typically significantly raise your premium, considering the amount of added protection it provides. So if you can opt for higher limits without your premiums going through the roof, you might want to consider purchasing more coverage. Like a personal auto policy, you should buy as much coverage as you can afford so you have the most protection possible.
When you may need an umbrella policy
Although your car insurance policy will provide you with liability coverage in the event you’re held responsible for an accident, it will only pay up to the limits of your policy. For many, this amount will be enough. But for those who want extra protection against liability claims, an umbrella policy may be worth considering.
An umbrella policy, also known as umbrella insurance or an umbrella liability policy, is a type of personal liability insurance that kicks in when you’ve exhausted the liability coverages in your auto, homeowners, and/or renters policies. In the case of an auto policy, umbrella insurance would kick in after you’ve reached the limits on your bodily injury and property damage liability coverages.
You can buy a $1 million personal umbrella policy for between $150 and $300 per year. The next $1 million of coverage typically costs about $75, and $50 for every $1 million after that. Considering how much coverage you receive for the premium, an umbrella policy can be a good idea for anyone with significant assets that are not covered by the liability limits of an auto policy.
FAQs about liability insurance coverage
What is the difference between full coverage and liability?
No insurer provides a policy called full coverage car insurance, but the term usually describes a car insurance policy that includes liability insurance as well as comprehensive and collision coverage. So although you can purchase a policy that only has liability insurance, you could consider yourself to have full coverage if your policy also includes comprehensive and collision coverage.
What is the basic difference between liability insurance and collision insurance?
Liability insurance pays for costs associated with injuries and property damage you cause to someone else as a result of an accident in which you are at fault. Collision is a type of car insurance coverage that reimburses you for damage to your car as a result of a collision with another car or object. Liability insurance is required in most states, whereas collision is an optional coverage.
When should you just get liability insurance?
Because collision and comprehensive coverages are both optional for those who own their vehicle outright, you might choose to purchase a car insurance policy with only liability insurance. This can be an easy and low-risk way to lower your insurance rate, especially if you drive a less-valuable car. If the total amount of your deductible and premiums are more than the market value of your car, it might make more sense financially to purchase a policy with only liability insurance.
Although liability insurance is required in most states, it’s a coverage most drivers shouldn’t be without. There’s simply too great of a financial risk involved in driving without sufficient liability coverage.
If you’re shopping for a new auto insurance policy or are wondering how to save money on car insurance, keep in mind that adjusting your liability insurance coverage amount can impact the cost of your premiums. That being said, you should not give up coverage to cut costs on your car insurance. This is a risky move that will leave you vulnerable any time your vehicle is on the road.
Instead, the best way to save money on car insurance is to shop around for the best prices. You can talk with an insurance agent or you can do your own quote comparisons online to find the best car insurance for you. You may find that getting the best deal means switching your car insurance to a new provider. But getting the most coverage at the best price will make that switch more than worthwhile.
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