Do you know your insurance coverage? If you don’t, you’re not alone. It’s fair to say that most people don’t know what their insurance coverage limits are and what exclusions they have. For the month of September we are going to be focused on liability insurance. Liability insurance is found within many types of insurance policies, but the most common are home, auto and renters. You can even purchase a stand alone liability policy, known as an umbrella policy. You might be wondering, what is liability insurance? It’s a part of your general insurance policy that protects you, the policy holder, from a lawsuit and helps cover the cost of damage from an accident.
The most common use of liability insurance that we see is from auto insurance. Within your auto insurance policy there are two types of liability coverage. The first is bodily injury, which can cover medical expenses, loss of income and funeral expenses for the victims of an accident. It can also cover the legal fees of the policyholder if the accident results in a lawsuit. Bodily injury coverage is often stated in per person and per accident coverage limits. If you have a policy that has coverage of $250,000 per person and $500,000 per accident then the most your policy will pay per accident is $500,000, even if you have four injured people. The second type of liability coverage within an auto policy is property damage. This covers the cost to either repair or replace the vehicle, or vehicles, and personal property, such as mailboxes, of the other involved parties in an accident. If the damage from an accident exceeds your policy limits then you, the policy holder, can be held liable for the excess damage amounts.
The next most common is homeowner’s liability insurance. If you have a mortgage on your home then homeowner’s insurance is typically a requirement, and liability insurance is embedded within your homeowner’s policy. This protects you, the homeowner, against accidents involving bodily injury or property damage to others. You are protected for damages caused by any member of your household, including pets, and you don’t have to be sued for your home liability insurance coverage to kick in. Covered damages can include a tree falling on a neighbor's car, your dog biting a visitor, or someone tripping and falling on your sidewalk, just to name a few.
If you have a renter’s insurance policy then your coverage needs are similar to those of homeowners, but they do differ slightly. As a renter, you don’t own the property but you can still be held liable for injuries and property damage. A great example of this is if you have a child who unintentionally breaks your neighbor’s window while out playing. Your liability insurance will likely pay to have that window replaced.
In addition to auto, home and renter’s liability insurance you can purchase an umbrella policy. An umbrella policy is a personal liability insurance that provides coverage above and beyond your home, auto, or renter’s liability insurance. Umbrella insurance generally starts with coverage of $1 million. If you have $500,000 of liability insurance on your auto and home policy and you have a $1 million umbrella policy you now have $1.5 million of liability coverage. If you have significant assets outside of your retirement accounts then it might be a good idea to run an analysis to see if you should get additional coverage. Something that many people aren’t aware of is that if you are sued then you may have to pay up to 20% of your income for 20 years to the party who is suing you (depending on the State you live in). This can add up to be a significant amount of money.
Insurance is a product that allows you to transfer financial risk (risk of those noted above happening); we hope you never have to use, but if you find yourself in a situation where you need it you want to make sure that you have sufficient coverage. It’s a good idea to get updated quotes every few years because life happens, things change and you may find you need different coverage. Through the requoting process you might even find a better rate and/or coverage.