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Auto Insurance: Liability Coverage

Liability coverage protects you if you bang up someone else or their property.

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Liability coverage protects you if you (or another person driving your car with your permission) injure or kill someone or damage property.

Assume an accident for which you are clearly responsible: You run a red light, strike another car and injure the driver. Your liability coverage obliges the company to defend you — in court, if necessary — and pay claims to the other driver for vehicle damage and bodily injuries, including medical and hospital costs, rehabilitation, nursing care, and possibly lost income and money for pain and suffering. (The liability section of your policy does not compensate you for damage to your own car or any injuries to you. They are covered by other parts of the policy.)

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Now assume that you're involved in a collision at an intersection with no witnesses or evidence to pin the blame on either driver. Again, under your liability coverage, your insurer agrees to defend you against most proceedings the other driver may take against you.

The company limits its liability payments to the policy limits, or the amount of coverage you select. You can be held personally accountable for any excess.

Liability coverage is mandatory in nearly all states (the others have financial-responsibility laws that can be met by purchasing this coverage). But state requirements are modest — typically $20,000 to $30,000 for bodily injury suffered by one person in an accident, $50,000 for all people hurt in the same accident, and up to $25,000 for property damage resulting from that accident. Most people need much more liability coverage than the state's required minimum.

How much coverage do you have?

Insurance companies use a shorthand to describe their liability coverage, and even if you understand the lingo, it might not be immediately apparent how much coverage you carry.

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For instance, a policy might be listed as 50/100/25. The first figure refers to the coverage (in thousands of dollars) for injury to one person, the second number is the limit for injuries to all people in the same accident, and the third figure is the coverage for property damage in the same accident.

Some companies issue single-limit policies, with one liability limit that applies to total payments arising from the same accident, regardless of the number of people injured or the amount of property damaged. In Canada, single-limit policies are the rule.

If the company incurs legal expenses to defend you against a lawsuit, those expenses don't count toward the liability limits. Nor do payments you receive under the policy for bail bonds and earnings lost while attending hearings and trials at the company's request.

However, many policies free the company from any obligation to continue your legal defense for sums above the amount it has to pay.

How much coverage you need

You should carry as much liability coverage as you can comfortably afford because damage claims today are sometimes settled for millions.

State minimums don't come close to covering the cost of a serious accident. You should carry bodily-injury coverage of at least $100,000 per person, and $300,000 per accident, and property-damage coverage of $50,000, or a minimum of $300,000 on a single-limit policy.

Raising your limits isn't expensive: $300,000 in coverage costs 20% more than $100,000, on average. The more coverage you buy, the less you have to pay per $1,000 of coverage.

Ask your agent for precise figures. You may even want to investigate raising your liability coverage further through an umbrella policy.

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