Guide to Liability Insurance: What It is and Why You Need It

When it comes to protecting yourself financially, things like an emergency fund, health insurance, and life insurance are typically some of the first topics that come up. And rightfully so, given that each is an important part of a secure financial foundation.

Liability insurance is a protection that often gets overlooked. If you have an auto, homeowners, or renters insurance policy, then you likely already have some level of liability insurance in place. But it may not be enough to fully protect you, and in this guide you’ll learn how to make sure you have the right coverage for your needs.

What Is Liability Insurance and Why Is It Important?

Liability insurance protects you financially in case you accidentally injure someone or damage their property. Common situations include:

  • You’re at fault in a car accident, and the other party experiences neck pain as a result.
  • Someone slips and falls in your driveway and breaks their tailbone.
  • You accidentally back your car into someone else’s mailbox.
  • Your dog bites someone while you’re out for a walk.

Each of those situations are accidents in which someone else experiences either an injury or property damage that will cost them money to fix. And in each case, they could legally hold you responsible for paying those bills.

That’s where liability insurance kicks in. Instead of having to spend your own money, your insurance company would cover the bill as long as it fell within the limits of your coverage. Any costs beyond those limits would be yours to bear.

And truth is that some of these situations could be very expensive. Imagine, for example, a car accident in which multiple other passengers are seriously injured.

That kind of situation isn’t fun to think about. But it could happen, and at the very least you can protect yourself from the financial impact. Otherwise, you could be on the hook for:

  1. Medical bills.
  2. Fixing or replacing the other person’s property.
  3. Lost income if the other person is forced to miss work.
  4. Legal bills for both you and the other person if there is any disagreement about who is at fault.

That’s why liability insurance is so valuable. It ensures that even if the financial impact of an accident is high — such as someone being forced to miss work for an extended period of time — you won’t be on the hook for the cost.

Who Needs Liability Insurance?

Just about everyone should have some level of liability insurance, but the truth is that the more money you have, the more likely you are to need it.

The simple reason is that if you have either a sizable income or a significant amount of savings and investments, there’s more for the other party to go after. They know that you can afford it, so they’re more likely to push for getting it.

On the the other hand, if you don’t have much savings and you don’t earn much money, there’s less potential for the other party to get a financial benefit, and they may therefore be less likely to pursue it.

Still, you can be held financially liable for your actions no matter how much money you have, and in certain situations you can even be required to pay a part of your income to the injured party. Plus, with liability insurance in place, you get the benefit of an insurance company handling all the procedural aspects of dealing with a claim, which can make the entire process a lot easier.

So again, just about everyone should have some base level of liability insurance. But if you’re a high-earner, and especially if you have significant assets, you’ll probably want to make sure you have at least enough coverage to protect your entire net worth.

Four Major Types of Liability Insurance

There are four major types of liability insurance policies, two of which are simply part of insurance policies you may already have in place.

1. Auto Insurance

You typically face the greatest risk of financial liability when driving. The simple reality is that driving is risky, accidents are common, and even careful drivers make mistakes that could leave them financially liable for fixing someone’s car and paying their medical bills.

Most states require you to have a minimum amount of liability coverage as part of your auto insurance policy, typically covering the following things:

  1. Property damage
  2. Per person bodily injury
  3. Per accident bodily injury (for when more than one person is injured)

Some states also require you to have uninsured motorist bodily injury coverage, which actually covers you and other passengers in your car if you’re in an accident and the other driver is at fault, but either doesn’t have liability coverage or doesn’t have enough to satisfy your claim.

For example, the minimum coverage requirements in New York currently look like this:

  • $10,000 for property damage
  • $25,000 bodily injury and $50,000 for death per person
  • $50,000 bodily injury and $100,000 for death per accident
  • $25,000 uninsured motorist coverage per person
  • $50,000 uninsured motorist coverage per accident

The minimum required coverage is often enough to cover the most common scenarios, but typically doesn’t provide sufficient protection in the case of major accidents. When you consider the medical bills and potential lost income in an accident involving multiple people, the total cost could be much higher than even the amounts listed above.

And given that the main value of your coverage is the protection against financially ruinous outcomes, it often makes sense to increase your coverage above the minimum. Most auto insurers allow you to get up to $250,000 of coverage per person and $500,000 per accident.

Unfortunately, it can be fairly expensive to secure liability coverage through your auto insurance policy, ranging anywhere from a couple of hundred dollars per year to $1,000 or more at the upper limits. The cost depends on the amount of coverage you want and on your driving history, so a clean record could lead to lower premiums.

2. Homeowners or Renters Insurance

Like auto insurance, liability coverage is a standard part of both homeowners and renters insurance policies, although it’s not always required. And the good news is that it usually provides broad coverage at a relatively low cost.

First, it covers any accidents that happen while someone is on your property, from falling down the stairs to tripping over your toddler’s walker. If someone is injured while at your house, your liability insurance has you covered.

Second, it covers non-auto-related accidents that happen away from your home as well. If your dog bites someone while you’re out for a walk, you accidentally bump into your neighbor’s ladder while they’re cleaning the gutters, or your child damages someone’s property, your liability insurance has you covered.

And all of that coverage comes at a relatively low cost too, with even several hundred thousand dollars of coverage typically only costing a couple of hundred dollars per year.

Most homeowners and renters insurance policies start with $100,000 of liability coverage, though you can typically increase it to $300,000.

3. Umbrella Liability Insurance

An umbrella insurance policy provides additional liability coverage above the limits in your auto and homeowners or renters insurance policies. And you typically have to do two things before you can get a policy:

  1. Secure your auto insurance and homeowners or renters insurance with the same company you’re getting your umbrella policy with. Not all insurers require this, but most do.
  2. Increase the liability coverage in both your auto insurance and homeowners or renters policies to a minimum level set by your umbrella policy insurer, which is often $300,000 for homeowners or renters insurance and $250,000/$500,000 for auto insurance. This is to make sure that your umbrella coverage only covers situations in which there are extraordinarily significant damages.

Because of that second point, umbrella liability insurance is typically more than most people need. Unless your income is high enough or you have more than $500,000 in net worth, it’s probably not worth considering this additional coverage. Your auto and homeowners or renters policies are likely enough.

But if you have significant income or assets to protect, an umbrella policy can provide substantial coverage at a small cost. Coverage typically starts at $1 million, and according to the Insurance Information Institute typically costs $150-$300 per year for the first $1 million in coverage and increases by $50-$75 per year for every additional $1 million in coverage.

4. Business Liability Insurance

If you run a business, even if it’s a small side hustle, the insurance policies listed above will not cover those business activities. You will need to get a separate policy.

The tricky part here is that liability coverage varies from profession to profession, so it’s not as easy as going out and getting a generic liability insurance policy like it is on the personal side of things.

Business liability insurance is beyond the scope of this guide, but if you’re in a business where you could be held financially liable for your mistakes, getting the right liability coverage in place could be well worth your time and money.

Business liability insurance can vary so much profession to profession. For example, doctors have a completely different type of liability insurance than lawyers. And even within those professions, it will vary by specialty. So it’s pretty difficult to give a price range or even offer general resources.

Three Ways to Get Liability Insurance

When it comes to actually getting liability insurance in place, you have three main options

1. Your Current Auto and Homeowners or Renters Insurance Policies

If you already have auto insurance in place, then you already have some amount of liability insurance. You just need to check your policy to see how much you have, and ask your insurer about the cost of increasing your coverage if you’d like more.

The same is true if you have homeowners or renters insurance. Check what you have in place now, and, if necessary, ask your insurer what the cost would be to either add liability coverage or increase it.

If you’re renting and you don’t already have renters insurance, you can check with your auto insurance company about adding it. You can also refer to this guide to help you find a policy that meets your needs: Guide to Renters Insurance: When You Need it and When You Don’t.

2. Shop Around

While sticking with your current insurance company is the easiest way to secure liability insurance, it may not be the most cost-effective. You could save a lot of money by shopping around, especially if you’d like to add an umbrella policy, which would likely require you to have all three insurance policies with the same company.

Here’s a process you can follow, borrowed from the renters insurance guide mentioned above:

  1. Google “auto insurance” plus your city/state. Almost every company that offers auto insurance also offers homeowners, renters, and umbrella insurance, so this will give you a solid list to start with.
  2. Get a phone number for each of the major insurers providing coverage in your state.
  3. Call each insurance company directly and ask for quotes for both auto insurance and either homeowners or renters insurance, making sure to include the amount of liability coverage you’d like to have for each.
  4. If you are looking for umbrella liability coverage, make sure to ask for a quote on that policy as well.
  5. If you have any possessions that are particularly valuable, such as jewelry or artwork, ask how much it would cost to get additional coverage for those possessions in your homeowners or renters policy.
  6. Make sure to ask if they offer a multi-policy discount and, if so, to get the premiums quoted with that discount applied.
  7. If there are any particular threats in your region, such as flooding or earthquakes, ask about their coverage of those specific threats.
  8. Compare the coverage and cost from each insurance company, including your current insurer. If you can get a better deal elsewhere, it should be relatively easy to switch.

3. Independent Insurance Agent

A good independent insurance agent will be able to help you evaluate your need for coverage and find that coverage at the best possible price given your needs and situation.

To find one in your area, you can Google “independent property and casualty insurance agents” + your city/state.

It won’t cost you any extra to work with an agent, but you should be aware that some agents may try to direct you to higher levels of coverage than you need, simply because it provides them a better commission. You should interview a few to make sure you find someone you trust.

The Forgotten Insurance

Unless you’re running a high-risk business, liability insurance probably doesn’t need to be at the top of your list of financial priorities.

But it provides valuable protection, and it’s something that shouldn’t be forgotten. It’s typically easy to add or increase the coverage you have through your existing policies, and doing so ensures that no accident will put you in a situation where you can’t reach your other financial goals.

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