What is Liability Insurance and Why Do I Have So Much of it?
If you’ve spent any time around here at all, you know that I’m a big fan of insurance. As I’ve said before, my wife and I probably have more insurance than almost anyone else we know who’s around our age. And we love it.
The reason why we love it is very simple. It’s often the least expensive way to make sure that our family will have the financial resources it needs no matter what. That security matters to us, a lot. So we buy insurance.
An often overlooked area of insurance is liability coverage. This is something I don’t hear people talk about all that often, but it’s something we have a lot of. And I do mean A LOT. You can see the numbers for yourself below.
So what is liability insurance and why do we have so much of it? Let’s dive in.
How does liability insurance protect you and your family?
At a high level, liability insurance will cover you financially in the case that you or something you own injures someone else or something they own. Some common examples of where this might come up include:
- You get into a car accident and are found to be at fault. There are the other person’s medical bills to pay, as well as damages to their car.
- Your friend slips on your driveway and injures herself.
- Your dog bites your neighbor.
These examples highlight a few different ways in which you might be found liable.
First, it covers situations where you personally are at fault (like the first example in which you’re driving), but it also covers incidents that happen at your property (e.g. someone slipping on your property) and even incidents where another family member or even a pet is at fault. It’s a pretty wide range.
Second, there are four big types of potential costs that liability insurance will handle:
- Property damage – e.g. Needing to fix someone else’s car.
- Medical bills – e.g. Paying for the care someone receives after slipping on your driveway.
- Lost income – This one isn’t explicit in the examples above, but any one of them could lead to someone missing work, or in a worst-case scenario not being able to return to work for an extended period of time. You could be held responsible for replacing that lost income, potentially for many years. To me, this is the big risk that I really want to protect against.
- Legal costs – Any costs required to defend yourself against claims for any of the above.
So your liability insurance will cover not only any damages you actually end up owing (up to your limits in coverage), but the insurance company will also pay for your defense if someone sues you (again up to your limits in coverage). Both of these are big benefits because even a faulty claim against you could cost a lot in legal fees if you had to fight it on your own.
Four types of liability insurance to own
There are four basic types of policies that have some form of liability coverage. Three of them are personal and one is for business:
Here’s a quick overview of each, along with a description of the amount of coverage my wife and I have along with the cost of that coverage. Please keep in mind that these are not meant to be recommendations for you. I’m including the personal information just to give you some sense of what it costs to get different levels of coverage.
For most people, this is where they’ll have the most amount of risk. It’s a simple reality that driving a car is a risk and an accident could have some significant financial consequences. It’s also likely to be the most expensive of the personal liability policies, again because it’s where there’s the most risk.
Each state imposes minimum coverage amounts you have to carry, but in my opinion those minimums are pretty much a joke. In Massachusetts, the minimum coverage for injury to others is $20,000/40,000 (per person/per incident). In a real accident, you could pass those numbers very quickly.
On our auto insurance policies, we have $100,000 of coverage for property damage and $250,000/500,000 coverage for bodily injury to others. Both of those are the maximum amount of coverage. For two cars, that runs us a total of $1,734 per year. But we live in Boston, and being in a city makes it more expensive. If we moved out to the suburbs that cost would be cut in 1/2 or possibly even 1/3.
Liability insurance is also part of the coverage you have on your homeowners or renters policy. The liability coverage is actually the main reason we have a renters policy. (If you want to know why we’re currently renting, you can read this: Why We Don’t Own a House, Yet).
It’s important to remember that the coverage here actually covers all of your personal activity (excluding auto coverage), not just anything that happens within your home. So even if you were out at the park and accidentally injured someone, you’d be covered.
The good news is that this coverage is relatively CHEAP. We have $300,000 of coverage (again the max), and while our policy doesn’t detail the cost for each different piece of coverage, the entire renters policy is only $163 per year.
This is the cherry on top.
Umbrella insurance is there to protect you against the true worst-case scenario, when even the maximum coverage on your auto, homeowners or renters insurance isn’t enough. It’s unlikely that you’ll need it, but the coverage here is pretty cheap and for me it’s worth the peace of mind knowing that my family is protected no matter what.
We currently have a $2 million umbrella policy, which is on top of the amounts in our other policies. I’ve definitely thought that might be too much, and there’s a decent chance we’ll update that to only $1 million of coverage in the near future (which is the minimum amount). Our annual premium for the $2 million is $401. For $1 million, the annual premium would drop to $243.
In either case, if this sounds like a TON of coverage, that’s because it is. But in my mind this is kind of the essence of what insurance is all about. It’s a low cost way to protect ourselves from the kinds of scenarios that are unlikely to occur but could be financially devastating if they did.
Business liability insurance
I’m not going to get into detail here because the kinds and costs of business liability coverage vary widely depending on the size and type of business you’re in. But you should know that the above policies only cover your personal liability. If you run any kind of business at all, even a small one like a blog, you’re likely not covered for those activities unless you have a specific policy.
What’s your liability coverage look like?
My wife and I have a lot of liability insurance, that’s for sure! But the nice part is that with the exception of the auto insurance, it’s actually all pretty cheap. And even the auto coverage would be much cheaper if we lived in a lower-risk area. So we’ve built up a large layer of protection at a relatively small cost.
What about you? Have you given much thought to liability insurance before? It would be pretty normal if you hadn’t, since it’s rarely ever talked about. But if it’s done right, it can be an integral part of creating a secure financial base for your family.
I couldn’t tell you off the top of the head how much liability insurance I have, but I do have home and auto liability insurance. I’m also a big fan of insurance and I think it’s great tool to lower your overall financial risk.
One of the big things I like about insurance is that it handles some of the big risks, which actually allows to take some more (calculated) risks in some other areas. It’s an incredibly helpful tool.
I’m not exactly how much liability insurance we have between our home, auto, and umbrella policies, but I think it’s a lot! It always seems like a waste of money until you need it.
If you’ve got an umbrella policy, then it’s definitely a pretty healthy amount. And it’s definitely not the most enjoyable money to spend, but the protection is well worth it in my mind.
Umbrella is very cheap to own and very important to have. I would say that 1-2MM is about what people own unless your net worth is higher than that.
I’m with you. The amount of protection you get for the premium is a great value.
I keep hearing the reference being made of net worth to the amount of liability insurance you should have. It seems to me that the relationship should be between the amount people sue for and the liability insurance that would cover it. i.e. give me the distribution of the amounts people sue for that would be covered by liability insurance and I could make a decision on what, statistically speaking, should be the amount of coverage. Is my thinking wrong-headed?
No I think that’s a good way to think about it. I actually think you can look at both metrics and decide where on the continuum you would like to fall based on your specific situation. But one specific reason that your line of thinking is good is that in certain situations your future income can be garnished to cover damages. If that were to happen, you could certainly end up on the hook for more than your net worth.
I definitely think insurance is very important, but I’m not a big fan of it. I know I should have it but I’m probably the opposite…underinsured. I’m not sure what my auto coverage is, but I’m sure it’s not the maximum. Your premiums aren’t too bad though for max coverage. Max coverage is required for umbrella coverage right? I’m not sure about umbrella coverage though…I don’t feel like I have enough assets to protect that I need it. Are you planning on writing a separate post on who needs umbrella coverage? =)
You don’t necessarily need max coverage, but you’ll need a certain amount before they’ll give you an umbrella policy on top. For us, they required the $250/500k.
I’ll probably write a post on umbrella insurance at some point, but the one thing I would say is that it’s not just your current assets you’re protecting but also your future income. This isn’t something I have a ton of expertise on, but I do know that there are cases where a court could garnish wages if you don’t have enough assets to cover the damages. That risk is the big reason we wanted the coverage.
Oh, man. We are insured at way lower levels than that. $50k for property and $50k/100k for bodily injury on the car & scooters. $300k for personal liability on the home. No umbrella.
May be time to reconsider the limits, & getting an umbrella. (Though I know we’ll also have to up our car insurance limits if we get an umbrella through the same company.)
Haha, I hadn’t considered scooter insurance before! I’m sure that thing can do some damage!
Ha! It’s preposterously cheap as it is ($37 for a year) so I figured, why lower the limits. But the only damage it’s going to do is to the rider. I’ve been avoiding a post titled “Am I Risking My Life by Riding this Thing” for a while. I don’t want to see what the data suggest, but I’m sure it’s not going to be good.
Eh, we’re all risking our lives every day. Might as well have some fun doing it!
We actually review our liability coverage once a year and we contemplate any changes we may have made in the previous year (i.e. new furniture,etc) that might impact our need. I am with you on the love for insurance and most liability coverage is extremely reasonable for the coverage you are provided.
Reviewing the property coverage on our renters policy is actually something I always mean to do but keep procrastinating on. I don’t think we have enough coverage there and I definitely need to get on it.
Good info – always nice to get a reminder on these things. I happen to have my auto/umbrella amounts right next to me since we just made some changes.
We’ve got 1MM of umbrella for $125/year. It’s crazy NOT to have that insurance. We’ve got 500k/500k on the auto policy, which I assume is why my umbrella costs less than yours (and 500k property could be on the high side… I assume there’s a reason I had that much but I don’t remember why I did that years ago). Maybe I’ll see how much I save by cutting the property damage – I gotta run into the wrong house to do that much… Business insurance is a lot more, but like you said that just depends on lots of details and is different for everybody.
I’m glad to see you guys have such good coverage! We basically went with the minimum coverages needed on the underlying policies in order to qualify for the umbrella, which is how we got to 250/500 on the auto. Different insurers might have different requirements though.
We’ve got a 2M umbrella policy, along with our auto and homeowners. Honestly, the umbrella policy is probably the one that provides the most peace of mind to me because it can cover all the crazy “what-if” scenarios that you hope only happen in your nightmares. My hubby and I are totally with you on the ‘having more insurance than almost anyone else our age’ theme. it helps us sleep at night knowing that we’re covered in the case of crazy unthinkable calamities.
I agree with you on the peace of mind from the umbrella policy. It’s so cheap and it’s nice to know that we’ve got almost any situation handled, at least from a financial standpoint. I’d hate to actually face one of those “what-if” scenarios and realize I wasn’t covered because I was trying to save a couple hundred bucks a year.
This is what I try to preach when I see people “saving money” on insurance not realizing how under insured they are. I was an insurance agent for a year and before that I would’ve cared less how much liability insurance I had.
But it is soooo important to be properly insured. State minimum liability limits in most states is pitiful. It has been 12.5/15/12.5 in Ohio for years until raised slightly last year. $15k total bodily injury will not pay for anything if you’re in an at fault accident and someone gets hurt. My old boss always recommended that at a minimum people should carry 100/300/100 in auto insurance and no less than 100k liability in homeowners insurance. And most people don’t realize that their homeowner liability insurance follows them.
People don’t get mad until they cause an accident and find out their insurance limits aren’t high enough to cover the aftermath. They only care about how much a month the insurance is costing them. It’s a bad deal!
I’m with you! And thanks for bringing an insurance agent’s perspective to the table. I think it’s interesting to hear how your opinion changed from before you were an agent to after. The state minimums for auto coverage are ridiculously low. Any serious accident would have you blowing right though them.
Thanks for this, Matt. We had an umbrella policy at the old house but I’m not sure we have one with our new home/new carrier. I will be checking this out !
No problem. Good luck!
Matt – It is embarrassing but I don’t know how to drive a car, so there is scope for auto insurance. Nor do I own a place, so no Homeowners insurance.
In this case, do I still need liability insurance?
I live in a condo managed by a property firm, so if someone slips on the driveway and injures himself/herself, then I will not be liable.
I have of renters insurance of 100,000
I can’t say for sure Ramesh since I don’t know all the details of your situation, but the fact that you have renters insurance is great and it sounds like there’s a good chance that’s enough for you.
Great thread here — I have a question about our homeowners liability. We live in the country. We, as does everyone out here – periodically burns our land. controlled burn they call it. So to clear out all the old brush thats grown up, you set fire to the grass/brush every few years. Then you put it out with a rake or water sprayer.
So if this fire would get out of control and , say, burn a neighbors house down. I only have $100,000 in liability coverage. Says the neighbors house is valued at $250,000. Would I have to pay the remaining $150,000 out of pocket? How’s that work?
I should add — a couple years ago we had a little bonfire on the weekend. It was out, for the most part. 4 days later – huge winds came up and blew ashes, grass caught fire, and it spread — like wildfire. We ended up damaging neighbors personal property. The insurance paid out $10,000 or so in claims. Luckily nothing expensive got burnt — like a house — but what if it did? Again, my liability coverage was only $100,000. I wonder if increasing my liability is better — or getting an umbrella policy?
This is a good question Chris and I would suggest talking to your insurance company about this. They’ll be much better at understanding the specifics of this risk and what your potential liability is.
So I talked to insurance today. Wow — raising my liability from $100K to $300K cost me a whopping $16 per year.
That’s great! I’m glad it was so easy.
As always, great article Matt. I haven’t had umbrella policies in the past. Any recommendations on companies?
Thanks German! Unfortunately the companies vary a lot from location to location, so I don’t have any blanket recommendations. I would start with whoever you currently use for auto and/or renters or homeowners insurance and then call around to get a few more quotes.
Matt – I am considering increasing the bodily / liability to 500/500k to qualify for an umbrella policy.
Do you recommend these same limits (250/500 or 500k) for unsinsured / underinsured? I currently have 100k/100k. I don’t have a luxury car so the chances of exceeding the limits seem extremely low. On the bodily side, I hope not to reach that, though if this is the case, my health insurance would kick in.
That’s a great question German and unfortunately, for legal reasons, I can’t give specific guidance without reviewing your overall financial situation. A good independent insurance agent should be able to help you make that decision though.