What is Liability Insurance and Why Do I Have So Much of it?

Photo courtesy of Aku S. Photography

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:

1. Property damage – e.g. Needing to fix someone else’s car.
2. Medical bills – e.g. Paying for the care someone receives after slipping on your driveway.
3. 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.
4. 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:

1. Auto
2. Homeowners/renters
3. Umbrella
4. 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.

Auto insurance

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.

Homeowners/renters insurance

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.

Umbrella insurance

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.