What Is Liability Insurance?

What Is Liability Insurance?

When you're at fault in an auto accident, someone is injured on your property, or you or a family member damage someone else's property, liability insurance helps cover the costs. For example, if a visitor to your home falls downstairs and breaks an arm, liability insurance pays their medical bills.

In addition to bodily injury, liability insurance covers property damage, such as paying to replace a neighbor's antique rug after your dog chews it up. Finally, liability insurance helps pay your legal defense costs and any financial damages if you're sued due to a covered incident.

Types of Liability Insurance

Liability coverage comes in several forms, including auto liability insurance, homeowners liability insurance and renters liability insurance. You can also buy umbrella liability insurance to extend the limits of your other liability coverage.

Auto Liability Insurance

Most states require drivers to carry a minimum amount of auto liability coverage, which includes both bodily injury liability coverage and property damage liability coverage.

Bodily injury liability insurance covers medical expenses for injuries to occupants of another car from an accident that's your fault. Property damage liability insurance covers damage to somebody else's property in an accident you cause.

The minimum required auto liability coverage varies from state to state. For instance, California requires at least $30,000 in bodily injury coverage per person (up to a total of $60,000 per accident) and $15,000 in coverage for property damage. In insurance quotes and documents, these coverage limits are shown as 30/60/15.

Learn more: What Is Liability Auto Insurance?

Homeowners Liability Insurance

Most standard homeowners insurance policies include a basic amount of personal liability coverage, with limits typically starting at $100,000. The personal liability part of your homeowners insurance pays medical expenses for visitors who are injured on your property, such as a party guest who falls and breaks their arm. It also pays to repair or replace property damaged by you or your family members, such as a neighbor's window that broke when your child hit a baseball through it.

Personal liability insurance pays lost wages, pain and suffering, and funeral costs for visitors injured or killed in an accident at your home. If someone sues you over these injuries or damages, your homeowners personal liability coverage also covers the cost of your legal defense and any financial damages awarded by the court, up to the dollar limits of in your policy.

Learn more: What Does Homeowners Liability Insurance Cover?

Renters Liability Insurance

Renters liability insurance provides protection similar to homeowners liability insurance, just for people who rent rather than own their home. Standard renters insurance policies cover medical expenses for visitors who are injured in an accident at your home. Renters liability insurance also covers any damage that your pets or family members cause to other people's property.

If you're sued over the damages or injuries, renters liability coverage pays your legal defense expenses and any financial damages awarded by a court, up to your policy limits. Liability limits for renters insurance usually begin at $100,000.

Tip: If you own a dog breed that's considered dangerous, homeowners and renters liability insurance may not cover medical costs or legal liability for dog bites on your property. Check your policy to be sure.

Learn more: What Does Renters Insurance Cover?

Umbrella Coverage

Umbrella coverage is personal liability coverage that protects you beyond the dollar limits of your existing home or auto policy's liability coverage. Also known as excess liability coverage, umbrella insurance is typically sold in increments of $1 million and is a relatively affordable way to protect your assets.

Suppose you cause an auto accident that leaves the occupants of the other car with $500,000 in medical bills—but your auto liability insurance caps out at $100,000. A $1 million umbrella policy would cover the remaining $400,000. Without umbrella coverage, your home, wages, bank accounts and other assets could be at risk.

Fortunately, umbrella insurance is relatively affordable, costing on average $383 annually for $1 million in coverage, according to data from high-net-worth insurance provider ACE Private Risk Services. Additional coverage increments often cost less than the first $1 million in coverage.

Learn more: What Is Umbrella Insurance?

What Does Liability Insurance Cover?

Depending on the policy, liability insurance may cover expenses such as:

• Medical bills for occupants of other cars in an accident you cause
• Car repairs for the other driver's car if you're responsible for an accident
• Repairs if you or a family member damage someone else's property, such as a mailbox or window
• Lost wages if someone can't work due to an injury from an accident in your home or a car accident you cause
• Funeral expenses if such an accident kills another person
• Legal fees if someone sues you over an accident or property damage

What Does Liability Insurance Not Cover?

Liability insurance doesn't cover every cost related to an accident. For example, it typically doesn't cover things like:

• Injuries you or your passengers suffer in an auto accident that was your fault
• Damage to your car from an accident you caused
• Damage to your car due to incidents such as theft, vandalism or hailstorms
• Medical bills for your family or pets if they're injured in your home
• Your lost wages if you can't work due to a car accident you caused
• Injuries or property damage that you or your family members intentionally cause
• Costs that exceed your policy's coverage limits

How Much Liability Insurance Do I Need?

It's recommended that you buy liability insurance in an amount that equals or exceeds your net worth, including real estate, bank accounts and retirement accounts. This usually means buying more than the minimum required auto liability coverage or the basic liability coverage included in homeowners and renters insurance policies.

However, you may not be able to purchase a liability policy with limits high enough to cover the amount of your net worth. This is where an umbrella policy comes in.

To determine how much umbrella insurance you need, calculate the value of your assets and subtract the lowest limit on your auto, renters or home liability coverage. For example, if you have $1 million in assets and your auto policy has a $100,000 coverage limit, there's a $900,000 coverage gap, which you can fill with an umbrella policy.

Learn more: How Do You Calculate Net Worth?

How to Get Liability Insurance

To get liability insurance, follow these steps.

• Decide how much coverage you need. Some level of liability insurance is automatically included in standard homeowners, renters and auto insurance policies. For renters insurance, you'll need to estimate the value of your personal belongings. You'll need the same information for homeowners insurance, along with an estimate of the cost to rebuild your home. (Insurance agents can help with this.) Finally, calculate your net worth to see if you need umbrella coverage.
• Shop for a policy. Insurance carriers generally require you to buy both auto and homeowners (or renters) insurance from them before you can buy umbrella coverage. Get quotes for the same amount of auto insurance, homeowners or renters insurance, and umbrella coverage from several insurance companies so you can compare prices.
• Complete an application. You can usually apply for insurance coverage online in a matter of minutes.
• Purchase a policy. Review the policy details to be sure you're satisfied. If so, pay your first premium to start your coverage.

The Bottom Line

If you're found responsible for an auto accident or a guest suffers an injury in your home, you could end up shouldering a huge financial burden without adequate liability coverage. You can get the coverage you need for less by looking for discounts, increasing your deductibles and bundling home and auto insurance.

In states where insurance companies can check your credit-based insurance score, having good credit could also help you save. As with your regular credit scores, paying bills on time and keeping credit balances low can help boost your credit-based insurance score, which may mean paying less for insurance.