Liability Insurance

If you're a homeowner or drive a car, then you've probably filled out a form or application asking you how much liability insurance you want to carry.  Most of us just breeze through that section without really giving it much thought.  But if you're found legally liable via a lawsuit and there is a monetary judgment against you, then you might find yourself scrambling to see just how much liability insurance you've got.

What is Liability Insurance?

Plain and simple, liability insurance provides you with protection in the event that someone is hurt or property damage occurs and you're ultimately found to be responsible for the damage or injury.  For most of us, we can get personal liability insurance through our homeowners insurance policy, our automobile insurance or a personal liability umbrella policy.

Contractor and Professional Liability Insurance

There are also two other ways that we can be introduced to the concept of liability insurance.  The first has to do with contractors we might hire to work on or around our homes.  The second is professional liability insurance which deals with professionals such as accountants or attorneys that we might hire.

Contractor Liability Insurance

If you're hiring someone to work on or around your home, it's fairly commonplace for contractors to carry liability insurance - usually in the amount of $1 million or more.  This insurance protects you in the event that the contractor accidentally damages your home or someone is injured by the contractor while they are working on your home.

Before you hire any contractor to work on your home, you should always ask to see a current copy of their liability insurance policy.  If they subcontract work, then make sure the policy covers subcontractors too.

Professional Liability Insurance

The most common form of professional liability insurance is malpractice insurance, which is carried by medical doctors.  But other professionals such as accountants and lawyers may also carry professional liability insurance.

Any professional providing a service should carefully consider whether or not they can be held liable for their actions and face monetary penalties.  If so, then professional liability insurance may be necessary.

Liability Insurance via Auto Insurance Policies

Most states require car drivers to carry liability insurance through their car insurance policies.  These policies pay for damages from car accidents that you are found to cause.  In general, most policies also pay for the cost to defend you in the event you're sued for damages.

Auto insurance policies usually divide liability insurance into two categories - bodily injury and property damage.

• Bodily Injury Liability Insurance - this coverage pays for claims and lawsuits by people that have been hurt as a result of an accident that you've caused.
• Property Damage Liability Insurance - this coverage pays for claims and lawsuits by people whose property was damaged as a result of an accident that you caused.

Liability Insurance via Homeowners Insurance Policies

If you own a home and you have a mortgage, then chances are you're required by your lender to carry a homeowners insurance policy.  As was the case with auto insurance, liability insurance through your homeowners policy is divided into two categories

• Personal Liability Insurance - this coverage pays for claims and lawsuits as a result of someone getting hurt or damage cased by you.
• Medical Payments to Others - this coverage pays for claims and lawsuits as a result of someone getting hurt and pays for the medical expenses incurred by that person.

Liability Insurance via Umbrella Policies

The final way of obtaining liability insurance is via an umbrella policy.  A personal umbrella liability insurance policy protects you against a large lawsuit or legal judgment.  Umbrella policies provide you with liability coverage that goes beyond your auto, homeowners or renters insurance coverage.

If you use the same insurance carrier for your home as your car, then you may automatically qualify for an umbrella policy.  Again, an umbrella policy is frequently used to increase your protection beyond existing policies.

How Much Liability Insurance?

The industry norm, and therefore the practice with most standard insurance polices, is to offer policyholders in the range of $100,000 to $300,000 in general liability coverage.  Most states will explicitly prescribe the minimum about of liability insurance required for automobile operators.

If your total net worth is in excess of your total liability coverage, then you might want to consider increasing your coverage.  Most auto and homeowner policies allow you to increase your liability coverage up to $1 million.

Liability Insurance in Excess of $1 Million

If your assets are in excess of $1 million, then you may want to purchase an umbrella policy to extend your liability coverage beyond the one million dollar mark.  The first million dollars under an umbrella policy should cost you somewhere in the range of $200 to $300 per year.  Again, if you have all your insurance through one carrier, then you may get a discount on your umbrella policy premiums.

If you live a lifestyle of luxury cars and / or own a large home, then you're likely to be a target of large liability suits.  That's just a fact of the litigious life we live here in America.  If you want to protect these assets from others, then you need to give an umbrella policy some serious consideration.

Calculating Liability Insurance Coverage

Unfortunately, there is no approved or standard formula for calculating the exact amount of liability coverage to carry.  One rule of thumb is that your liability insurance coverage should be equal or greater than your net worth.  Your net worth is simply the value of everything you own minus the money you owe others.

As with all decisions concerning how much insurance to buy, a lot depends on your risk tolerance.  If you think the possibility of a losing a large liability lawsuit is small, or if you're willing to take on the risk, then you might feel comfortable with a lower amount of insurance.  If you're afraid of losing everything, then increase your insurance.

We'll finish this one up with a couple of questions that you should think about when answering the "How much liability insurance do I need?" question.

• Do you drive your car a lot or take mass transit to work?
• Do you live a lifestyle that might attract liability lawsuits?
• Do you have parties or other gatherings at your home that involve the serving of alcohol?
• Are there features of your home that might be dangerous to some?  For example, broken sidewalks and steps or even a swimming pool.

Now that you have a better understanding of what liability insurance is all about, the ultimate decision about coverage is an individual one.  Only you can make the right choice for both your financial outlook and risk tolerance.

About the Author - Liability Insurance

Copyright © 2006 - 2007 Money-Zine.com

Buying Insurance Resources on the Web