Liability Insurance Coverage

Nearly all homeowners or automobile insurance policies can provide liability protection too.  Unfortunately, this is oftentimes an overlooked or ignored option.  That's unfortunate, because liability insurance can play a critical role in protecting the owner's assets.

What is Liability Insurance?

Simply stated, liability insurance provides protection in the event that someone is hurt or property damage occurs and the policyholder is ultimately found to be responsible for the damage or injury.  For many, it's possible to purchase personal liability insurance through a homeowners, an automobile, or a personal umbrella policy.

Contractor and Professional Liability Insurance

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


When hiring someone to work on or around a home, it's fairly commonplace for those contractors to carry liability insurance; usually in the amount of $1 million or more.  This insurance protects the homeowner in the event the contractor accidentally damages the home, or someone is injured by the contractor.

Before hiring a contractor, be sure to ask for a current copy of their liability insurance policy.  If they subcontract work, make sure the policy covers subcontractors too.


The most common form of professional liability insurance is malpractice insurance, which is carried by medical doctors.  Other professionals, such as accountants and lawyers, may also have this coverage.

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.

Automobile Policies and Liability Coverage

Most states require drivers to carry liability coverage within their car insurance policies.  This coverage pays for damages from car accidents the policyholder is found to cause.  In general, most policies also pay for the cost to defend the policyholder in the event they are sued for damages.

Automobile insurance policies usually divide liability coverage into two categories:  bodily injury and property damage.

  • Bodily Injury:  this coverage pays for claims and lawsuits by people that have been hurt as a result of an accident the policyholder caused.
  • Property Damage:  this coverage pays for claims and lawsuits by people whose property was damaged as a result of an accident the policyholder caused.

Homeowners Insurance and Liability Coverage

If someone owns a home, and has an active mortgage, then chances are they are required by their lender to carry a homeowners insurance policy.  As was the case with car insurance, liability coverage through a homeowners policy is divided into two categories.

  • Personal Liability:  this coverage pays for claims and lawsuits as a result of someone getting hurt or damage caused by the policyholder.
  • 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.

Umbrella Policies

The final way of obtaining liability insurance is through what's called an umbrella policy.  This insurance protects against a large lawsuit or legal judgment.  Umbrella policies provide liability coverage that goes beyond an automobile, homeowners or renter's insurance policy.

Individuals that use the same insurance carrier for their home and car may automatically qualify for an umbrella policy.

How Much Liability Insurance?

The industry norm, and therefore the practice with most standard insurance policies, is to offer protection in the range of $100,000 to $500,000.  Most states will explicitly prescribe the minimum amount of liability insurance required for automobile operators.

If someone's total net worth is in excess of their total liability insurance, they might want to consider increasing coverage.  Most policies will allow increases to liability coverage up to $1 million.

Coverage in Excess of $1 Million

If the policyholder's assets are in excess of $1 million, it may be desirable to purchase an umbrella policy that extends coverage beyond the one million dollar mark.  The first million dollars under an umbrella policy should cost in the range of $300 to $600 per year.  If all insurance is through one carrier, it may be possible to get a discount on the umbrella policy premiums.

Anyone that lives a lifestyle of luxury cars, or owns a large home, may be the target of significant liability suits.  That is just a fact of the litigious life here in America.  In order to protect these assets from others, an umbrella policy should be given serious consideration.

Calculating 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 liability coverage should be equal or greater than the policyholder's net worth, which is simply the value of everything owned minus the money owed others.

As with all decisions concerning how much insurance to buy, a lot depends on individual risk tolerance.  If someone believes the possibility of losing a large liability lawsuit is small, or is willing to take on that risk, they might feel comfortable with a lower amount of insurance.  Someone that is afraid of losing everything might decide to increase their coverage.

Questions to think about when trying to determine how much liability insurance is needed include:

  • 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.

The ultimate decision about coverage is an individual one.  The right choice will balance both the individual's financial outlook as well as their risk tolerance.

About the Author - Liability Insurance Coverage (Last Reviewed on May 31, 2016)