What Is Liability Insurance?

How Liability Insurance Works

You might think of liability insurance as an umbrella that helps prevent you from being financially soaked in a storm. Depending on the type of liability insurance, a policy may cover items such as:

• Hospital bills
• Lost wages
• Car repair bills
• Legal fees if someone sues you over injuries or damage arising from an accident

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

• Injuries you suffer in an auto accident you caused
• Damage to your car caused in an accident that was your fault
• Damage to your car caused by incidents such as theft, vandalism or hailstorms
• Medical bills for your family or pet if an accident occurs in your home

Aside from not covering certain things, liability insurance may not entirely cover financial losses from an accident. That's because liability insurance typically comes with coverage limits; for instance, your auto insurance policy might include dollar limits like these:

• $100,000 for injuries for each person involved in an accident that was your fault. (This excludes injuries you suffered.)
• $300,000 total for injuries suffered in an accident that was your fault. (This excludes injuries you suffered.)
• $100,000 for property damage in an accident you caused.

The cost of liability insurance can vary widely depending on factors such as what kind of coverage you buy and where you live. Homeowners and renters normally pay for personal liability coverage as part of their standard insurance policies, and can increase their liability limits relatively inexpensively.

Liability Coverage for Different Types of Insurance Policies

Liability coverage comes in several forms. For example, you may have liability coverage as part of your car insurance policy and also separately as part of your homeowners insurance policy. Here's a look at four common kinds of liability coverage.

Auto Liability Insurance

Most states require motorists to carry a minimum amount of auto liability coverage, and many motorists must carry a combination of bodily injury liability coverage and property damage liability coverage. Bodily injury liability insurance covers medical expenses for injuries that someone else suffers when an accident is your fault. Property damage liability insurance covers damage you cause to somebody else's property in an accident that's your fault.

The dollar limits for auto liability coverage vary from state to state. For instance, Texas requires at least $30,000 in coverage for injuries per person (up to a total of $60,000 per accident) and $25,000 in coverage for property damage. In insurance quotes and documents, this is shown as 30/60/25.

Homeowners Liability Insurance

Most standard homeowners policies include a basic amount of personal liability coverage.

Homeowners liability insurance covers you if someone sues you over injuries or property damage that you or your family members cause to other people. The person suing could be someone who broke their leg in a trip-and-fall accident at your house or a neighbor whose antique rug was damaged by your dog.

Personal liability coverage pays for your legal defense in court and any financial damages awarded by the court, up to the dollar amount outlined in your policy. Liability limits usually start at $100,000.

Renters Liability Insurance

Renters enjoy liability coverage that's similar to liability coverage for homeowners.

Standard renters policies provide personal liability coverage that protects you in the event you are sued for injuries or property damage that you or your family members cause to other people. It also covers damage caused by your pets to property that you don't own.

This liability coverage pays the cost of defending you in court and pays financial damages awarded by a court, up to the dollar amount listed in your policy. Liability limits typically begin at $100,000.

Umbrella Coverage

Umbrella coverage, also known as excess liability coverage, is a type of personal liability coverage that protects you beyond the dollar limits of your existing policy's liability coverage. This coverage can be critical if existing liability coverage doesn't come close to matching your household income or the value of your assets.

Should You Get Liability Insurance?

In many states, you have no choice about getting auto liability insurance; laws in those states require a minimum amount of liability coverage. Standard homeowners and renters insurance policies typically include a basic amount of liability coverage.

In general, you should carry enough liability coverage for your car, home or apartment to shield your assets, such as real estate, checking accounts, savings accounts and retirement accounts. Without this layer of protection, someone who successfully sues you over injuries or property damage that are your fault could seriously deplete your assets. This usually means taking out more than the minimum coverage offered.

If you feel that your existing liability coverage is lacking, you can buy an umbrella policy that offers higher dollar limits and broader coverage. An umbrella policy usually costs $150 to $350 a year for an extra $1 million in liability coverage.

The Bottom Line

If you wind up bearing responsibility for an auto or home accident, you could end up with a big financial burden unless you have adequate liability coverage. It's wise to periodically review your liability coverage with your insurance agent or insurance company to ensure your insurance still meets your needs.