Liability Coverage – What is it and how much do I need?

Liability Coverage – What is it and how much do I need?

One of the most frequent issues I see on people’s current insurance is insufficient liability insurance. How much an individual or family needs is largely dependent on their assets and lifestyle. There is no one size fits all approach, and I try to customize each client’s plan to fit their needs.

What is liability? The root word of liability is liable, and to be held liable for something means you’re being held legally responsible. In the insurance world, becoming liable for something is almost always a direct result of the insured person’s negligence. Negligence would occur when someone is deemed “at fault” for something, due to their actions or failure to act.

Damages might include property damage, bodily injury, medical bills, economic loss, lost wages, pain and suffering, or damaged reputation.

So where’s the risk at? The risk is pretty obvious when talking about your car. If you cause an accident, you’re on the hook for bodily injury, medical bills & property damage. The risk with homeowner’s can be a little more obscure. It starts with simply owning the property or slice of land. If someone gets hurt on your property, you can be held responsible for it, plain and simple.

When you consider the physical features of your home, like stairs, a pool or hot tub, a dog that you thought would never bite anyone, or a slippery kitchen floor, you start to realize all the ways in which you could become liable for something.

Other questions to ask yourself would revolve around what kind of lifestyle you have. Do you have kiddos that go to a ton of sports or activities? Do you ever transport your kid’s friends with you? Maybe you have people over to watch the game every Saturday. Do you serve alcohol? Perhaps one of those guests becomes overserved one day and leaves your house. Do you have guns in the house or are you a hunter? Do you have motorcycles or ATVs? Are you a golfer? Maybe you slice your driver and bounce your ball off the attorney’s head on hole 9.

How much coverage is enough? I’d start with $500,000 on your homeowner’s, and buy as much liability insurance as the carrier will sell you on your auto policy. If you have a positive net worth or your lifestyle includes some of the things mentioned above and more, I would recommend an umbrella policy of somewhere between $1-5 million. Lawsuits are way too common these days. There are plenty of people walking around with a victim mentality, and if one of those people files a lawsuit against you, there’s no such thing as too much insurance.

I could never afford a million-dollar liability policy! Liability insurance is actually relatively cheap when you consider what sort of risks you are transferring to the insurance company. As you were reading the article, I bet you were thinking to yourself “These things are so unlikely to happen to me.” Well, you’d be right. The odds of these things happening are obviously small, but accidents happen every day, and none of the people responsible for those accidents woke up that morning and decided they wanted to become negligent for something!

Other factors to consider when purchasing liability amounts:

  • Your net worth
  • Your aspiring future net worth
  • The small annual cost versus what you’d pay in attorney’s fees and/or a judgement placed against you
  • The other people in your household. Sure, YOU may be a good driver, but what about your spouse or teenager? Maybe every time you get in the car with them you feel yourself pressing the imaginary brake on the passenger side.

When you consider all the potential risks you face, $200 every year for 1 million dollars in liability coverage might be a pretty sweet deal.