Types of Liability Insurance
/The Wall Street Journal summarizes liability insurance. A quick and concise guide.
What Does Liability Insurance Cover? - Buy Side from WSJ
“No one expects to be responsible for a catastrophic event that injures someone else or their property, but it happens. And it can be expensive.
That’s where liability insurance comes in. Instead of dipping into your own savings or paychecks to cover someone’s medical expenses or repairs, your insurance company takes care of it.
“It’s really about taking a small amount out of your pocket to shift the risk to somebody with a much bigger pocket, an insurance company,” says Damon Winter, a Lake Oswego, Ore.-based financial advisor. Liability coverage is baked into homeowners and car insurance policies, but there are other areas you may need coverage in too.
Here’s what you should know about the different types of liability insurance, what each covers and how much it costs to be fully protected.
Types of liability insurance
Liability insurance can be split into three categories: personal, professional and business.
1. Personal liability insurance
If you own a home or drive a car, you already have some liability insurance. A standard part of homeowners and auto policies, liability coverage saves you from paying for someone else’s injuries or property damage when there’s an accident. Sometimes the insurance company will even pay when it’s not your fault.
Take homeowners insurance, for example. If a visitor gets hurt on your property, whether it’s in the pool, during a party or because your dog bit them, you could be responsible for their medical bills. But since you pay for insurance, the insurer covers it.
Liability coverage within a homeowners policy is broad. It also typically pays for legal defense costs if you’re sued by the injured person, as well as their wages if they’re unable to work, court-awarded damages for pain and suffering or funeral costs if the injury led to death. It can also cover legal costs if you’re sued for defaming someone’s character, whether or not it happens at your house.
With car insurance liability coverage, your insurer pays for the victim’s medical expenses, lost wages, court-award settlements or property damage when an accident is your fault. But depending on the type of car and severity of the injuries, that can add up fast. You’re responsible for paying any expenses beyond your coverage limit.
2. Professional liability insurance
Professional liability insurance covers small businesses or individuals who offer advice or services, such as accountants, financial advisors, doctors and lawyers. Otherwise known as errors and omissions insurance, it covers legal defense fees when a professional is sued by a client or patient, and settlement costs if they’re found liable.
“Basically, it protects you from unsatisfied clients,” says Mark Friedlander, a spokesman for the Insurance Information Institute.
3. Business liability insurance
There are several forms of business liability insurance. It generally protects the financial interests of a business and its owner from claims of physical injury and property damage from employees, contractors or patrons. Manufacturers often have product liability insurance, for example, which pays legal defense costs and any court-awarded settlements if a product has a defect that causes bodily harm or property damage.
How much coverage do I need?
Personal insurance policies come with a minimum level of liability coverage, but you can—and often should—buy more, Winter says. Increasing your limits will usually lead to a higher monthly payment, but one bad liability claim could “crush you” financially, he says, so the protection is worth the added cost.
Car liability insurance
States set minimum car insurance liability requirements for drivers, which are divided into three parts:
Bodily injury limit, per person: How much the insurer will pay for a single person’s medical bills when they’re injured in an accident caused by the policyholder. Also includes legal fees if the policyholder is sued by the victim. According to data from insurance-comparison site The Zebra, state minimums range from $15,000 to $50,000.
Bodily injury limit, per accident: The combined amount the insurer will pay for medical bills for multiple injured people in an at-fault accident. State minimums range from $30,000 to $100,000.
Property damage limit: How much the insurer will pay for replacements or repairs for other cars or physical property (a light pole or fence, for example) that are damaged in an at-fault accident. State minimums range from $5,000 to $25,000.
Friedlander says most insurance professionals recommend drivers have annual auto liability coverages of 100/300/100, meaning $100,000 in bodily injury coverage per victim, $300,000 in bodily injury coverage per accident and $100,000 in property damage coverage.
It’s possible to get liability-only car insurance, but that means you don’t have coverage for damage to your own car in an accident. A liability-only policy with coverages of 100/300/100 can cost anywhere from $42 to $84 a month for a single, 30-year old male driving a Honda Accord, according to estimates from The Zebra.
Keep in mind that those prices are samples; your individual driving record and location, among other things, determine how much you pay. Plus, adding comprehensive and collision coverage—the portion of your policy that pays for damage to your own car—will increase your monthly payment.
Homeowners liability insurance
A standard homeowners or renters policy provides at least $100,000 worth of liability insurance. That covers medical bills for visitors if an accident occurs on the property, plus legal fees and settlement costs if the visitor sues you.
It also covers actions by the homeowner, family members who live with them or pets—anywhere in the world. If you wreak havoc on a hotel room, for example, causing thousands of dollars in damages, your insurer will step in and cover the bill up to your policy limit. (That doesn’t mean you have free rein—insurers can increase your monthly payment if there’s a claim like that). Most home insurers’ liability coverage maxes out at $500,000.
Figuring out how much coverage you need, Winter says, comes down to one question: “What do you have to lose? That’s really a big factor.” Even if you don’t think the odds of something bad happening are high, he says, you have to consider what the financial impact would be if something did. For many people, the potential loss is great.
According to ValuePenguin, an insurance comparison marketplace, a typical homeowner can increase their liability coverage without much of an impact on their monthly payment. For instance, upping coverage from $300,000 to $500,000 costs only $10 more per month, based on a sample homeowner profile. In general, prices will vary based on your home’s location and other factors.”
