Liability Insurance

 

You've probably seen the commercials on television, talking about your state's requirement that you show "proof of financial responsibility" if you're ever pulled over for a traffic violation. This doesn't mean they need to see bank records showing you have enough cash to pay a ticket. It refers to something of far greater importance: liability insurance. The phrase "proof of financial responsibility" refers to the minimum-required coverage in your state, for both property damage and bodily injury coverage should you be the at-fault party in an accident. Most states have a mandatory minimum coverage requirement, which you must have in order to register your car each year, but if you own a home, you should probably consider boosting your coverage beyond the minimums.

 

What is Covered?

Liability insurance is broken into two parts: coverage for property damage and coverage for bodily injury.

• Property Damage Coverage: This portion of your policy covers damage to other vehicles if you are at-fault in an accident, but it also covers damage to other property as well. For example, if you hit a fence, wall, or even the side of someone's house, your liability insurance will pay for repairs, up to the limit of your coverage.
• Bodily Injury Coverage: This pays for medical expenses for any victims involved in an accident where you are at fault, including treatment of their injuries, and compensation for pain, suffering, loss of income, and funeral expenses. Because medical expenses can quickly escalate beyond the minimum required coverage, it's recommended that you boost this coverage to equal the value of your home and its contents.

 

How Much Coverage is Enough?

Liability insurance is designed to compensate victims in the event of an accident, as well as to protect your assets if a lawsuit is filed against you, and is generally capped at specific per-person and per-event amounts. These caps are generally expressed as a fraction, such as 50/100 which represents thousands of dollars of coverage, split between two types of coverage. The Insurance Information Institute recommends minimum coverage of $100,000 per person for bodily injury, and $300,000 per accident.

 

What About "No-Fault" States?

Several states have "no-fault" insurance laws, where your insurance pays for damage to your vehicle and the injuries you and your passengers may have, while the other driver's insurance pays for his or her damage or medical expenses.

Liability insurance protects you from having to pay out-of-pocket for damage and injuries in an accident that you caused, which makes it a smart choice even if your state doesn't require it, but it does NOT cover your own medical expenses or vehicle damage. For that, you must have collision and/or comprehensive coverage.