Liability Coverage Explained

Liability coverage is the legal minimum a driver must carry on their auto, but it also accounts for the majority of almost any policy. But what is it exactly?

What Does Auto Liability Insurance Cover?

In essence, if you're responsible for an auto accident that injures someone, damages another person's vehicle or other property, your protection will pay the damages. Obviously, the damages to a person would be medical in nature, while the rest would be to repair or replace the damaged vehicle or property. It is divided into two categories for the above reasons: bodily injury and property damage liability. The amount of coverage provided will vary from place to place, and policy to policy. Because it is perhaps the most important component of any auto insurance policy, your level of protection can usually be raised above the minimums required in a given state or municipality. It is mandatory in most states.

Two Components to Consider

As mentioned above, there are two basic components of coverage: bodily injury (BI) and property damage (PD). In some policies, the protection is available either as a combined single limit policy, or as a split limit policy:

  • Combined single limit - A combined single limit combines property damage liability coverage and bodily injury coverage under one combined limit.
  • Split limits - A split limit liability coverage policy separates the coverages into property damage and bodily injury.

BODILY INJURY (BI)

This component protects the policyholder should they cause bodily injury or death in the course of an accident. It also provides for a legal defense if another party in the accident files a lawsuit against you. More specifically, claims for BI may be for such things as medical bills, loss of income, or pain & suffering. Because a high percentage of accidents result in serious injury, you will want enough protection to equal or exceed a judgment against you in a lawsuit - without putting your personal assets in jeopardy. Because this protection isn't for your vehicle or yourself, but for the vehicles of others and their bodies, you should definitely carry the same levels of liability on all your cars and trucks regardless of their value. Bodily injury liability coverage is usually further segmented into a maximum payment per person and a maximum payment per accident. In the insurance business it's referred to as dual coverage limits, and is noted as two numbers. However, protection is limited to the terms and conditions contained in your policy.

PROPERTY DAMAGE (PD)

This component is for damages to someone else's vehicle or property. That could be the car, or it could be a tree, a shed, a bicycle, or any other property damaged during an accident. It also provides you with legal defense if another party files a lawsuit against you for those property damages. Again, protection is limited to the terms and conditions contained in your policy.

Setting Your Level of Protection

Aside from the legal minimums you must carry in your policy, you want to make sure you set them at the highest levels you can afford. If you select limits that are too low, you could be putting yourself at serious financial risk. Why? Because if you or a driver covered by your policy causes a serious accident and the damages exceed your coverage, you will be held responsible for the amount above those limits. You could face bankruptcy or be forced to sale your property and/or exhaust your savings, and other investments or other assets. So, by all means, purchase enough protection to account for both your current and future net worth. If you do that, you will be limiting your liabilities!