Understanding Liability Insurance
The word liability gets thrown around a lot, but rarely do we actually understand what that means. In short, it is insurance coverage that provides for legal defense and money for the settlement of a judgment that is made against you. But that definition doesn’t make the question, how much liability coverage do you want on your homeowners or auto insurance policy easy to determine. As an insurance agent, I cannot tell you how much liability coverage you should purchase until you are looking at a lawsuit settlement, then I can tell you how much you should have purchased, but by then, it’s too late and not helpful at all.
Being that I don’t have a crystal ball, what I can do is try to explain how to think about liability which hopefully will help in answering the question of how much liability do I need. The best way that I can explain it is with a football analogy.
Let’s start by listing your assets. Let’s sum up all the cash, accounts, stocks, crypto, real estate, future earnings ability (yes if you are young this might be your greatest asset), etc that you have. We are going to put that in an end zone and say IF you let the other team’s offense score they get to loot your assets after they have finished with the latest and greatest dance.
So here is the golden question: as the defense, where do you want the offense to start their offensive drive. Do you want it to be a goal-line stand, where they have a yard or two to go? Or do you want them to be starting their drive on their own 5-yard line with 95 yards to go? Remember, if they score they can take all your assets.
Liability Coverage Creates Space
The obvious answer is you want them to start as far away from your goal line and assets as possible. And in a courtroom, your defense strategy should be no different. If someone sues you, they are after your assets (remember all the stocks, crypto, real estate, etc). If they win the lawsuit you become legally liable and have to pay out of your assets. BUT if you have liability insurance your insurance policy will pay out BEFORE they get to take your assets.
So if you have state minimum limits on your auto policy, you get some protection, but not a lot. It’s like letting the offense start on the 5-yard line. Conversely, if you have limits of 250,000/500,000/100,000 with a 1 million umbrella policy it’s like them starting on their own 20-yard line. Is it possible they score, and that you have to give them some of your assets? Yes! There is always a chance, BUT with high liability limits, the chance is significantly less than if you had low limits. Why? Because if you are found liable, have sufficient limits, and it’s not excluded, the insurance company will actually pay the settlement and your assets remain safe for another day.
How Much to Purchase – Sorry I still can’t answer
So while your insurance agent can’t and shouldn’t make the determination of how much insurance you need, the starting place of the offense matters. So when you purchase insurance, don’t short the liability coverage. It is often very inexpensive to go from 1 limit to another.
So our recommendation is to purchase liability as much as you can afford, and make sure that it is at least as much as your assets, and maybe 2 to 3 or times your assets if you are wealthy. So as you purchase your auto insurance, homeowners insurance, or rental property insurance consider what you have and how close you want the offense to be to your assets.
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