In most states, bodily injury liability and property damage liability are required as part of the minimum auto insurance coverages you must carry as a car owner.
Each state has its own state car insurance requirements. These requirements are commonly shown in a set of three numbers separated by slashes, such as 20/40/10. The first two numbers refer to bodily injury liability limits and the third number to property liability. For example, 20/40/10 means coverage up to $20,000 per individual injured in an accident, $40,000 for all persons injured in an accident, and $10,000 coverage for property damage.
In Connecticut, for example, the minimum liability requirement is exactly 20/40/10, but consider Alaska’s 50/100/25 and California’s 15/30/5 requirements as higher and lower examples, respectively.
Most insurance experts advise anyone with assets such as a home or savings to protect those assets by purchasing at least 100/300/50. The car owner is responsible for whatever the insurance company doesn’t pay, and, after all, the typical new car costs $30,000 nowadays. Hit somebody in a Porsche, and your expenses could skyrocket.
Also, extra liability coverage is very inexpensive. For example, CarInsurance.com research found that an adult male driver in ZIP code 94608—the Bay Area, California—could buy the minimum required liability insurance for $470 a year, and could buy 10 times as much for just $75 more.
Before we dig any deeper into your coverage needs, let’s review just what liability insurance comprises:
Automobile liability insurance is financial protection for a driver who, while operating a vehicle, harms someone else or his/her property; it does not protect the driver or the driver's property (this is where collision and comprehensive car insurance kicks in). The bodily injury component pays for injuries to others, and the property damage liability part pays for damage to someone else’s car or property.
Bodily injury liability coverage
Bodily injury liability insurance pays the cost of any injuries for individuals you are found liable for injuring, or killing, with your car. A few examples of items covered would be loss of income, medical and hospital bills, and pain and suffering damages. Aim to have enough liability insurance to cover any judgment levied against you in a lawsuit resulting from an accident (more about that below).
Property damage liability coverage
Property damage liability insurance covers damage that you cause to property as the result of a car accident. This coverage can help pay for such things as structural damage, repair or replacement costs for stationary objects, and vehicle repair or replacement costs. Property damage coverage can also help keep your assets safe in the event of a lawsuit resulting from an accident.
How much liability insurance do you need?
As the above indicates, you could be putting yourself at risk financially if you stick to your state’s minimum requirements for liability insurance. Not to put too fine a point on it, but, if you cause a serious accident where expenses exceed your limits, you can be held responsible for the amount above your limits. You could lose your life’s savings (except funds in 401k and IRA accounts, which are exempt from creditors) and the equity in your home in a large claim.
When determining the amount of coverage that is right for you, consider that the average cost per paid liability claim jumped more than 30 percent from 2005 to 2013—from $11,738 to $15,506—according to the Insurance Research Council’s “Trends in Auto Injury Claims, 2015 edition.” Also, every state except for West Virginia experienced a jump in bodily injury claim severity (the average cost per paid claim) from 2005 to 2013.
Here are some more statistics, from the National Highway Traffic Safety Administration, to consider when determining the amount of coverage you want to purchase:
- Of the total number of U.S. vehicular crashes in 2013, 1,591,000 caused injuries and 4,066,000 caused property damage only.
- While injuries in motor vehicle crashes have been declining over the past few years, in 2013, 6,337 people were injured each day in motor vehicle crashes—one every 14 seconds.
So, how much liability insurance is necessary? Here’s advice given in a CBS MoneyWatch article: If you own a home and have an investment portfolio, you should increase the bodily injury limits of the auto liability coverage to $250,000 per person and $500,000 per accident.
While you can purchase the minimum level required in your state, your safest bet is to purchase liability coverage in an amount that at least equals your net worth. If you’re ever in a serious accident, it might turn out to be the investment of a lifetime.