Liability car insurance protects you from losing everything if you’re sued for causing a bad accident. It’s also the type of coverage most states — all except New Hampshire — mandate car owners purchase.
How much you need, then, depends on the value of your assets, or what your combined savings and property are worth. It’s highly dependent on your financial situation, so be wary of generic liability coverage recommendations you might see. The more you own, the more liability insurance you should have.
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What is liability car insurance?
Liability coverage pays to repair damage or treat injuries you cause to others in an accident. The two main types of liability car insurance are:
- Bodily injury liability covers medical expenses and lost wages for other drivers, passengers and any bystanders or pedestrians injured in a crash you cause.
- Property damage liability pays to repair or replace others’ vehicles and valuables, as well as damage to their property in an accident you cause. This can include government property, such as lamp posts.
Your auto policy’s liability coverage does not pay to repair your own property or injuries if you cause an accident.
If you caused an accident and were sued, liability insurance would pay first, protecting your assets from being seized or sold. But it only pays out up to the limits stated in your policy — you’re on the hook for the rest.
Liability limits are usually shown as three numbers, referring to the most your insurer will pay for an accident you cause. A common policy structure has 100/300/50 liability limits, which covers up to:
- $100,000 for injuries per person.
- $300,000 for injuries total, per accident.
- $50,000 for property damage per accident.
In some states, you can buy a policy with one combined limit for injuries and property damage per accident.
Your auto policy’s liability coverage does not pay to repair your own property if you cause an accident. Nor does it pay to treat your injuries, or injuries to a member of your household, if you cause an accident.
Is liability coverage the only car insurance you need?
Many states require minimum policies to have more than liability coverage. These might include:
- Personal injury protection insurance, commonly known as PIP. This pays for lost wages and treatment of minor injuries to you or your passengers in an accident. It’s required in “no-fault” states, where PIP pays out before liability coverage, but victims in these states can still sue if they suffer severe injuries.
- Medical payments coverage, or MedPay. This is similar to PIP and covers you or your passengers’ injuries in an accident, regardless of fault. Unlike PIP, this coverage won’t pay for lost wages, and limits are lower, often less than $10,000.
- Uninsured and underinsured motorist coverage, which pay out if another driver causes an accident and doesn’t have any (or enough) liability insurance to cover your and your passengers’ injuries.
State requirements aren’t coverage recommendations, just the minimum needed to drive legally in each state. Injuries and damage from a car accident can easily cost far more than the required minimum limits.
How to choose liability coverage limits
State requirements aren’t coverage recommendations, just the minimum needed to drive legally in each state.
You might not need much liability insurance if you have no assets to protect. Suing you would be pointless for the other party. But if you own a home and have savings, you need enough liability insurance to cover their value.
Add up the value of your home, cars, savings and investments, then subtract your debt to calculate your net worth. You’ll want total bodily injury limits (the middle number) at least that high. Options tend to come in $50,000 or $100,000 increments.
For example, if you found your net worth to be $220,000, a good policy might have 100/250/100 liability limits or higher. Property damage tends to cost less than injuries in an accident, so focus on the middle number when looking at coverage options.
The maximum liability insurance you can buy on a car insurance policy varies by company. Common maximum limits are:
- $250,000 for injuries per person.
- $500,000 for injuries total, per accident.
- $100,000 for property damage.
Grab an umbrella to cover the excess
If you need more liability insurance coverage than a company offers, you might want umbrella insurance, also called excess liability insurance. It pays for costs exceeding the liability limits on your home or car insurance policy.
» MORE: Understanding umbrella insurance
Be aware that you may have to purchase the maximum limits on your home or auto liability coverage (or both) before you qualify for an umbrella policy.
However, buying umbrella insurance is relatively inexpensive. A $1 million to $2 million umbrella policy costs about $380 a year, according to the Independent Insurance Agents and Brokers of America.