When it comes to your car insurance, it’s a bit more complicated than just being ‘covered’ or not. Because there is such a wide range of accidents, there must be a wide range of coverage options to manage these different situations. What is liability insurance exactly? You need everything there is to know about auto insurance liability limits explained.
Liability insurance is designed to cover damage or injuries that happen as a result of your actions to other parties, whether they be other drivers and their vehicles or pedestrians. Without liability insurance, you could be sued for all damages and medical costs. Liability insurance protects you against these costs. But how exactly does liability insurance work, and do you need to have it as a part of your insurance policy? We’ll answer those questions and more in this article that helps you get auto insurance liability limits explained. But first, it’s important to understand the distinction between the two primary types of liability insurance—property damage liability coverage and bodily injury liability coverage.
Property Damage Liability
Property damage liability covers damage that occurs to other peoples’ vehicles, property, or possessions as a result of an accident in which you are in the wrong. These damages don’t just extend to personal property, but also to business and government property—for example, if you were to damage a government-owned guardrail or traffic light.
Without property damage liability, you could be sued for the amount of damages caused by your actions. Property damage liability insurance will cover any of these costs up to the maximum set forth in your policy.
For example, let’s say you make a driving mistake and cause an accident. The accident results in another person’s vehicle, valued at $20,000, being totaled. Their vehicle also contained a laptop and other possessions totaling $2,000 in value. You could be sued for $22,000 or more to recoup these costs. If your property damage liability insurance maximum limit is set to $25,000, then the insurance company would pay for the costs to replace these valuables rather than the burden falling entirely on your shoulders.
Bodily Injury Liability
Bodily injury liability follows many of the same principles, but in this case it involves injuries that are inflicted on other people who are not in your vehicle when you are found to be at fault. Here are bodily injury auto insurance liability limits explained. This doesn’t just extend to medical costs, but could also cover the cost of lost wages as a person recovers from an injury. It’s important to note that this isn’t just a factor in car-on-car collisions, but could also involve any bicyclists, bystanders, or pedestrians that are involved in the crash.
Bodily injury liability is designed to pay for these medical costs rather than the cost coming out of your pocket, so it can be incredibly important to make sure that your policy includes a solid total maximum. For example, you might choose a maximum of $25,000 per person and $50,000 for all injuries in an accident. It’s important to set this limit wisely, because any costs that exceed it will come back directly to you, as you’ll be held personally liable.
The last thing you want is to be on the hook for someone’s major medical expenses, which can be substantial when it comes to serious injuries—and can keep coming even months or years after the initial accident. Bodily injury liability transfers that risk from you to your insurance company up to your coverage limit.
Auto Insurance Liability Limits Explained
Auto insurance liability limits are decided between you and your insurance provider. In simple terms, we find it helps to have auto insurance liability limits explained this way— they determine the absolute maximum that your insurance provider will pay for liability costs as a result of an accident where you’re at fault. That number matters, because any costs above that maximum will fall to you.
So how do you decide the best limits for you? This depends largely on how many assets you have. Why? Because if you’re sued for damages and are found financially responsible, then those assets will become available as collateral to pay for those damages. So if you have a home worth $350,000, and you’re liable for $400,000, that house might be on the chopping block.
One formula that’s recommended by NerdWallet for auto insurance liability limits explained is to add up the value of your house, vehicles, savings, and investments. Then, subtract any debts you have from that figure. That will reveal your rough net worth, and you’ll want to make sure that bodily injury limits are at least equal to that figure or more. For example, if your net worth adds up to $100K, you’ll want a liability limit of $100K or more.
Limits on Property Damage Liability
When it comes to property damage and having your auto insurance liability limits explained, figures usually don’t have to be as high as personal injury. That’s because property damage costs generally have a lower ceiling than medical costs, which can easily stretch into the hundreds of thousands once pain and suffering is considered—especially if multiple people are injured.
Property damage costs, on the other hand, are limited to the value of a vehicle or other personal property. Generally, property damage liability maximums are usually set around $15K to $150K depending on your personal preferences and financial situation. Again, your personal net worth should be a factor in deciding what this should be. This will help protect you from a financially devastating event if you’re found to be at fault in an accident—no one wants to find all of their assets seized in order to settle a personal property damage suit.
Other Types of Car Insurance
It’s worth addressing the fact that property damage liability and bodily injury liability aren’t the only types of car insurance coverage you need to consider. There is a wide range of other options, from those that are legally mandated by state law to the completely optional and even the over-the-top. While you might not need insurance that covers your aftermarket stereo sound system, there are some coverage types that you’ll want to be aware of and consider when it comes time to put together a policy.
Here are some of the most common other types of car insurance that you’ll be responsible for determining whether to include in your car insurance policy. Each one has its own specific area of coverage, limit and deductible options, and exclusions that apply. You’ll want to be informed and aware of what they all are so that you can have an educated conversation with your insurance provider or representative to create a policy that’s right for your unique needs, preferences, and budgetary restrictions.
Collision Insurance
In the same way that property damage coverage protects you from financial responsibility for damage to other vehicles, collision insurance protects you from having to pay for damage to your own vehicle. Collision coverage will pay for any necessary repairs that are required to get your car back to the condition it was in before the accident. If this isn’t possible or is prohibitively expensive, the insurance company may decide total your car. In this case, they’ll pay for the value of your car and you can put that money towards purchasing a replacement.
Collision insurance comes with a deductible and a maximum limit. The deductible determines how much of the costs you’ll have to pay before your insurance company picks up the rest. This is often either $250, $500, or $1,000, but it can be more or less depending on the options that your insurance company offers. A higher deductible means more out-of-pocket expenses for you in the event of an accident, but a lower monthly premium. A lower deductible means less out-of-pocket expense, but a higher monthly premium.
Comprehensive Coverage
If collision coverage protects you from costs associated with your vehicle experiencing damage from a collision, what about damage that comes from non-collision events? These non-collision events can include fires, theft, and other potential causes of damage. Comprehensive coverage covers these risks, and it’s not required by law—but it's worth considering. It has the same deductible and maximum limit conditions as collision insurance, but the figures can be different. Think about comprehensive coverage if you live in a high-crime or extreme weather area, or if you expect that your car is likely to endure damage or incidents that aren’t directly the result of a collision. Comprehensive coverage is usually sold together with collision coverage.
Personal Injury Protection
Personal injury protection, often notated as PIP, is much like injury protection to other drivers. But in this case, it applies to injuries that you sustain as a result of an accident. It will also cover medical costs for passengers in your vehicle, and is valid even if you are found to be at fault for the accident. Personal injury protection requirements and laws can vary from state to state, with some requiring it as part of any auto insurance policy while others don’t offer it at all. Your insurance provider will help inform you about whether it’s required in your state, but it’s worth doing some research yourself so you can be independently informed about what’s expected of you.
In some states without PIP coverage, there is a similar coverage called Medical Payments coverage that will pay for injuries that you sustain in an accident, but only if it was your fault.
Uninsured/Underinsured Motorist Insurance
Have you ever wondered what would happen if another driver causes a collision that results in property damage or injury to you, but the other driver doesn’t have the insurance or assets to cover the costs of that damage? What happens next?
If you have uninsured/underinsured motorist (UM) insurance, your insurance company will have you covered when this takes place. They’ll make up for gaps in coverage resulting from an improperly insured responsible party up to the limits of your UM coverage, ensuring that you’re not stuck with the bill. This is definitely an insurance coverage option you should consider when putting together your policy, as you’d be surprised by how many drivers are out on the roads without proper coverage—or coverage at all. The last thing you want is to not only experience the stress and trauma of an accident and resulting injuries/property damage, but to then be left covering the costs of that damage yourself all because someone wasn’t responsible enough to get legally-required insurance coverage. UM coverage is usually very affordable compared to other coverage types, so be sure to consider your options when you get a quote on your policy.
Who is responsible for medical bills?
Answering this question can be complicated, because it depends on a large range of factors that have to do with the circumstances of the accident as well as where the accident takes place.
Let’s start with where the accident happens. Every state has very specific and unique rules about determining who is at fault in an accident. In some states, known as ‘no-fault’ states, they don’t worry about who is at fault. Your insurance provider will cover your costs up to your Personal Injury Protection (PIP) limit regardless of whether you were responsible or not, and then will determine fault and work out who owes what with the other insurance company later. In other states, a party will be determined to be at fault, and that party will be responsible for covering costs from the accident. And in some states, both parties can be at fault to varying degrees. For example, you might be found to be 30% at fault while the other party is found to be 70% at fault—that means you and your provider would be responsible for 30% of the associated costs.
Financial responsibility also depends on the type of coverage you have. As we mentioned above, there are various types and degrees of coverage ranging from property damage and injury to other parties to damage and injury to yourself and your passengers. Talk with your insurance provider about your policy to get a clear and defined understanding of what they will pay for in a range of situations.
How do I know how much liability insurance to buy?
So how do you choose the right auto liability insurance coverage? In most states, a certain minimum amount of coverage is legally required by state law. That number can vary from state to state. We discussed above some of the ways to decide how much coverage to purchase, but here are some common liability limits that are popular among insured drivers. For example, Freedom National offers minimum limit liability coverage based on your state that's usually either $15,000/$30,000 or $25,000/$50,000.
Remember—these are just general guidelines to be used as an example, not a hard and fast rule to follow. Your personal net worth should be the main factor in determining your level of coverage, though other factors may be part of your decision—factors like how much you use the car, how common car accidents are in your area, whether you use the car for personal or business use, and your driving history/ability. For example, you may want more protection for an inexperienced teenage driver than someone who has been driving for twenty years without a single incident.
A rule of thumb that’s been used in some personal finance blogs is that you should choose policy limits and deductibles that will make an accident just a financial inconvenience, not a financially devastating event. We generally tend to agree with that assessment, as long as you have an emergency fund set aside to cover deductibles and other costs that fall outside of your insurance policy’s coverage.
Otherwise, deciding how much liability insurance to buy is highly personal and unique to you—though we highly recommend discussing it in depth with your insurance provider or agent to get their perspective and expertise on the matter.
What will happen if I drive without liability insurance?
Driving without liability insurance might sound like a good way to save money, but the consequences can potentially end up costing you much more than the premium you would have paid had you been properly insured. Potential penalties from the DMV include fines, license and registration suspension or revocation, and reinstatement fees. If you're driving without insurance and you're stopped by a police officer, you can expect to get a ticket and even more fines. However, where you’ll run into the most trouble is if you’re involved in an accident where you’re found to be partially or fully at fault. You’ll be on the hook for any costs, and medical costs in particular can add up extremely quickly.
For example, an ambulance ride alone generally costs a minimum of $1,000 or more. A standard visit to the ER starts out around $3,000. That’s not to mention ongoing costs of treatment, recovery, medication, surgery, and even lost wages that result from inability to work because of injuries. Without liability insurance, you could be found financially responsible for all of these costs for everyone involved in the accident.
Understanding What Different States Require for Auto Liability Coverage
Even if you live in a state like New Hampshire that does not have a specific car insurance requirement, every state requires you to have some kind of proof of financial responsibility. That means that the decision about liability insurance for most people won’t be a matter of ‘if,’ but how much. We’ve discussed this in the section above titled How do I know how much liability insurance to buy?
What other types of car insurance do I need?
To start with, you’ll need to check out the local laws and regulations of your state. Each one has different regulations for which coverages, how much coverage, and deductible requirements. Your insurance provider will help you identify what these amounts are for your state, but you can also find this information online easily if you’d like to do some research in advance.
Aside from liability insurance, we also generally recommend comprehensive and collision insurance if you have a newer vehicle, and uninsured/underinsured motorist coverage for everyone. Other than that, you have your choice of specialty options. These can include:
GAP coverage, which will pay for the difference between what you owe on your car loan or lease and what the vehicle is currently worth.
Special equipment/customization coverage,which protects any aftermarket or custom parts you’ve added to your vehicle that might be damaged in an accident
Other premium coverages,including roadside assistance (highly recommended), rental car reimbursement, and more. Ask your specific insurance provider to see what specialty coverage options they offer in their policies.
How to access the best insurance rates
Accessing the best insurance rates available is as simple as doing your research. Find out which companies offer the best discounts, as well as those that are willing to offer competitive rates—even for drivers with less-than-perfect driving histories that might include moving violations or previous accidents.
It’s also important to share information with your provider, because you’d be surprised by which factors can give you access to certain discounts—factors like marriage status, home ownership, educational background, occupation, and more.
Want to find cheap car insurance quotes online? Freedom National has you covered with the best, most customizable, and cheapest car insurance available.
