Why You Need a Lot of Liability Coverage - Even if You're Law Abiding
Everyone should have at least one million dollars in liability coverage.
Liability insurance covers you in the event that you are sued or held legally responsible for damages or injuries. So, does that mean it's just for people who are careless or irresponsible?
Absolutely not. Liability insurance is worth carrying even if you're careful, conscientious, and law-abiding. In this article, we'll tell you why.
The Most Common Types of Liability Insurance
The vast majority of people should carry two kinds of liability insurance.
The first one is part of your automobile insurance and it will cover you if you are at fault in a collision and are sued or threatened with a lawsuit because of it.
The other is part of your homeowner's or renter's insurance. This coverage is broad and will typically cover legal liability arising out of your personal actions anywhere in the world. That sounds almost far-fetched but, of course, the policy will have a set of exclusions. Among those exclusions will be liability that arises from the use of an automobile or aircraft, liability arising out of your employment of other people, and more.
There are other kinds of coverage out there. And if you want coverage for anything that is excluded by your homeowner's or renter's liability coverage, you'll have to buy insurance for that specific risk. But for this article, we'll assume that you're among the vast majority of people out there and, therefore, only need these two kinds of liability insurance.
The Insurer’s Duty
If you're involved in an event that leads to your potential liability, your insurance company will have two duties: the duty to defend and the duty to indemnify.
Duty to Defend
The duty to defend means that the insurer must hire a law firm to represent you if you are sued. This is a duty they must uphold regardless of the amount of coverage you have. Whether you have $10,000 in liability coverage or $1 million, they must defend you (find out more in Insurance and Lawsuits: What Happens When You Are Sued).
Duty to Indemnify
The duty to indemnify means that the insurer must pay any settlement or judgment against you, up to your policy limits. Although the duty to defend comes into play no matter how much coverage you have, having $10,000 version $1 million in liability coverage makes a bid difference when it comes to this duty.
Worst Case Scenarios
When we're throwing around those numbers – $10,000 and $1 million – we're talking about a wide range. So, just how much liability insurance does the average person need?
To answer that, let's look at two scenarios.
Scenario One: Jumped Fence and Dog Bite
Let's say you own a dog or two – big ones that could be aggressive if they feel threatened. There's a fence around your yard. It's low, but high enough to keep the dogs in.
One day, a kid from the neighborhood climbs the fence to come visit your kid and no one answers when he yells from the gate. Your dog pegs him as an intruder and attacks, causing severe injury.
Not only does the hospital bill run up to $130,000, but the unfortunate kid has suffered nerve damage that will leave one arm less than fully functional for the rest of his life. There is also, of course, the emotional distress, which has caused his grades to drop and has made him more withdrawn.
Now, let's say the case goes to a jury trial and the jury finds the boy to be 10% liable because he climbed over the fence, but finds you to be 90% liable because it was foreseeable that someone could climb the low fence and come face to face with the dogs. Ruling that you should have taken greater precautions, the jury awards $130,000 for medical expenses, $150,000 for the partial loss of the use of the boy's arm, and $150,000 for emotional distress. With a total of $430,000 in damages and you being 90% at fault, you will owe $387,000.
Scenario Two: Collapse and Fall
Don’t own dogs? Well, imagine you have a stone walkway that includes some stairs. It runs from the public sidewalk up to your front door.
Over time, one of the stones have started getting loose because of soil subsidence underneath it. You've noticed this a month or two ago but haven't gotten around to fixing it yet.
One evening, you host a small party at your house. As one of the guests is leaving, the loose stone collapses as he steps on it. He falls backward and hits his head hard on another of the stone steps, resulting in a severe concussion that renders him unconscious. After medical treatment, he discovers that his vision will be permanently blurred. That would be bad enough, but his job is working for the police department as a forensic expert who scans and compares the minute details of fingerprints. Corrective lenses help, but he simply can't see clearly enough to keep doing his job. On top of that, he suffers from period headaches that make it impossible for him to do any work whatsoever at times.
What is a case like this worth? Hard to say. But it could easily climb into the six figures. The man could recover all of his medical expenses, his lost wages, and the pain and suffering from ongoing headaches. And perhaps the biggest amount of all, compensation for the significant future wage losses from no longer being able to continue in his line of work (for related reading, see Why You Need Disability Insurance).
Liability Issues Can Happen to Anyone
As you can tell from these two scenarios, liability issues can happen to anyone, no matter how innocent. The homeowners in these scenarios didn't break any laws. They were negligent, but not to an extreme degree. They simply weren't as careful and diligent as they might have been.
Even if you keep a high fence, leave your dogs indoors, and fix every stone in your walkway the minute it comes loose, chances are there are a few things about your property or conduct that could lead to a liability case. And of course, there's no way to completely prevent accidents from happening.
So, How Much Liability Coverage Do You Need?
Damages in personal injury can easily run into the hundreds of thousands. And no one except for the exceptionally wealthy could easily recover from paying a significant portion of it out of pocket.
Because of that, no one – repeat, no one – should have less than $1 million in liability coverage.
Beware of Lower Limits
When you ask them how much coverage you should get, many insurance agents will tell you to get as much coverage as you have assets. So, if you own a $150,000 home with a few other modest investments, they might recommend $300,000 in coverage.
This is nonsense.
These agents are not litigators and are, therefore, not fully aware of the issues. How much can be liable for has nothing to do you with the value of your house. A $500,000 judgment against you is a $500,000 judgment against you no matter if you home is worth $150,000 or half a million dollars.
And what happens if you have insufficient coverage? Unfortunately, you don't get to just walk away scot-free. If your $300,000 liability coverage can't pay for the whole $500,000 in damages, the judgment creditor could put a lien against your home and garnish your wages to make up the balance.
Plus, if you have $1 million in coverage, the plaintiff's lawyer will likely be willing to settle the case for something within your policy limits, rather than trying the case before a jury in the hopes of a settlement that exceeds that amount. In general, the more coverage you have, the easier it is for the case to be settled without going to trial.
Don't let an agent talk you out of high policy limits. Insist on them. $1 million in coverage doesn't cost much more than $300,000 or even $100,000 in coverage, but it will cost you plenty if you have to pay damages in excess of your limit.
The examples used here were all related to homeowner's and renter's insurance, but the same applies for your auto insurance. Get $1 million in coverage for auto liability, too, so you don't find yourself at fault for auto-related injuries or property damage you can't afford to pay for (see Auto Liability Insurance: How Much Is Enough? for more details).
Liability issues can happen to anyone, no matter how careful they are. Make sure you've got adequate coverage. A million dollars sounds like a big number, bu you really can't afford anything less.
Written by David Hughes | Writer/Researcher
David Hughes worked as a researcher and writer for two California litigation law firms between 1988 and 2005, and has worked on a freelance basis since then. His areas of expertise include personal injury litigation plaintiff and defense, medical malpractice plaintiff, contract law especially contracts of insurance, insurance bad faith litigation defense, insurance coverage opinion letters, administrative law defense . He also taught English in China and Azerbaijan for eight years and worked as a welder in shipyards in the San Francisco Bay Area for seven years. He is an outdoorsman and loves being in the mountains.