As an insurance agent, the question I get the most-blank stares on is “What liability limits do you want on your auto policy?”
Most states have a set minimum limit of liability insurance, which automobile owners must carry by law. However, they are usually very low. For example, the minimum limit in Alabama is $25,000/$50,000/$25,000. With commercial vehicles this is altogether different, you should have a look at commercial general liability insurance quotes to get a better understanding of premiums and all other relevant factors.
Ok, I know I have already lost pretty much everybody, so let’s start with the basics. The example above is called split limits of liability. The first $25,000 is the amount the company will pay on the driver’s behalf for each person’s bodily injury. The middle number ($50,000 in our example above) is the total amount that the company will pay for all combined bodily injuries in a single accident. And the last $25,000 is the amount the company will pay for any property damage that the insured is legally liable for causing.
Obviously, $25,000 does not go very far when you are talking about hospital bills, or even someone’s brand new 2009 Mercedes. As an agent, I always recommend at least $100,000/$300,000/$100,000, but you can choose limits even higher than this if you wish. Often, choosing higher limits of liability is very inexpensive. Many companies may even charge less for higher limits than what you would pay for the state minimum as a way to encourage their customers to be more responsible.
If split limits of liability are too confusing, you may opt for a simpler combined single limit. So instead of having limits of $25,000/$50,000/$25,000, you may have a single limit of $75,000. This limit would be split up as needed to pay bodily injuries or property damage or both.
Another option with liability insurance is known as the personal umbrella policy, or PUP. This is an additional liability you can purchase which can provide you with an additional million dollars of coverage. It also covers your liability on your auto policy and your homeowners’ policy, which is why it is referred to as an umbrella. Your agent can explain this to you in further detail and discuss whether or not you may need it based on your net worth.
So let’s just say that you purchased a policy with split liability limits of $50,000/$100,000/$50,000.
You are driving along on your way to work and you are in a hurry because you are already late. So you are driving along and eating your granola bar and all of a sudden your cell phone rings, so you bend down to look for it. All of a sudden you slam into the side Cadillac CTS, because you did not notice that the traffic light had turned red. The Cadillac is totalled and the worth is $60,000, the driver of the Cadillac has sustained bodily injuries in the amount of $65,000, and they have a passenger who also has bodily injuries in the amount of $45,000. What happens now?
Your policy will only pay out $50,000 to the driver of the Cadillac and will pay the full $45,000 to the passenger and $50,000 for the damages to the vehicle. But, you still owe the driver $15,000. Just because your policy does not pay it, does not excuse you from being legally liable. They may choose to sue you if you do not pay up. If you can’t pay them $15,000, they may place a lien against your home, or vehicles, or even have it deducted from your paychecks each week.
If you had chosen a combined single limit of $75,000 and the same accident occurred, your total damages would be $170,000. Your policy would only pay $75,000 to whoever sends them a bill first leaving you to come up with $95,000. I don’t know very many people who have that much money just lying around. Now just imagine if the driver was unable to work for any number of weeks, or even if they had been killed in the accident. How would you provide compensation for them or their family if that were the case?
It’s pretty scary when you think about it. So how do we know how much insurance we need? We don’t. It is your agent’s job to discuss these possible scenarios with you and help you choose the best protection for you.