In today’s world I think we can all agree that there is a certain level of litigiousness. Everyone seems to be willing to sue at the drop of a hat rather than try to work out issues and problems one on one as might have happened in the past. What this does to our culture is a topic for a different kind of blog. But the impact this has on your insurance is MY business.
Liability insurance are those numbers that few concern themselves with. In auto insurance they might look like this 100/300/100 or this 25/50/15 or maybe 250/500/100. In your homeowners policy it’s listed under “Coverage E”. Our first concern with auto insurance is usually “How high is my deductible? Because I don’t want to pay too much if I get in an accident.” And our first concern with a homeowners policy is “What’s the amount of coverage on my house and what’s my deductible?” While these are very legitimate questions, I want to argue that your limits of liability protection are just as, if not more important.
Let’s use auto insurance to illustrate the point. what the numbers mean, where our risk lies and how to best protect ourselves as well as our community. Those three mysterious numbers relate to dollar payouts in thousands. So the first number would be $100,000 per person for bodily injury. That means that if you are at fault (liable) for injuries caused to another person, the insurance company will pay up to this amount toward their medical and recovery costs. You can see how the state minimums in Colorado, $25,000 per person, are quite low. The second number is a “per accident” number for bodily injury, or $300,000 maximum per accident. And the third is for property damage liability, repairs or replacement of someone else’s property.
Your level of liability protection should be sufficiently high to pay for damage you might cause in an accident. If you are liable, the payout is not limited to your insurance amount. The insurance is merely the amount of risk that you have transferred to an insurance company. You are still personally liable for any amount over this. For example, let’s say that you carry the state minimum of 25/50/15 and you are liable for an accident. Let’s even say that you weren’t speeding or doing anything illegal, you merely looked down for a moment to change the radio station and didn’t notice the car in front of you had stopped. It’s happened to all of us but this time you aren’t able to brake in time and you rear-end a car with a family of four inside. Let’s say that the dad who was driving had to be cut out of the vehicle and air lifted to the hospital. His treatment and rehabilitation takes 6 months during which he can’t earn a living. His total medical bills come to $150K. In this case, your insurance company will pay $25,000. A court will make a judgment for you to pay the additional $125,000 in medical costs and will likely add to this some amount for lost income. And I haven’t brought up the value of their totaled vehicle. Suppose it is a modes $25,000 car, your insurance will pay $15k and you get to pick up the tab for the rest.
You might argue that in the above scenario they can’t come to you for restitution because you don’t have that kind of money. But you do have an income, so 25% of every check for the foreseeable future will be garnished.
Given this scenario, I doubt any of us would be comforted to know that we saved 15% on our car insurance or that we only had a $250 deductible to repair our own car. The much larger risk is your liability risk.
The advice that I share with my clients every day is to raise liability limits and offset the higher premium by also raising your comprehensive or collision deductible. If you transfer an additional $225,000 of risk to the insurance company and accept an additional $750 risk yourself without a significant change in your premium, this is a great trade. This is what insurance does best and this is how to make your insurance dollars protect your dreams, your family and your future.
Home insurance liability coverage is similar, increasing the average $300,000 in coverage to $500,000 might cost $30 per year. You can also look at purchasing an umbrella policy for a couple hundred per year which would increase your protection to at least $1,000,000.
Liability coverage is the best coverage, dollar for dollar, that you can buy.