Liability Coverage
Insurance that pays for bodily injury or property damage you legally cause to others.
Liability coverage protects you financially when you are legally responsible for causing bodily injury or property damage to another person. In auto insurance, bodily injury liability pays for the other driver's medical expenses, lost wages, and pain-and-suffering damages when you cause an accident; property damage liability pays to repair the other driver's vehicle. In homeowners insurance, personal liability protects against claims if someone is injured on your property or if you damage a neighbor's property.
Liability coverage limits are expressed in split limits (e.g., $100,000 per person / $300,000 per occurrence) or single occurrence limits. The minimum limits required by state auto laws are often dangerously low—$25,000/$50,000 in some states. Financial planners typically recommend $100,000/$300,000 at minimum for auto and $300,000 for homeowners liability, with an umbrella policy on top for additional protection.
Liability claims can be very large: a serious injury accident can easily generate $500,000 or more in medical and legal costs. Carrying adequate liability limits and an umbrella policy is one of the most important financial protection decisions you can make.
Real-World Example
When a guest broke her wrist after slipping on the icy front steps, the homeowner's $300,000 liability coverage paid her $45,000 medical and settlement costs.