What Is Covered By Liability Insurance? Liability insurance policies cover any legal costs and payouts an insured party is responsible for if they are found legally liable. Intentional damage and contractual liabilities are generally not covered in liability insurance policies. Unlike other types of insurance, liability insurance policies pay third parties, not policyholders.
How Liability Insurance Works
Liability insurance also called third-party insurance is critical for those who are liable and at fault for injuries sustained by other people or in the event that the insured party damages someone else’s property. As such, liability insurance is also called third-party insurance. Liability insurance does not cover intentional or criminal acts even if the insured party is found legally responsible. Policies are taken out by anyone who owns a business, drives a car, practices medicine or law—basically anyone who can be sued for damages and/or injuries. Policies protect both the insured and third parties who may be injured as a result of the policyholder’s unintentional negligence.
For instance, most states require that vehicle owners have liability insurance under their automotive insurance policies to cover injury to other people and property in the event of accidents. A product manufacturer may purchase product liability insurance to cover them if a product is faulty and causes damage to the purchasers or another third party. Business owners may purchase liability insurance that covers them if an employee is injured during business operations. The decisions doctors and surgeons make while on the job also require liability insurance policies.
Personal liability insurance policies are purchased primarily by high-net-worth individuals (HNWIs) or those with sizeable assets, but this type of coverage is recommended to anyone with a net worth that exceeds the combined coverage limits of other personal insurance policies, such as home and auto coverage. The cost of an additional insurance policy doesn’t appeal to everyone, although most carriers offer reduced rates for bundled coverage packages. Personal liability insurance is considered a secondary policy and may require policyholders to carry certain limits on their home and auto policies, which may result in additional expenses.
According to data from the Insurance Information Institute, the United States is the largest market for commercial liability insurance. For instance, there were $86.6 billion in liability claims written across the country in 2014, followed by $10.6 billion in the United Kingdom.
What Is Covered By Liability Insurance?
Many types of insurance policies include liability insurance. Generally speaking, it helps pay to repair another person’s property or for their medical bills if the policyholder is found responsible for causing the damage or injuries.
Auto liability insurance helps cover another person’s medical expenses and property damage via these two types of coverage listed below:
Bodily injury liability coverage (sometimes abbreviated as “BI”)
- If you’re at fault for an accident that injures another person, bodily injury liability coverage helps pay for their medical expenses. For instance, this coverage can help you avoid paying out of your own pocket for the injured person’s X-rays and treatment.
Property damage liability coverage (sometimes abbreviated as “PD”)
- If you cause an accident that damages someone else’s property (their car, for example), property damage liability coverage helps pay for repairs. For example, if you rear-end another car, this coverage can help prevent you from paying out of pocket to repair the other driver’s vehicle.
Liability Insurance Coverage Limit
The amount your insurer will pay for a covered liability insurance claim depends on the coverage limits you choose. Each state sets minimum coverage limits for bodily injury liability and property damage liability that drivers must purchase, but you may decide to buy additional coverage. You may see three liability coverage limits on your car insurance policy:
Property damage liability limit.
- This is the maximum amount your insurer would pay to repair damage you cause to another party’s property. The maximum payout would not exceed the limit you’ve set.
Bodily injury liability limit per person.
- This establishes a maximum payout for each individual who is injured in an accident that you cause.
Bodily injury liability limit per accident.
- This sets a cap on the total amount that your insurance provider will pay out for all medical expenses other people incur from a single accident you cause. It’s important to set this limit at an amount that makes you comfortable, as it may be needed to help pay for the medical expenses incurred by multiple people.
Most insurers package bodily injury and property damage limits together. For example, you may be able to purchase auto liability coverage with limits like the following:
- 25/50/10 ($25,000 BI per person limit, $50,000 BI per accident limit, $10,000 property damage limit)
- 100/300/50 ($100,000 BI per person limit, $300,000 BI per accident limit, $50,000 property damage limit)
Your coverage limits will depend on the packages your insurer offers — in other words, you may not be able to choose standalone limits for bodily injury or property damage coverage.
How Much Does Liability Insurance Cost?
The amount you’ll pay for liability insurance is based on a number of factors, including how much coverage you purchase. The higher your coverage limit, the more you’ll likely pay for liability insurance. Your insurance agent can tell you how much your coverage will cost if you adjust your limit.
General liability insurance typically costs $30 a month or less based on a survey we performed on 50,000 small business owners. We also learned that 95% of the surveyed small business owners pay less than $50 per month for general liability insurance, and just 1% of small businesses pay more than $100 per month.
How Much Liability Insurance Should I Buy?
Any costs that exceed your liability coverage limits are your responsibility — in other words, you’d have to pay them out of your own pocket. That’s why it may be a good idea to increase your auto liability limits above the state’s minimum requirements by purchasing more coverage.
Even if your state doesn’t require liability insurance, it’s a good idea to have at least $500,000 worth of coverage that encompasses both types of liability coverage—property damage liability and bodily injury liability.17 Jun 2020
Consider the following: You are at fault for a crash that injured three people in another car. Your bodily injury liability limit per person is $50,000 and your bodily injury limit per accident is $100,000. If Person 1’s medical bills total $40,000, Person 2’s cost $30,000 and Person 3’s cost $25,000, you’re likely covered. Each person’s bills were under $50,000 (your bodily injury limit per person), and the total cost of injuries is $95,000, which is lower than your $100,000 bodily injury limit for a single accident.
But suppose all three people had $50,000 in medical bills, totaling $150,000. In that case, your bodily injury liability coverage would pay $100,000 toward those bills, and you may need to cover the remaining $50,000 yourself.
What Does Liability Insurance Not Cover?
Liability coverage typically doesn’t pay to repair damage to your own car after an accident — collision coverage helps with that. It also doesn’t pay to repair damage caused by other factors, such as hail, which may be paid by comprehensive coverage.
Liability coverage also does not extend to costs associated with your own injuries after an accident you cause. If you want this type of coverage, you may want to consider medical payments coverage. Your insurance agent can help answer questions about auto liability insurance or your state’s coverage requirements.