The Law Forum – Liability Insurance

An important aspect of each automobile and homeowners insurance policy is its liability coverage.

Liability coverage is insurance coverage which will make payment to a person who is injured as a result of your negligence. Of course, negligence is the technical term for an act of carelessness.

In the context of an automobile insurance policy, negligence is an event such as carelessly pulling into the path of another vehicle. In the context of a homeowners policy, negligence is an event such as failing to remove ice from your sidewalk.

A frequently asked question is how much liability coverage should be carried on automobile and homeowners policies. Unfortunately, there is not a universal answer to this question. Rather, the answer essentially involves two considerations.

First, it is important to understand the level of liability exposure which exists in our society. While million dollar lawsuits are rare, they certainly do occur.

For example, if you cause an automobile accident which results in catastrophic injuries to another person, a million dollar jury verdict cannot be ruled out. If the person you have injured was a high wage earner, a multi-million dollar jury verdict is possible.

Because of the foregoing, it is almost impossible to be guaranteed that any amount of liability coverage is enough.

With the above in mind, the second consideration is your personal net worth. The importance of this is best illustrated by example.

Suppose your net worth is only $10,000, but you possess $100,000 of liability coverage. In this situation, it is likely that the catastrophically injured person will agree to quickly settle his claim by accepting your $100,000 of liability coverage, rather than pursuing protracted litigation in hope of ultimately claiming both your liability coverage and your $10,000 of personal assets.

The injured person is given the incentive to “take the money and run” since most insurance companies will only pay their insurance monies when the claim, including any litigation, has been resolved in all respects.

On the other hand, if your net worth is $100,000, and you possess only $100,000 of liability coverage, it is unlikely that a catastrophically injured person will settle his claim by simply accepting your $100,000 of liability coverage. Rather, he will very likely resist the temptation to do so, hoping that he will be able to secure a large jury verdict which will allow him to claim both your liability coverage and your $100,000 of personal assets.

Because of the foregoing, the question to be answered in deciding the amount of your liability coverage is the following: What amount of liability coverage will give the injured person the incentive to “take the money and run”, rather than pursuing protracted litigation in hope of also claiming your personal assets? Some experts suggest that this requires a person of low or moderate wealth to carry liability coverage in an amount which is at least two or three times his personal net worth, if not more.

Of course, it is emphasized that if the worst case scenario occurs, it is unlikely that any reasonable amount of liability coverage will be adequate to protect you.

Lastly, keep in mind that individuals who are not homeowners, but are instead renting, can also obtain liability insurance coverage as part of their renters insurance policy. This is important since renters likewise have liability exposure in the event that they cause an injury as the result of a careless act.

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