Liability insurance is a fundamental requirement for all drivers, serving as the legal and financial shield in the event of an accident.
By addressing the most common questions concerning liability insurance, you will learn what liability insurance is, what it covers, and why it’s vital for every driver.
We cover liability insurance policy specifics, different types of coverage limits, who specifically is covered, and the consequences of inadequate insurance.
What is liability insurance?
Car liability insurance is designed to provide financial protection for a driver who is at fault in an accident, covering costs associated with damage or injuries to other people or property. It is a type of auto insurance coverage that is legally required in most states.
There are two main components of liability insurance:
- Bodily Injury Liability – This covers costs related to injuries that the policyholder or other covered drivers cause to someone else. It can help pay for medical expenses, lost wages, and legal fees if a lawsuit is brought against the at-fault driver. It also may cover the cost of pain and suffering claims.
- Property Damage Liability – This part of the policy pays for damage that the policyholder or other covered drivers cause to another person’s property. Typically, this means damage to someone else’s vehicle, but it can also include damage to buildings, utility poles, fences, and other types of property.
The Purpose of Liability Insurance
The purpose of liability insurance is to ensure that if you cause an accident, you can bear the financial responsibility without it leading to severe economic hardship, and also to comply with legal requirements.
It’s important to note that liability insurance does not cover the policyholder’s own injuries or vehicle damage. For that, drivers would need to consider other types of coverage like collision or comprehensive insurance.
Two types: Split limit and Combined Single Limit (CSL)
When buying liability insurance, you may have the option to either use split limits or combined single limits or CSL.
They provide similar coverage for bodily injury and property damage, but CSL liability differs in a unique way. Here is the explanation of how each one works including a claim example which highlights the potential benefit of CSL.
Split Limit Liability Insurance
The coverage limits for split limit liability insurance are typically described by three numbers, for example, 100/300/50. This would translate to a maximum of $100,000 for injuries per person, $300,000 for total injuries per accident, and $50,000 for property damage per accident.
Example showing how split limits work in a claim
Let’s say you’re at fault in a car accident that injured two people and damaged another vehicle. Your liability limits are 100/300/50.
The first person had medical bills amounting to $80,000, well within your per-person limit of $100,000, so your insurance covers this cost.
The second person’s bills come to $150,000, exceeding your per-person limit. Here, your insurance pays up to the $100,000 cap, but you might be personally responsible for the remaining $50,000.
Now, the car you hit had $40,000 worth of damage. This is below your property damage limit of $50,000, so your insurance would cover the repairs in full. If the damages exceeded your coverage limits, you would be responsible for paying the difference out-of-pocket.
Combined Single Limit (CSL) Liability Insurance
CSL policies have a single limit that applies to the total of all bodily injuries and property damage per accident, without separate limits.
For example, a $300,000 CSL policy could be used to cover $300,000 of bodily injuries, property damage, or both combined.
Example showing how combined single limits work in a claim
Using the same split limit example from before, if you have a $300,000 CSL policy, it would cover the entire $230,000 of bodily injury claims from both injured parties and any property damage up to the remaining $70,000.
Since the other drivers vehicle sustained $40,000 in damages, the entire claim would be paid in full since it does not exceed the $70,000 remaining under the CSL limit.
This example highlights the key difference between split limit and CSL liability insurance. With split limits, you may be on the hook personally for $50,000 in medical bills. With the CSL policy, all injuries and property damage are covered.
The flexibility of CSL allows for all damages to be covered up to the single limit amount, which can be particularly beneficial in accidents with high property damage or when injuries to multiple people exceed individual per-person limits.
Why liability insurance is required by law
Liability insurance is mandated by law primarily to ensure that drivers can cover the cost of damages for which they are responsible in an accident.
This requirement is grounded in the principle of financial responsibility, aimed at protecting individuals from the potentially ruinous costs associated with traffic collisions.
When a driver is at fault in an accident, they are legally responsible for the harm caused to other people or property. The expenses from such incidents can quickly escalate, often beyond the financial means of the average individual.
- Financial Responsibility – Car liability insurance ensures drivers can afford the costs of damages and injuries they may cause in an accident, protecting victims from financial ruin.
- Victim Compensation – It provides a reliable means for victims to receive compensation quickly, without the need for lengthy legal disputes.
- Public Welfare – By mandating liability insurance, the government minimizes legal conflicts and ensures a smoother process for damage recovery after accidents.
- Safer Driving Incentives – With potential insurance premium hikes on the line for at-fault accidents, drivers may be more motivated to adhere to safe driving practices.
- System of Accountability – Requiring insurance emphasizes that driving is a public act with societal responsibilities, including the duty to bear the costs of one’s actions on the road.
- Legal Efficiency – The requirement helps to reduce the burden on the court system by decreasing the number of cases that arise from seeking accident-related damages.
- Shared Roadway Integrity – It upholds the collective agreement that all drivers must participate in maintaining the safety and financial sustainability of public roadways.
While car liability insurance is mandated as a legal requirement in the vast majority of states, there are exceptions.
New Hampshire and Virginia stand out as the states where motorists are not required to carry liability insurance by law.
In New Hampshire, drivers must demonstrate their ability to meet New Hampshire Motor Vehicle Financial Responsibility Requirements after an at-fault accident.
Virginia allows drivers to pay an Uninsured Motor Vehicle (UMV) fee to the state, permitting them to drive uninsured at their own risk.
However, even in these states, the financial risks of driving without liability coverage can be substantial. Given the potential for high out-of-pocket costs in the event of an accident, the decision to forgo liability insurance should be weighed against the serious financial implications of such a choice.
For required minimum liability limits in your state, see our Car Insurance 101 article titled State-by-State Car Insurance Requirements: What You Need to Know.
Why Buying More Liability Than Your State Requires is a Good Idea
Purchasing more liability insurance than your state’s minimum requirement is often a very good decision.
Here’s why:
- Asset Protection – If you’re at fault in a serious accident, costs can quickly exceed state minimums. Additional liability insurance can protect your personal assets, like savings and property, from being targeted to cover the excess costs.
- Risk of Litigation – With minimum coverage, you’re at a greater risk of lawsuits for damages that exceed your policy limits. Increased coverage can mitigate the risk of personal financial loss from legal judgments.
- Peace of Mind – Knowing you have higher coverage limits can afford you greater peace of mind. If an accident happens, you’re better prepared to handle the financial repercussions, which can be particularly valuable if you have significant assets to protect.
- Cost Efficiency – Increasing your liability limits often doesn’t double the cost of your premium. The cost-to-benefit ratio of higher coverage limits is generally favorable, and for a relatively small increase in your premium, you can significantly increase your coverage.
- Safeguarding Future Income – Adequate liability insurance isn’t just about protecting your current assets – it also helps protect your future earnings from potential garnishment as a result of an at-fault accident.
Carrying more than the minimum liability insurance required by your state can serve as an important buffer against the uncertainties of the road, providing a solid foundation for your financial security.
How liability insurance benefits you
Liability insurance safeguards your financial stability and legal standing in the event you are found at fault in a car accident.
As mentioned earlier, it primarily offers protection in two pivotal areas: it covers the cost of injuries to others (bodily injury liability) and repairs for damage to another person’s property (property damage liability).
Benefits of Bodily Injury and Property Damage Liability
When an accident occurs and you are deemed responsible, liability insurance absorbs the financial blow that could otherwise be devastating.
For bodily injury, this means that medical bills, loss of income, and even legal fees of the injured parties are taken care of up to your policy’s limits, thus protecting you from dipping into personal savings or assets.
For property damage, it ensures that repair or replacement costs for the damaged property are covered, which can include vehicles, buildings, and public infrastructure like light poles or road signs.
It Also Provides Legal Defense and Peace of Mind
Furthermore, beyond just covering costs, liability insurance can also offer legal defense if a lawsuit ensues, providing you with an attorney and covering associated court costs within your policy limits.
It also provides peace of mind when on the road. It gives you a backstop, so you’re not facing these financial burdens alone.
Ultimately, liability insurance is a mandatory safety net that upholds your financial and legal defense, ensuring that a momentary lapse on the road doesn’t lead to a permanent dent in your financial future.
What happens if you don’t carry enough liability insurance
Carrying insufficient liability insurance can lead to dire financial consequences. If you’re at fault in a car accident and your liability limits don’t cover the full extent of the damages, you are personally responsible for the outstanding costs.
This shortfall can occur in severe accidents where medical expenses, vehicle repairs, or other property damages exceed the coverage limits you’ve selected.
Consequences of Not Having Enough Bodily Injury Coverage
For bodily injury, if the costs of care, rehabilitation, or compensation for pain and suffering surpass your policy’s per-person or per-accident limits, the injured parties can seek the remainder from your personal assets.
This could involve tapping into your savings, selling personal property, or even garnishing your wages.
Consequences of Not Having Enough Property Damage Coverage
The same applies on the property damage side of liability coverage. if repair or replacement costs of the other person’s property exceed your coverage, you are expected to pay out-of-pocket to make up the difference.
Moreover, being underinsured doesn’t only risk your current assets. It could also affect your future earnings and financial stability, as judgments can be collected over a period of years.
Additionally, the legal costs of defending against claims that exceed your coverage can add another layer of financial strain.
Consequences of driving without any liability insurance
The consequences of driving with too little liability insurance can be severe, but driving without liability insurance altogether can result in even stiffer legal, financial, and personal consequences.
Here’s what could happen:
- Legal Penalties – If you’re caught driving without the legally required minimum liability insurance, you can face hefty fines, license suspension, and possibly even jail time depending on state laws. The legal ramifications are meant to be a deterrent against uninsured driving.
- Financial Liability – Without insurance, you’re personally responsible for any damage or injuries you cause in an accident. This can mean being obligated to pay out of pocket for medical bills, repair costs, and other compensatory damages, which can quickly amount to tens or hundreds of thousands of dollars.
- Lawsuits – If you cannot afford to pay for the damages you’ve caused, the affected parties may sue you. This could lead to a court judgment against you, potentially resulting in the garnishment of wages, seizure of assets, or other debt collection methods.
- No Legal Protection – Insurance companies provide legal defense in case of lawsuits related to car accidents. Without insurance, you would have to pay for your legal defense, which can be exorbitantly expensive.
- Increased Future Premiums – If you’ve been caught without insurance, insurance companies may classify you as a high-risk driver, leading to increased premiums once you do purchase insurance.
The decision to drive without liability insurance is a gamble that exposes you to potential outcomes that can have long-lasting impacts on your financial health and legal standing.
How liability is different than comprehensive or collision
Liability insurance differs significantly from comprehensive and collision coverage in its purpose and scope.
Liability insurance is primarily concerned with the costs you may incur to other individuals and their property in the event that you are at fault in an accident.
It does not cover your own injuries or damages to your vehicle. Its two main components, bodily injury liability and property damage liability, are designed to cover the expenses of the other party, not the policyholder.
In contrast, collision insurance pertains to your vehicle, providing coverage for damage resulting from an accident with another vehicle or an object, regardless of fault. It’s there to fund the repair or replacement of your car after an accident.
Comprehensive insurance, on the other hand, covers damages to your vehicle that are not caused by collisions. This includes a wide range of incidents, such as natural disasters, theft, vandalism, and encounters with animals. It’s a protection against the ‘other than collision’ events that can happen to a car.
While liability coverage is often mandatory by law, comprehensive and collision coverages are typically optional unless required by a lender or leasing company.
Together, all three create a full spectrum of auto insurance protection, but each serves a distinct purpose in your overall vehicle insurance strategy.
Factors that can influence the cost of liability insurance
The cost of liability insurance can be influenced by many factors, reflecting the risk profile of the insured as well as the level of protection they seek.
Some of the key factors include:
- Driving Record – A history of accidents, traffic violations, or DUIs can significantly increase premiums.
- Age and Driving Experience – Younger drivers, especially males under 25, typically face higher rates due to their perceived inexperience and higher risk of accidents.
- Credit Score – In many states, a higher credit score can lead to lower premiums, as insurers correlate good credit with responsible driving behavior.
- Vehicle Type – The make, model, and year of your vehicle can impact your rates. High-performance or luxury vehicles usually cost more to insure.
- Annual Mileage – The more you drive, the greater the likelihood of an accident, so higher annual mileage can lead to higher premiums.
- Location – Urban areas with higher traffic density and greater risk of theft and vandalism typically have higher rates than rural areas.
- Coverage Limits – Opting for higher coverage limits will increase your premium, but provide more financial protection.
- Deductible Levels – While liability insurance typically doesn’t have a deductible, your overall policy cost can be influenced if you carry comprehensive and collision coverage with a high deductible.
- Insurance History – A lapse in insurance coverage can be seen as a risk factor and may lead to increased rates.
- Marital Status – Married individuals often receive lower rates than single drivers, as they are statistically less likely to file claims.
- Discounts – Many insurers offer discounts for various reasons, such as bundling policies, being a good student, or installing safety features in your vehicle.
Insurers use complex algorithms to weigh these factors and determine the level of risk they believe a driver presents.
The premium reflects the insurer’s assessment of how likely the driver is to file a claim and the potential cost of that claim.
For a comprehensive list of factors with detailed explanations, see our Car Insurance 101 article titled Drive Your Car Insurance Cost Down: Understanding Rate Factors.
Being at-fault: The key to liability insurance claims
‘At-fault’ in the context of liability insurance refers to the determination that a driver is responsible for causing an accident.
When a traffic collision occurs, there’s an assessment process – which might involve law enforcement, insurance adjustors, and sometimes the courts – to establish who caused the accident.
Liability Only Pays If You Are At-Fault
The driver who is deemed ‘at-fault’ is then financially liable for the resulting harm to others, such as bodily injuries or property damage.
Liability insurance is designed to cover these expenses up to the policy’s limits.
Bodily injury liability will cover costs like medical expenses, lost wages, and legal fees of the other party injured in the accident.
Property damage liability will pay for repairs to the other person’s vehicle or property.
Being determined ‘at-fault’ thus triggers the coverage provided by your liability insurance. This not only includes covering the costs you are liable for but also provides a legal defense if the other parties involved decide to sue.
Different states have different rules regarding fault, with some operating under a ‘no-fault’ system for minor injuries, where each person’s insurance covers their costs regardless of who caused the accident, reducing the dependency on determining fault for those claims.
However, for more serious incidents and for property damage, the concept of ‘at-fault’ remains a central pillar in liability claims.
Vehicle passengers: Who liability insurance covers
Liability insurance is specifically designed to cover injuries to other people and damages to their property when you are at fault in an accident.
Liability insurance plays different roles when it comes to passenger injuries in the driver’s car versus the other car involved in an accident.
Passenger Injuries in the Other Car
When the policyholder is at fault in an accident, their liability insurance covers the injuries of passengers in the other car. This is managed through the bodily injury liability portion of the policy.
It pays for medical expenses, lost wages, and possibly pain and suffering of those injured passengers, up to the policy limits. The coverage is clear-cut: if you are at fault, your insurance pays for the injuries of the passengers in the car you hit.
Passenger Injuries in the Driver’s Car
However, the driver’s liability insurance does not typically cover the medical expenses of passengers in the policyholder’s own vehicle if the policyholder is at fault.
Instead, passengers would rely on the policyholder’s medical payments coverage (MedPay) or personal injury protection (PIP), if available and included in the policy, or they might use their own health insurance for their medical expenses.
To learn more about PIP and MedPay coverage, see our educational series article titled Medical Payments and PIP Coverage: How it Works and Pitfalls to Avoid.
In some states, PIP is mandatory and will cover passengers regardless of who is at fault, offering a broader spectrum of protection including medical expenses, lost wages, and other related costs.
These coverages operate regardless of who is at fault and can help pay for medical expenses and other related costs for you and your passengers after an accident.
Always check your policy details or consult with your insurance provider for specific coverages, as insurance laws and coverage options can vary significantly by state and individual insurance policies.
Why liability insurance usually has no deductible
Liability insurance typically does not have a deductible. A deductible is the amount of money that the policyholder is responsible for paying out of pocket before the insurance coverage kicks in.
The purpose of a deductible is to prevent small, frequent claims and to share the risk between the insurer and the insured.
However, the nature of liability insurance is such that it is designed to cover the policyholder’s financial responsibility to other parties for injuries or damages they have caused.
Because these costs can be significant, and since liability insurance is a legal requirement, having a deductible would potentially hinder a policyholder’s ability to promptly compensate the affected parties.
This could leave injured parties uncompensated for a period of time and expose the at-fault driver to additional legal and financial risks.
By not having a deductible, liability insurance ensures that the victims of an at-fault accident can be compensated immediately up to the policy’s coverage limits.
The bottom line: Stay insured
We covered key aspects of car liability insurance, emphasizing its essential role for drivers. Liability insurance is a legal requirement in most states because it ensures that if you are at fault in an accident, the victims receive compensation.
The importance of liability insurance extends beyond legal compliance, as it provides financial protection against potentially devastating claims for damages and injuries one may cause. In addition, it safeguards personal and financial assets.
The consequences of driving without liability insurance can be severe, and the cost of the coverage is minimal compared to the amount of protection it provides.
It embodies responsible driving by ensuring that if you are at fault, you’re able to fulfill your financial obligations without resorting to personal assets or facing severe legal repercussions.
This critical coverage forms the foundation of a solid car insurance policy, offering peace of mind to drivers and protection to individuals on the road.
During his career as an independent insurance agent, Ryan Grabenstein was appointed with Progressive, Allstate, Nationwide, Travelers, and many smaller regional and mutual companies. He has a Bachelor's degree in Finance from the University of Nebraska at Lincoln and Certified Insurance Counselor (CIC) personal and commercial lines training.