Intro
Personal Liability Insurance
What is it?
Personal liability insurance protects your assets if you injure another person or damage someone else's property. It's known as third-party insurance because it protects you if a third party files a claim against you. If you are found legally responsible for causing an injury or property damage, your personal liability insurance will provide a legal defense, if necessary, and pay the claim up to the limits of the policy. Personal liability insurance can be purchased as part of a package policy (such as a homeowners or automobile insurance policy) or as a separate policy (such as a personal umbrella liability policy).
Determining your need for personal liability insurance
Do you need personal liability insurance?
Some people mistakenly believe that personal liability insurance is necessary only if you are wealthy (and more likely to be sued because you have more assets than most people) or if you are reckless. However, accidents can happen anywhere or to anyone.
You may, for instance, hit a bicyclist or accidentally spill hot coffee on your neighbor's arm. Your cat may scratch your neighbor's car or your friend may fall down your icy stairs. No matter how careful you are, you may one day be sued because you injured someone or damaged someone's property. Although you can't avoid all accidents, you can transfer some of the financial risk you face to an insurance company by buying personal liability coverage.
Tip: Liability coverage under your policy may extend to your relatives as well. For instance, your father may be covered if he drives your car and injures another driver. Or, if your child accidentally breaks your neighbor's window, your policy may pay the damages resulting from the claim. Check your liability policy to determine how it defines a relative because the definition varies from policy to policy.
How much personal liability coverage do you need?
You probably need more liability coverage than you think you do, even if you have few assets to protect. Lawsuits and claims are being filed more frequently than in the past, and the cost of defending yourself may be high. If you have no liability insurance, you will likely have to pay the entire cost out of pocket. If you do have liability insurance, your insurance company might settle out of court because in a major suit, your insurer's legal fees can exceed your policy's liability limit. In addition, juries frequently award damages that exceed the actual monetary amount of damage done. They award money for pain and suffering, mental anguish, and punitive damages. Even if you have liability insurance, you may find yourself owing money if court-ordered damages against you exceed the liability limits of your policy. If you don't have the money to pay damages now, your future earnings and assets may be subject to liens and/or garnishment.
Because there's no optimum amount for every individual, how much personal liability coverage you need depends partly on your tolerance for risk. Can you afford to pay the cost of a claim out of pocket or would even a small claim threaten your finances? If you already have liability coverage, take a look at your current policy. Determine whether your liability limits are high enough, or if there are any coverage gaps you'd like to fill (see below for more information on coverage under typical personal liability policies).
Basic liability protection under a homeowners or automobile insurance policy
If you own a homeowners or automobile insurance policy or another type of property insurance (e.g., mobile home insurance or renter's insurance), you have basic liability coverage. These policies will protect you against many liability claims. Your insurance company will defend or settle claims and lawsuits brought against you and pay the sum owed for covered damages (bodily injury or property damage) up to the liability limits of the policy (usually $100,000 to $300,000 per occurrence). No deductible applies. If you want maximum liability coverage or if you want broader coverage, consider purchasing a personal umbrella liability policy (see below).
Tip: Bodily injury and property damage liability insurance for automobile owners is often mandatory under state law, although a few states don't require you to carry even basic automobile insurance. When required, mandatory minimum liability limits are usually low ($40,000 per accident is common). Bodily injury and property damage liability insurance for automobile owners is usually sold with split limits (e.g., $100,000/$300,000/$50,000), which means that your policy provides coverage up to $100,000 for any one person you injure, $300,000 for all the people you injure, and up to $50,000 for property damage.
Comprehensive personal liability insurance coverage under a personal umbrella liability policy
What is a personal umbrella liability policy?
A personal umbrella liability policy supplements the basic liability protection you already have by insuring you against large losses or losses not covered under your other personal liability policies. Although an umbrella policy is often added to an existing homeowners or automobile policy, it can also be purchased as a stand-alone policy from a different insurer. In either case, your insurer will ordinarily require you to carry basic liability insurance with certain minimum limits.
Example(s): Before his insurance company would issue him a $1 million umbrella policy, Hal had to raise his homeowners insurance liability limit to $100,000 and his automobile insurance liability limit to $100,000/$300,000/$50,000.
Higher liability limits than basic liability coverage
One reason to purchase a personal umbrella liability policy is that it will provide you with a higher amount of liability coverage than a basic liability policy. Umbrella liability policies are normally issued with a liability limit of $1 million per occurrence. However, the umbrella policy may pay numerous claims of $1 million each per policy period, so your actual protection may be more. Some companies set limits, however, on how much can be paid out during the policy period or over a lifetime. A common limit is $10 million. Since an umbrella liability policy is issued in conjunction with basic liability coverage, your total liability protection will be the combined limits of each policy. For instance, if you have an auto policy with a liability limit of $100,000 and a $1 million umbrella liability policy, then your total liability protection will be $1,100,000.
Broader coverage than other types of liability insurance
An umbrella liability policy will protect you from losses not covered under basic liability insurance. It covers you against damages for unusual occurrences, including personal injury losses due to libel, slander, wrongful eviction, false arrest, and invasion of privacy. Your umbrella liability policy might also pay for damages incurred worldwide. In addition, an umbrella policy might pay a proportionate share of a claim even if your basic liability insurance policy cannot pay its portion, either because you failed to comply with the conditions of the policy or because the company itself has become insolvent.
Claims are paid under an umbrella policy only after basic liability coverage is exhausted or unavailable
If you have purchased an umbrella liability policy, it will pay a claim in one of two main ways after you have satisfied a deductible:
- If you are found legally responsible for injuring someone or for damaging property, your umbrella policy will pay that part of the claim in excess of the liability limits under your basic liability coverage
Example(s): Hal purchased a homeowners insurance policy (with liability coverage of $100,000) and a $1 million umbrella liability policy. When Hal's swimming pool sprang a leak and caused $25,000 worth of damage to his neighbor's yard, Hal's homeowners insurance paid the total claim. However, when Hal was sued after a rotting oak tree on his property toppled and injured his neighbor's daughter, his homeowners liability coverage paid only the first $100,000 in damages (the liability limit on his policy). The remaining $900,000 of the court-ordered settlement was paid by Hal's umbrella liability policy.
- Your umbrella liability policy will pay total damages for bodily injury and liability if the liability exposure is not covered under your basic liability coverage but is covered under your umbrella policy
Example(s): Hal borrowed his brother's lawnmower and ran over his neighbor's deaf cat that was napping in the yard. Because the damage was caused by nonowned property in Hal's care (which is specifically excluded from his homeowners policy liability coverage), Hal's personal liability umbrella policy paid the $1,500 veterinary bill.
Caution: Although a personal umbrella liability policy is sometimes called excess personal liability insurance, it is really not the same thing. Excess liability insurance typically provides additional coverage only if the basic policy provides coverage as well, whereas an umbrella liability policy will provide coverage that is sometimes different than that provided under the basic liability policy.
What personal liability insurance does not cover
Although a personal umbrella liability policy covers more types of hazards than basic personal liability policies, no personal liability insurance policy will protect you against every loss you might face. All types of personal liability insurance generally exclude the following:
- Claims stemming from the insured's business or profession (some types of business activities may be covered under a homeowners or automobile policy, so check your policy)
- Claims resulting from the insured acting intentionally to cause injury or damage
- Damage to property owned by the insured
Other common exclusions under a homeowners policy are damage caused by communicable diseases and acts of war. An automobile policy might exclude accidents and losses that occur overseas or while a vehicle is in transport. Umbrella policies often exclude liability losses related to aircraft, damages caused by watercraft not covered under your homeowners policy, or injuries suffered by someone covered by workers' compensation.
Questions & Answers
Can anyone purchase a personal umbrella liability policy?
No. It's the underwriter's job to determine who may purchase a personal umbrella liability policy. Once an individual has applied for the policy, the underwriter will evaluate the application and may reject applicants who pose an undue risk to the company. For instance, broadcasters may be denied coverage because they face a high risk of claims alleging personal injury. Politicians and actors may be denied coverage because their jobs expose them to publicity. Individuals whose property poses a hazard (such as someone who owns an unfenced swimming pool) may also be denied coverage.
Is a personal umbrella liability policy expensive?
Not for the coverage it offers. An umbrella liability policy will generally cost between $150 to $300 per year and will significantly expand liability coverage (typically $500,000 to $1 million of coverage). However, you may also pay more for your homeowners or automobile coverage if you are required to increase your policy limits.
Personal Liability Insurance: Policy Types
What is it?
Personal liability insurance protects your assets if you are found legally responsible for injuring someone or damaging property.
Several types of liability protection are available. You can purchase basic liability protection as part of a property-casualty insurance package that also covers you against other perils, including damage to your own property. You can also purchase extended coverage in the form of a comprehensive or umbrella liability insurance policy.
Tip: Personal liability policies exclude claims related to business activities, but if you own a business, you can purchase liability insurance specifically designed to protect business owners.
Types of basic personal liability policies available
Automobile insurance
An automobile insurance policy is made up of several parts, one of which is personal liability coverage. Most states require that you carry a minimum amount of liability coverage that is made up of two portions: bodily injury liability and property damage liability. While bodily injury liability pays claims resulting from injuries to passengers in your car, or in a car you collide with (if you are found legally responsible for the accident), property damage liability pays for things you damage with your automobile, such as another vehicle. Your automobile liability coverage will pay up to your policy limits for actual damages, and will also pay court ordered judgments for other losses (such as pain and suffering), and for your legal defense if you are sued.
Your automobile liability coverage is usually expressed as a split limit. If your liability coverage on your policy's declaration page is
$100,000/300,000/50,000, this means that your insurer will pay a maximum of $100,000 to each person hurt in an accident, up to a limit of $300,000 per accident, and will pay up to $50,000 in property damage. No deductible applies.
Homeowners insurance
Liability coverage under your homeowners policy is separated into two types. The first, personal liability coverage, pays an injured party for losses resulting from your actions. The second, medical payments coverage, pays an injured party's medical expenses incurred within three years of the accident that caused the injury. In addition, liability coverage under your homeowners policy will also cover you if you damage someone's property, and it will pay for the cost of legally defending you against claims. Many people carry a liability limit of $100,000 on their homeowners policies. However, many policies are issued for more than this ($300,000 limits are becoming increasingly common). The liability portion of your homeowners insurance covers you both at home and away from home, covers members of your family who live with you, and protects you against many types of accidents and occurrences.
For instance, you may be sued when a tree falls on your neighbor's house and destroys the roof or if someone falls on your pool deck and breaks an ankle. You may be visiting a friend in a different city when your 10-year-old son throws a baseball and breaks your friend's nose; these accidents all may be covered under a homeowners liability policy.
Tip: Homeowners insurance does not cover motor vehicles that are registered and licensed by the state department of motor vehicles. However, some other vehicles (including trailers, golf carts, and some types of boats) are covered.
Tip: If you need more liability insurance than a homeowners policy can provide, consider purchasing a personal umbrella liability policy that will significantly expand coverage and offer a liability limit beyond that provided by your homeowners policy.
Condominium owner's insurance
When you purchase a condominium, make sure you protect yourself adequately against liability by purchasing a condominium owner's policy (the HO-6 form of homeowners insurance). Some states require that condominium associations purchase comprehensive liability coverage for their members (see below), but if your state does not, make sure that you buy adequate insurance on your own, because condominium owners are sometimes involved in disputes related to insurance claims. Whose policy covers what is sometimes unclear. While your condominium association will carry insurance protecting the building and its common areas, you need to protect your own unit and your assets against liability claims and property damage. The condominium owners policy also offer some protection if the condominium association and its individual members are sued by paying up to $1,000 if you are assessed special fees as a result of the lawsuit.
Mobile homeowners insurance
Mobile homes may be truly mobile (on wheels) or set on a foundation. This means that sometimes they are insured more like vehicles and sometimes more like homes. Some stationary mobile homes may be covered by homeowners forms HO-2 or HO-3 if a mobile home endorsement is added to the policy. Others may be insured by separate mobile home policies. No matter what the form, however, mobile home insurance should contain liability coverage that will protect you if you injure someone or damage someone's property.
Renter's insurance
Many tenants don't bother to purchase renter's insurance (the HO-4 form of homeowners insurance) because they think that their belongings aren't numerous enough or valuable enough to insure. However, tenants often overlook another important reason to purchase renter's insurance: the personal liability coverage it offers. You need liability coverage when you rent for two reasons.
First, like a homeowner, you're at risk if someone is injured in your rented residence or if you cause a fire or accident in your building and others are injured or their property is damaged. If you are sued either by other tenants, by a third party or by your landlord, and you are found legally responsible, you will have to pay for any damages or costs out of pocket unless you own renter's insurance. If you do purchase a renter's policy, you will be covered up to a certain liability limit, and no deductible applies to the liability portion of your policy.
Watercraft insurance
If you own some type of watercraft, how you protect yourself against liability depends on the type of watercraft you own. For instance, if you own a motorboat, a jet ski, or a boat under a certain length, it is likely covered under your homeowners policy (if you have one). However, if you own a larger boat or a yacht, you may need to purchase a watercraft package policy or personal yacht (Ocean Marine) insurance that will offer you protection and indemnity, which is a form of liability insurance.
Types of extended liability policies
Personal umbrella liability policy
A personal umbrella liability policy can protect you against liability more completely than basic liability coverage can. It protects you against losses that basic liability coverage often excludes, and it also covers losses up to a higher limit. Unlike other types of liability coverage, a personal umbrella liability policy can be purchased as a stand-alone policy. However, your insurer will require that you have underlying basic liability coverage (usually an automobile or homeowners policy, or both) before you can purchase an umbrella liability policy. When you are found legally responsible for an injury or for property damage, your basic liability policy will pay first. However, if damages exceed the liability limits of your basic coverage, your umbrella policy will then pay the remainder, up to the limits of that policy. Or, in cases where your underlying policy does not cover the loss (e.g., you are found liable for personal injury), your umbrella policy may pay the total damages due.
Comprehensive liability policy
A comprehensive liability policy protects those without underlying basic liability coverage, usually because they don't own a home or a car. If you purchase such a policy, your policy will pay damages resulting from covered liability claims against you, including legal costs and medical costs.
Example(s): Hal owned a dwelling policy on a four-unit apartment building he was renovating, but he wasn't covered for liability under the terms of the policy. So he purchased a comprehensive liability policy that would protect his assets in the event he was sued.
Tip: Although the terms "comprehensive liability policy" and "umbrella liability policy" are used interchangeably at times, they are different largely because a comprehensive liability policy does not require underlying coverage, while an umbrella policy does (see below). In addition, the coverage under a comprehensive liability policy may not be as broad as coverage under an umbrella liability policy.
Excess liability policy
An excess liability policy can be purchased to supplement coverage provided by basic liability insurance. Coverage under an excess liability policy will be identical to coverage under the basic liability coverage, but will have a much higher liability limit.
Tip: A personal umbrella liability policy is sometimes known as an excess liability policy, but is different in that it doesn't duplicate coverage provided by the underlying policy. Rather, it provides both excess coverage (a higher limit of liability coverage) and broader coverage (it covers things that the underlying policy does not cover).
summary
This is a companion discussion topic for the original entry at https://peakprosperity.com/insurance/