How Liability Insurance Works

By: Melanie Radzicki McManus

The Limits of Liability Auto Insurance

Umbrella insurance provides additional coverage for your home, auto and boat.
Umbrella insurance provides additional coverage for your home, auto and boat.

As critical as it is to carry adequate liability auto insurance, it's not some magic cure-all. Don't forget that it doesn't cover any damage to your vehicle or property, or any bodily injuries you suffer. It's strictly for damage and injuries to others and their property. That's why most drivers also purchase additional auto insurance coverage such as collision, which does cover damage to your own vehicle, and personal injury protection, or PIP, which covers your own injuries, lost wages and other associated costs.

PIP is required in Delaware, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania and Utah; in Arkansas and Maryland it's not mandatory, but you have to reject it in writing if you don't want it. If you live in a state where PIP isn't mandatory, remember to check over your health insurance before you purchase PIP (or a similar insurance called medical payments). If you've got great health coverage, you may be able to either skip PIP/medical payments, or just purchase the minimum amount available [source: Reed].


The other caveat when it comes to liability auto insurance is that even if you purchase the most that's available (generally $250,000 per person, $500,000 for all), you can still come up short if you're in a serious accident. That's why it's a good idea to also carry umbrella insurance if you're able to swing it. Also called excess liability insurance, umbrella insurance provides additional general liability coverage to your home, auto and boat. Because of this, it's only available to people who have their homeowners, auto and boat coverage with the same insurer [source: Travelers].

Here's how it works: Let's say you cause a serious auto accident, and the resulting bills are $300,000 more than your auto liability insurance can pay. No worries; simply tap into your umbrella insurance, which covers the rest. (That's how it gets its name, incidentally -- you're supposed to think of this coverage as a giant umbrella opened up over your car, home and boat, shielding them from harm.) Umbrella coverage is generally available in increments of $1 million, up to $5 million.

The bottom line is, nobody really likes to pay for insurance. It's expensive, and you may never get a penny back from what you pay in. But when you start grumbling the next time you read your bill, just remember this: Nobody struck by disaster ever regrets being prepared.