At least daily my office is asked to do quotes for state minimum liability limits. What I have noticed is a perpetuation of misinformation by agents who are trying to close a deal and/or ignorance from the consumers because nobody has taken the time to explain what any of it means.
When a client or prospect has zero knowledge of a topic you can 100% guarantee they will make decisions based on price point rather than features and benefits. It’s just natural. If I go buy a banana and one says Organic Banana and the other just says banana and I have no idea why Organic might be better all I can see is that the Organic Banana is $2 and the normal banana is $.50. You can bet that I will just pick the same banana I had always eaten as a kid and save myself the money.
That’s doesn’t make me a bad person but it does make me a bad consumer. I never asked questions or took the time to understand what I was purchasing.
I think 80-90% of insurance consumers do something very similar to this because insurance is complicated and boring to the majority of people so most do not understand it and do not want to take the time to understand it because it’s not flashy or entertaining. With this post, I am hopeful it will provide the information you need to clear up some insurance-related terms and problems we see frequently.
What is Liability Insurance and How Does It Work?
Let’s start with understanding what the liability portion of your insurance even means. Liability insurance protects you from potential lawsuits that might arise if you cause property damage or bodily injury to another party due to negligence. The most common form of this is a car accident but liability can also present itself in the home as well some examples are slip and fall accidents, pool drownings or injuries, injuries from fires, and even potential assault/battery for that bar fight or scuffle.
Liability coverage can come in two different forms split limit or combine single limit. The simplest way to explain this is with split limit the bodily injury coverage and property coverage are “split” out into separate limits whereas with Combine Single Limit, sometimes referenced as CSL, your bodily injury protection and property damage protection are one single limit.
Our state minimum coverage in Nevada is $25,000 / $50,000 / $20,000. The 1st number ($25,000) indicates how much coverage you will have per person for bodily injury. The 2nd number ($50,000) indicates the maximum amount a carrier will pay for all people involved in an accident. The 3rd number is the amount of total property damage the carrier will cover for all parties.
For Example, if I have state minimum liability and I hit two cars causing $25,000 in bodily injury to party #1 and $50,000 to party #2 my policy will pay $25,000 to each party so I may also be sued for an additional $25,000 in damages from party #2 since their damages exceeded what my insurance coverage would pay for. Now if I have $100,000 CSL my carrier would pay up to $100,000 for any type of damage and does not care what combination of bodily injury and property damage is done so the full $75,000 for this example would be completely covered by the carrier.
How Much Coverage Do You Need?
The amount of coverage necessary comes down to your state laws and how protected you are from negligence suits by the state law. In Nevada our statute allows someone to take up to 25% of your annual wages for 10 years. So if you are someone who makes $50,000/year salary over the next 10 years you stand to make $500,000 (baring no increases in income) 25% of that would be $125,000. Worst case scenario the courts could award $125,000 of your salary to a plaintiff if you were to lose a case.
Generally speaking, it is a good rule of thumb to meet or exceed your “at-risk” income as your “per person” limits. In this example since the person making $50,000/year stands to lose $125,000 in a lawsuit they would want to carry $100,000 / $300,000 or $250,000 / $500,000 coverages depending on their other assets outside of retirement assets like homes, cars, cash, etc. If they have a good income and assets it makes sense to have higher coverages and consider a possible umbrella.
My hope is this article will serve you well. Please contact us if you have any questions!