Auto Insurance Liability Limits

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We mentioned auto insurance liability limits  briefly in Tuesday’s video segment, but we felt that they were a topic that deserved greater explanation.   Today we’re going to take an in-depth look into car insurance liability limits, and we’ll do some thinking about how to work out the right insurance liability limits for your individual needs.

Before we get into detail, let’s have a look at one or two terms you should be familiar with:

Liability – a legal obligation, usually to pay a certain amount of money to a third party. In the case of a vehicle accident, usually as a result of damages caused by yourself to a third party.

Cover – in the most literal sense, the level of liability that an insurance company will be prepared to compensate you for, should it be incurred.

We’ll be dealing with third-party or liability only cover for the time being, as it is usually more straightforward. This means all damages that are being paid are insurance claims by third parties, or the vehicle that you hit.   You only have liability if you caused the accident.

What Are Insurance Liability Limits?

Liability limits, when applied to vehicle insurance, are a set of three numbers which describe the maximum amount your insurance company will pay out for damages to any one person, all persons in the vehicle, and property damage, and they are usually expressed as a series of numbers such as 25/50/15.

The numbers can be explained as follows:

The first number is the liability limit for medical expenses claimed by any single person in the vehicle you hit, and it means $25,000. This means if there was only one person in the vehicle, your insurance will pay up to $25,000 of their medical expenses.   If there was more than one person in the vehicle, the second number then also applies.

The second number is the liability limit for medical expenses for all occupants of the vehicle you hit.   This means if there were three people in the vehicle, your insurance company will pay out a total of $50,000 for all medical expenses, and not more than $25,000 for any single person.

The last number is the value of the liability limit for property damage caused by you in an accident.   This number is normally the lowest, but this can backfire on you if you hit an expensive car.

Let’s look at an example, similar to the one we mentioned in Tuesday’s post. Say you take out the accident cover above at 25/50/15 You’re driving home from work and you hit a car driven by a woman who has just picked up her kids from school.   Nobody is badly hurt, but the mother incurs $30,000 in medical expenses and the two children each incur $15,000 in expenses.   The total damage to the car is only $8,000.

Firstly, the mother’s medical expenses cost $30,000 – this means that you will be liable for $5,000 of those expenses, since your individual medical cover is only $25,000.  Secondly, the family’s total medical expenses add up to $60,000.   You’ve used up $25,000 of your occupants’ medical cover, so the policy will only cover $25,000 of the children’s expenses.   This leaves you with another $5,000 to pay.   The car’s damage is covered completely, so you don’t have to worry about that.

All in all, you walk away with a bill for $10,000.   Unfortunately, adding that extra level of cover on to your liability limits would probably only have cost you another $25-$30 a month.

How To Choose Liability Limits

Armed with the above knowledge, you can see how it makes sense to get the best level of cover you can afford.   However, there are also a few things you need to know about the average claim in order to make a decision.

The most important thing to remember is that the average car on the road has an average of just over one occupant, so your chances of hitting a car with more than one or two people in it are quite low.

The second important thing to remember is that medical bills can spiral out of control, especially if doctors know that insurance is paying for it. This means it makes sense to have a high individual medical cover limit – up to around $45,000 – and an occupant cover liability limit at around $70,000, in order to keep yourself as covered as possible.

The average size of a claim in New York is just under $10,000 in total, but remember that an expensive claim can sink you financially. It is important to try to work out the “sweet spot” between where you are adequately covered, and when you are paying too much. If the amount you are paying for raised premiums is unlikely to be paid back over three years, it is probably too much.