3

I've seen the advice to get enough liability insurance as you have in total assets, i.e. if your owned home, owned car & savings = $100,000, then get $100,000 liability coverage.

What is the rationale behind that? In the unfortunate event one is liable for $1,000,000, wouldn't the insurer pay the first $100,000, then the claimant would sue for the difference? If a person has $100,000 in assets they would lose all their assets in a judgement or have to claim bankruptcy, right?

In this case, wouldn't having $25,000 in liability be the same as having $100,000 liability?

What is the equation for calculating how much liability one should purchase for home and car insurance?

3

In the U.S., liability claims are usually for at most what the person can reasonably pay. The infamous "I'll sue you for everything that you've got!" threat that you hear in the movies and TV shows is fairly literal. The person suing you doesn't usually know what insurance coverages you have. They can reasonably know what your assets/net worth are.

There's no point in suing you for more than you've got, because you're not going to pay it anyway - you'll declare bankruptcy and walk away. So if anyone sues you - it will be for what you've got (and can reasonably earn in the near future).

That is why it is advisable to have liability coverage to cover your ass-ets, and future earnings for the next year or two.

You could/should also have an umbrella liability policy to cover the assets in excess of what the homeowners/renters/car insurance provide.

Talk to an insurance adviser/broker licensed in your state for a proper insurance advice, and a lawyer for legal advice on liability issues. This is my personal understanding of things, and I'm not a licensed adviser on these issues.

  • duffbeer703 sai "When people try to score risk, the "formula" is usually something like:risk score = probability of incident * severity of incident " what would be the equation as it relates to the question above (how much liability insurance to buy?) – catjacent Sep 16 '13 at 23:36
  • 1
    @catjacent that might be a good formula for damages, but not for liability (in the US, liability is not necessarily limited by the actual damages). – littleadv Sep 16 '13 at 23:37
  • I don't see how this applies at all. If you injure someone, and their medical bills come to a million dollars, then they will sue you for a million dollars. – DJClayworth Sep 17 '13 at 16:04
  • @DJClayworth and if you don't have assets in such an amount - the suit will not help them much, would it? – littleadv Sep 17 '13 at 16:56
  • 1
    @littleadv - in court, wouldn't the plaintiff (or even the judge) be allowed to ask you if you have insurance coverage, and for how much? And if they do, wouldn't you be obliged to answer and tell the truth? – TTT Mar 25 '16 at 14:55
-1

In the United States, most liability is limited to "street value", not "purchase price".

This becomes important when you talk about car insurance liability; if you totalled another person's car, for which he paid $25,000 but it's currently worth $15,000 in the blue book, insurance will pay $15,000 (minus his own deductible) and that's the end of it; he cannot sue you for the remaining $10,000.

People who drive fancy supercars (and their insurance companies) know this. Most such cars are, in fact, purchased in a similar way as a home in a neighborhood with an HOA; the buyer signs a contract agreeing to be bound by some terms of ownership. One of those terms for these kinds of cars is that the buyer must maintain a "gold-plated" insurance policy on it; collision, comprehensive, underinsured motorist, etc, all for the purchase price of the vehicle. In fact, many of these cars are leased, and the lease contract will have a similar insurance requirement rider.

Even in the "lower high end" (Porsche, BMW Ms, Mercedes AMGs and SLs), the owners know damn well they'll never see the full replacement cost from you or your insurer, and so the smart move is to get that kind of insurance whether the seller requires you to have it or not.

So, the general guidelines I have seen are:

  • Auto: Enough to cover street value of the most expensive major brand you see on a typical drive home. That's usually in the 100k/300k/100k range of coverage level.
  • Home: The concrete slab of the house is usually worth about 15% of the house value, and can usually be saved to build upon even if the rest of the house is a total loss. Similarly, the land on which the house sits usually isn't going anywhere (with a few notable exceptions like coastal property prone to erosion or beach encroachment) So, take the home's value, minus 15%, plus the street value of all the things you have in it (this is typically a different "bucket" of coverage limit, and keep in mind the insurer will pay present value, not replacement cost), and that should be your coverage limit.
  • Life: If you're the breadwinner, you want enough to pay off all your current and long-term debt (your current mortgage principal value is the key item here), plus your funeral and other final expenses (including medical; the hospital still sends you a bill if you die) and at least allow your family a few months' expenses to grieve before your spouse or eldest child has to get a job. If you really want to be nice, you can ensure your family never has to work again for their lives with a policy in the $1.5m-2m range (average lifetime earnings potential of a U.S. wage earner), but consider that, in a given year of your working life, you have about a 0.45% chance to die, I personally don't lose much sleep with a quarter-mil coverage limit (and I don't even need a physical for that much). However, if you think you might need an early payoff (available in some policies, you get a reduced payout upon confirmation of a terminal illness) then you might want more coverage here.
  • Umbrella/Personal liability: Typically this is only required when you do a job on contract that involves handling and working with other peoples' property (HVAC/electricians/plumbers, mechanics, couriers, etc). If you are employed by a company and work in course and scope of that employment, you are an agent of the company and shielded from liability (though you're probably out of a job if you screw up that badly). You can usually get pretty big limits on these policies with a safe working record; how much to get depends on how much damage you can do. I've seen insurance for homebuilders at up to $10 million a head. Remember that if you're in your car when you cause damage, car insurance pays first, and if damage is suffered in your home, their medical insurance pays first, followed by your homeowner's insurance, so personal liability only kicks in after all of those buckets have been exhausted and there are still actual damages to be repaid.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.