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I'm in the market for car insurance for the first time, and I'm trying to understand the best way to approach it. I've talked to some insurance salesmen, and they consistently try to convince me that I need a lot of coverage, in case I cause some big car accident (this is, after all, their job).

However, let's say for the sake of argument that the total value of all my assets is only around $30,000.

I believe that in this situation it's generally much cheaper to get the minimum amount of car insurance coverage allowed by law ($25,000 / $65,000 bodily injury and $15,000 property damage), and then to instead pay for personal liability insurance which covers an amount slightly greater than my assets. This type of insurance, in general, seems to be much cheaper than car insurance which covers a large amount of money.

My understanding is that, if I get in some accident my car insurance doesn't completely cover, the people involved may be able to sue me. However, assuming I don't disclose what type of insurance coverage I have, they are only going to try to sue me for "all I'm worth" (i.e., the approximate total of my assets). If this does occur, the cost will be absorbed via personal liability insurance.

Is my understanding of how this works correct? Do I really need a large amount of car insurance (the insurance salesmen seem to think that $100,000 / $300,000 bodily injury and $100,000 property damage is what I should buy)?

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Most personal liability umbrella policy issuers will not sell you a policy unless you have the maximum possible coverage on the underlying policies. Underlying policies include

  • automobile insurance (if you have a car)
  • boat/off-road vehicle insurance (if you have a boat/off-road vehicle)
  • homeowner coverage (if you own a home) or renter's insurance (if you do not own a home and do rent)

You have to have each one of the above that applies to you and have all their liability line items completely maxed out before you qualify for umbrella.

Note: The above was my experience with State Farm in Illinois and also what was told to me by a "high-priced" personal liability lawyer, but may not apply to all states or all situations.

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  • That makes a lot of sense, and explains why personal liability insurance seems so cheap.
    – CmdrMoozy
    Jul 31, 2014 at 22:50
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While people will say, "I'm going to sue you for all your worth!", that's not how it really works. When someone brings a lawsuit, they are supposed to show how much harm you actually caused them. The court then awards them an amount equal to whatever the judge or jury are convinced was the actual harm. So in the case of a car accident, if someone can convince the court that you caused the accident and that he had $100,000 in medical bills, lost wages from work, and/or whatever other expenses, than the court will order you to pay $100,000. (A court can add on compensation for "pain and suffering", and it can add "punitive damages" if you were reckless and irresponsible, but that doesn't change the point here.) If you're a billionaire and this is less than you spend on lunch in a week, good for you, you pay it and you're done. If your only assets are the clothes you're wearing and your iPhone, and you don't have enough insurance to cover it, then you will be in debt for a long, long time. Saying, "Sorry, I don't have that much money" will not help. Your liability is not limited to what you can afford to pay.

Many people say that in real life courts will order big companies that are responsible for an accident to pay more than it would order an ordinary person to pay because they figure that they can afford it. I don't know whether that's true. But even if the court goes easy on you because you're poor, you can still be ordered to pay a substantial amount of money.

If the amount is totally beyond what you have -- if the court orders you to pay $1 million and you make $10,000 a year -- than the other person can't expect to ever get all their money. But you'll be paying for the rest of your life.

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  • I was under the impression that one would file bankruptcy if ordered to pay an infeasible amount. Obviously this isn't desirable, but it does mean that it's generally not worthwhile for an individual to sue another for an amount of money they can't reasonably pay. Am I misunderstanding how that works?
    – CmdrMoozy
    Jul 31, 2014 at 22:55
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    You may not be able to collect the full amount, but you'll still sue for damages. It's not generally the case that you know the other side's assets when filing such a lawsuit.
    – ChrisInEdmonton
    Jul 31, 2014 at 23:09
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    I am not convinced the filing bankruptcy would get you out from under a court order garnishing your wages until you have paid the judgement. But I Am Not A Lawyer.
    – keshlam
    Jul 31, 2014 at 23:57
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    I was taught to always have the maximum liability coverage on my policies because a particularly sympathetic plaintiff and a particularly biased jury could -- with non-zero probability -- decide to garnish my wages forever as punishment. The personal liability attorney with whom I consulted practically laughed at this idea; in all her years suing people she's never seen anything close to such an award. I remain unconvinced that this can't possibly happen, but she did manage to convince me to only get coverage of 5x my net worth (instead of the, say, 20x I was considering).
    – dg99
    Aug 1, 2014 at 1:11
  • @dg99 I'd think "always take the maximum available" is extreme. I mean, if the insurance company sold a policy to Bill Gates their maximum may be billions of dollars. :-) Any amount more than "all the money you will make in your life" is probably pointless. I don't claim to know what the optimal amount is, but I'm sure it's more than "the total of my present assets" for most people who expect to have income in the future.
    – Jay
    Aug 1, 2014 at 14:17

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