If you own a car, you are generally required to carry a liability policy that will pay for damages you cause if you are at fault in an accident. However, your policy might not provide enough coverage, especially if you cause a serious accident that results in injuries. In that case, you might face a lawsuit to recoup any costs that weren't covered by insurance.
Liability Coverage Limits
When you purchase your car insurance policy, you select the amount of liability coverage you want. Different states have different minimum amounts, and these minimums are generally well below what a serious car accident could cost in property damage, medical bills and lost wages. If someone sues you for an accident, your insurance only covers up to the stated limits on the policy. For example, if your insurance policy has a limit of $100,000, your insurance company is only going to pay that amount, even if a judgment is rendered against you for $1 million.
If you do have a judgment entered against you in excess of your car insurance coverage amount, you're personally liable for the rest of it. For example, if insurance only covers $100,000 out of a $1 million judgment, you need to come up with the last $900,000 out of your own assets. That might include the money you'd been saving up to use for a down payment on a house, an engagement ring or something else.
Consider Higher Limits
As your net worth goes up, you may want to consider higher car liability insurance limits to protect those assets in case an accident happens. For example, if you're just getting out of college and starting out on your own, your net worth may be deep in the red because of student loans, so even if someone got a judgment against you, you would literally have nothing to pay it with. In that case, you might decide it's not worth it to pay higher premiums for the higher coverage amounts. But, as you start to pay off your debts and save for the future, you being to have assets that someone could get from you to satisfy a judgment.
Umbrella Coverage Options
To further protect yourself and your assets from liability, you might want to consider an umbrella insurance policy that would kick in if your other insurance isn't sufficient to cover damages you're required to pay. For example, you might get a $1 million umbrella policy that kicks in after your car insurance, home insurance, renter's insurance or other coverage runs out. That way, if you do cause a horrific and costly accident, you'll have more insurance to cover it before you have to start using your personal assets to pay off the judgment.
- USA Today: Protect Your Family From Lawsuits Even if You Aren't Rich
- Nationwide: Auto Liability Insurance
- Insurance Information Institute. "Facts + Statistics: Highway Safety." Accessed August 13, 2020.
- Louisiana Department of Insurance. "Louisiana Department of Insurance Consumer's Guide to Auto Insurance." Accessed August 13, 2020.
- State of California DMV. "Requirements for Vehicle Registration." Accessed August 13, 2020.
- Insurance Information Institute. "Five Insurance Mistakes to Avoid... (and Still Save Money)." Accessed August 13, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."