What Is Liability Insurance

If you own a car in America your state requires you to carry Liability Insurance. What is liability? Let's begin by defining the term "liable" as by Websters New World Dictionary:

1. Legally bound or obligated, as to make good any loss or damage that occurs in a transaction; responsible
2. Likely to have, suffer from, etc.; exposed to or subject to [liable to heart attacks]
3. Subject to the possibility of; likely (to do, have, get, etc. something unwanted or unpleasant)

The definition of "liability" is:
1. The state of being liable
2. anything for which a person is liable

How does this apply to auto liability insurance?

You are driving your car and hit another car from behind causing both property damage (the other car's damage) and bodily injury to the other car's occupant(s). So, according to the first definition of "liable" you are legally obligated to make good the damages you incurred to the other person. You are liable for their sustained property damages, bodily damages, hospital bills, doctor bills, loss of income/wages and any other expenses incurred due to your negligence.

So let's look at how insurance comes into play involving an auto accident. Insurance is transferring risk from the individual - you - to a company. You agree to pay a premium in exchange for money (liability limits) you are legally obligated to pay in the event you are found negligent for someon else's loss. You hit someones car and were determined to be "at fault" (AZ is an at-fault state). By paying the agreed amount of premium, the insurance is now obligated, on your behalf, to settle the claim of loss by the other party. You then agree to hand over all claims handling to the the insurance company. The insurance company will settle to their liking. That is what you agreed to when you signed the insurance contract/policy and submitted the premium.

How do you determine what are adequate liability limits for you and your family? Let's keep on with the above example. After you were determined to be negligent in an auto accident and the insurance company exhausted all of the liability money you agreed to in the policy (we will look at limits next) paying to replace/repair the other car and all medical bills associated with the accident, it was discovered that your limits were insufficient to pay for all the damages sustained. Now the claimant has the right to take you to court and sue you for the remaining monies your insurance policy did cover. The other party has the right ask for full disclosure of your assets, including current and potential income, to determine your ability to repay their remaining bills and expenses.

Arizona law allows the claimant/plaintiff to request up to 15% of your GROSS income be garnished until your obligation is paid in full. If you have liquid assets (cash, savings, retirement account, real estate equity), the plaintiffs attorney will likely go after those amounts first. So, as a rule of thumb, your liability limits should be sufficient to cover your current net worth.

How are limits offered by insurance companies? Arizona offers "split limits" with the minimum amount being 15,000/30,000/10,000. The first number is the maximum amount the policy will pay for each person's bodily injury. The second number is the maximum amount the policy will pay per each accident. The third is applied to property damage.

To explain in layman's terms using minimum liability limits: you hit a car and send 3 people to the hospital. Your policy limit for all of their injuries is $30,000 with a maximum of $15,000 to a single person. If the actual injuries exceed the $30,000 limit then they can sue you for the excess.

Your policy limit for the damages to their car is $10,000. If the repair/replacement of the car is greater than $10,000 then they can sue you for the excess amount.

As you shop for auto insurance comparing rates, keep in mind as the agent on the other end asks questions of your employment, lifestyle, and activities, he/she is not to prying into your privacy but rather determining what recommendations to make for your family's financial protection.

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