These days, most types of insurance policies include something called liability coverage. Whether it is a renter’s insurance policy, a homeowner’s insurance policy, an automobile policy, etc., it should have some liability coverage and a maximum limit in case you are sued. Let’s run through what that means and what you should do to make sure you have the proper type and amount of insurance in place.
First, understand that while we hear about lawsuits and litigation all the time, the chance of your actually getting sued for something is pretty low. Of course, this depends on your behavior, risk issues, and other factors. Some professions, sadly, are frequent targets of lawsuits. For example, if you are a doctor, you'll probably get sued at some point, according to the American Medical Association. This is why doctors have special, expensive coverage for this liability. However, for the average person who isn’t in a risky profession, the chances of getting sued are low, but you still should carry adequate liability protection just in case.
Luckily, most insurance policies give you some protection with limits of around $100,000, which it typical for a renter’s policy, or $300,000 of coverage for a homeowner’s policy. This means if you get sued by another party and it’s a covered peril, the insurance carrier will provide an attorney to defend you in the case and settle it or pay any judgment up to your policy limits.
For example, let’s say you have a barbeque at your house and your big dog bites a child who gets badly hurt. And let’s assume that the parents blame you for whatever reason. They may ask you to pay their medical bills, and if you refuse, they may file a lawsuit against you to recover their costs. Generally, regardless of the merits of the case, if it is a covered peril, your insurance will step in and help you. But their help only extends up to the maximum limit of coverage that you decided upon and purchased in your policy. Once the costs go past that limit, it is your responsibility to cover additional expenses.
A coverage amount of $100,000 might be okay for a new working young professional without a high salary or significant assets, and you should discuss your situation with your insurance professional. But if you earn a lot of money, have a lot of assets, or are in a higher risk behavior category, you may want to increase your liability coverage.
You also need to understand what is a covered peril and what is not covered. Items related to personal issues that you may have caused or be responsible for, like slips and falls, dog bites (depending on breed), household accidents, etc., are usually covered by a regular policy. But you must discuss your policy and issues with your insurance agent because different carriers have different policies and coverage. Items that are not covered are business-related issues, harm caused by your breaking the law (like driving drunk), or if you are grossly negligent and that's what caused another person harm. If your insurance doesn’t cover the issue, that means you need to hire an attorney on your own to defend you and pay any settlement or judgment against you out of pocket.
Lastly, you can also increase the offered liability coverage in your policy or with a separate policy called an umbrella policy. You can raise your maximum coverage limit by $1,000,000 for a policy premium of about $350 per year. Insurance companies can keep costs that low because they know that the risk of the average person getting sued is pretty minimal. However, if everyone starts getting sued and the insurance companies start having to pay out all the time, coverage premiums would be much higher.
Hopefully, you will never get sued, but it’s good to have the proper type and amount of insurance in place just in case you do get involved in litigation. Discussing your risk and net worth with an insurance professional is the best way to assure that you have adequate coverage in place.