Jessica Sautter is a Content Writer for CarInsuranceCompanies.com with a Bachelor’s Degree from Eastern Michigan University in Elementary Education with a Major in Reading and a Minor in Mathematics.

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Oct 6, 2020

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Key takeaways...

Drivers are required to carry a minimum amount of auto liability insurance coverage by the laws of all 50 states.

Insurance companies are not allowed to underwrite policies under the stated limits. Accidents happen when people least expect them, and insurance is designed to mitigate the risk of loss.

Adequate car insurance coverage is an important element of the responsibility accepted by drivers. Saving a few dollars each month on car insurance is less important than having sufficient coverage when an accident occurs.

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Table of Contents

Definition of Liability Insurance

https://www.youtube.com/watch?v=qq4gjxq0v8o

The purpose of liability insurance is the same regardless of the type of insurance policy purchased.

Coverage for the damages incurred by third parties is provided through the liability component of a homeowner’s policy, automobile policy, business insurance policy or umbrella liability insurance policy.

Anyone without sufficient liability coverage runs the risk of litigation to recover the costs incurred by others.

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Subcomponents of Auto Liability Insurance

Every state requires drivers to carry auto liability insurance as a major component of the auto insurance policy.Collision and comprehensive insurance coverage are optional, but liability insurance is legally required for every driver.

Damages incurred by third parties fall into two distinct categories.

  • Bodily injury – Passengers in the policyholder’s vehicle, and the driver and passengers in other vehicles might sustain injuries in an auto accident. The liability component of the auto insurance policy will pay for the medical expenses associated with treating injuries. Lost wages and awards for pain and suffering are paid under this liability subcomponent. Most major insurance companies recommend hundreds of thousands of dollars of bodily injury coverage.
  • Property damage – Vehicles and stationary objects sustain damage by moving vehicles. This subcomponent pays for the repair or replacement of the property belonging to third parties. Public property damaged in auto accidents will be paid for by the property damage liability subcomponent.

Limits of Auto Liability Insurance

Minimal levels of auto liability insurance are required by each state. Major insurance companies track actual statistics associated with previous claims paid to repair damages to property and medical bills for third parties.

Based on the statistics, agents and company representatives will offer suggestions for drivers when the policy is being underwritten.

  • Minimum requirements  States with higher costs of living will require higher auto liability coverage limits because parts and labor are more expensive. Drivers comply with the law when minimal amounts of liability insurance are purchased. Personal financial hardship can result if the costs of damages exceed the auto insurance policy liability coverage limits.
  • Prudent liability coverage  Drivers who attempt to save money by lowering liability limits might find it impossible to pay the remaining costs associated with an accident. Major auto insurance companies will encourage all drivers to carry $100,000 to $300,000 limits on the auto insurance policy. These amounts might seem extreme until an accident occurs.
  • Umbrella policy – Insurance companies are offering umbrella liability policies to raise the liability coverage for people with personal assets. Protection of the house and other assets is important for those with substantial wealth. Large umbrella policies are less expensive than high liability limits on every insurance policy.

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Auto Liability in No-Fault States

Some states have adopted a no-fault insurance system to reduce the litigation costs associated with automobile accidents.

Assumptions are made about the no-fault system, but the simple explanation is that the courts have determined acceptable award limits that will be followed for all automobile accident cases.

  • Assigned responsibility All accidents are caused by something or someone. Police accident investigators include the cause of each accident in the police report. Insurance companies base decisions on the information in policy accident reports. The at-fault driver’s insurance company will pay for the appropriate portion of each claim.
  • Actual expenses paid  Third parties will receive compensation for medical bills and other costs associated with the accident. The no-fault system allows for the losses sustained by anyone involved in the accident.
  • Limits on litigation awards  State governments have set dollar limits on the court awards paid to third parties injured in automobile accidents. The limits are meant to restrain the costs of automobile insurance rates over time. In the past, very large court awards increased the costs incurred by insurance companies, which made the premiums rise rapidly every year.

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Possible Auto Liability Scenarios

Many different types of accidents can happen involving automobiles, and the results might include injuries to third parties or damage to their property.

  • Property damage scenario  Your car is parked on an incline. Without anyone in the car, the vehicle rolls down the hill, crashes through a fence and hits a tree in someone’s front yard. The homeowner calls the police. The fence will be repaired, and the tree will be treated or removed using the funds provided by the automobile property damage liability subcomponent.
  • Personal injury scenario – You are driving your car with three passengers when you run a stoplight. The automobile that you hit in the intersection has four passengers. All seven people sustain injuries. The automobile personal injury liability subcomponent will provide the funds to pay the medical bills for all of the third parties injured in the accident that was deemed your fault.

Final Word

All drivers must carry sufficient auto liability coverage to prevent financial hardship when the property belonging to third parties is damaged. Policy limits will determine how much money the insurance company will pay for each claim.

The policyholder will pay deductible amounts, so the policy deductibles must be set at affordable levels to prevent strain on the household budget.

Major insurance companies offer healthy auto insurance discounts, which offer the preferred way to reduce annual premiums. Lowering policy limits is the last resort when attempting to save money on car insurance premiums.

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