Auto Liability Insurance: How Much Is Enough?

Take a look at the declarations page of your insurance policy and you'll find a few limits listed. These limits are the maximum amount the insurance company will pay out under a judgment or settlement to someone you have injured in an auto accident.

In this article, we'll discuss three types of limits in auto insurance: liability limits, uninsured limits, and underinsured limits.

Liability Limits

The legal minimum amount of liability insurance you can have varies from state to state in America and from province to province in Canada.

In most parts of Canada, the minimum is $200,000. In America it can be as low as $15,000/$30,000, meaning that if you injure one person in a single collision the insurer will pay a maximum $15,000 but if you injure more than one person they will pay a maximum of $30,000. In all cases, the uninsured and underinsured limits are the same as the liability limits.

Uninsured Limits

By law in both Canada and America, all automobiles must be insured. But for a number of reasons, some drivers will neglect to insure their vehicles (which explains some of The Top 5 States with the Highest Auto Insurance Rates). If you or the occupants of your vehicle are injured when struck by an uninsured vehicle driven by someone who has no significant assets, you will file what is called an uninsured motorist (UM) claim against your own insurance company. This claims means that you will be compensated for your injuries by your own insurer instead of the negligent driver (or their insurer).

Underinsured Limits

If a driver of another vehicle injures you or occupants of your vehicle and has liability limits lower than yours, this driver is considered underinsured (relative to you).

For example, if you have $300,000 in liability insurance and the negligent driver who injured you has only $100,000 in liability insurance, that driver is underinsured. If their $100,000 policy is not sufficient to compensate you for your injuries, you are entitled to file an underinsured motorist (UIM) claim with your own insurance company after you collect the full $100,000 you are entitled to. In this case, you would be entitled to recover a maximum of $200,000 (subject to proof of injury) from your own insurer. In other words, you would receive the full $300,000 limit from your policy, minus the $100,000 you already recovered from the other driver's insurance company.

How Much Is Enough?

As you can see, the liability limits on your auto insurance policy are actually three limits: liability to other people, protection for you and the occupants of your vehicle against uninsured drivers, and protection for you and the occupants of your vehicle against underinsured drivers. But how much insurance should you actually get?

Let’s take an admittedly extreme example: you are driving with your spouse and two children and are hit head-on by a drunk driver who is driving at a high speed. The drunk driver has no insurance. All four of you suffer significant injuries. While your health insurance covers most, but not all, of the medical treatments, you and your spouse are both unable to work for months. You need to hire nurses and other people to assist you in your daily life but most of this is not covered by your health insurance. Some of your injuries are permanent and affect your ability to work. The losses suffered that are not covered by your health insurance could run to many hundreds of thousands of dollars or even, in extreme cases, millions.

You should think in such extreme terms when deciding on a policy. The answer to how much insurance you need is simple: enough to protect you, your family, and other passengers from the consequences of a serious collision.

How Much Does It Cost?

Generally, the biggest cost increase is going from having no insurance to being covered for the minimum amount required by law. Increasing your limits from the minimum rate to $1 or $2 million will only slightly increase your monthly premiums.

Be aware that while the agents who sell auto insurance are hard-working and honest, the vast majority of them have little familiarity with the litigation system and will often tell you that a relatively small liability limit, even the minimum limit, is sufficient. That's because they look mostly at the liability limits and don't focus on the UM and UIM limits.

Don't settle for small liability limits. Remember that the liability limit doesn't just protect other people from your negligence; it also protects you and your family from other negligent drivers. Serious automobile accidents can be incredibly costly and you don't want to have to pay for them out of pocket.

Summary

You and your family need high liability limits in your auto policy. I recommend a minimum of $1 million. If $2 million policies are available where you live, get one. The increase in cost compared to the minimum policy is small but the protection you get from it is invaluable.