When it comes to home insurance, personal liability coverage is often overlooked, as most buyers tend to focus on the dwelling coverage. Certainly dwelling coverage is very important in helping homeowners recover from a loss of their home and personal possessions; however, the personal liability coverage is equally important, if somewhat less tangible to the average person. As a homeowner, you should be very aware of the benefits of personal liability insurance, as it’s a risk that can threaten you with the loss of your home no differently than the peril of fire.
What is personal liability insurance?
The two main coverages on a standard home insurance policy are the dwelling coverage and the personal liability coverage. These two coverage types are different in that the former is known as a first party coverage whereas the latter is a third party coverage. First party coverages only involve you, the insured, and the insurance company. Included in this category are the coverages for your house, contents, and loss of use. If there is a loss, the insurance company pays you directly to reimburse you for the damages.
Third party coverages are designed to protect you from claims against you made by third parties. These are synonymous with liability claims, as you are alleged to be liable to third parties for their bodily injury and property damage. The insurer steps in on your behalf to either defend you or pay a claim on your behalf to the third party.
A simple way to think about this coverage is to equate it with your automobile insurance, which also contains both first and third party coverages. The collision and comprehensive coverages are considered first party insurance and reimburse you for damage made to your car. The liability coverage is third party insurance that protects you if you hit someone else with your car in an accident. Most people are familiar with these differences on their auto policy but frequently are not aware of the parallels with their home insurance policy.
Limits and exclusions to your coverage
When reviewing your home insurance policy, it’s important to understand that liability limits are somewhat different from first party limits. The dwelling coverage is often a very specific dollar amount that you have specified to cover your property. Your personal liability coverage is generally expressed as a per occurrence limit and is available based on increments offered by the insurance company. An occurrence is considered an incident that results in bodily injury or property damage to third parties. It’s possible, though, to have a single occurrence that gives rise to multiple claims. Therefore, the per occurrence limit applies to the entire incident and not to each individual making a claim against you. As an example, if you had a party at your house and too many people congregated on a deck that subsequently collapsed, the whole incident would be considered one occurrence. You might have multiple injured persons making claims but your policy would only pay up to the single occurrence limit, regardless of the number of people making claims. Common home insurance policies offer either $100,000 or $300,000 of personal liability limits.
The only way to trigger your policy’s coverage is to have an occurrence that results in bodily injury or property damage. Your personal liability coverage usually states that it will pay on your behalf to the extent that you are legally liable. As with many insurance policies, however, the exclusions to coverage are lengthier than the actual grant of coverage. It’s extremely important to read your policy carefully and understand what is actually covered or is excluded.
Many exclusions fall into the category of losses covered elsewhere. Because insurance companies don’t want ambiguity in their policies, they do their best to have each policy cover only what it is intended to cover. For example, your home insurance policy is very careful to exclude anything arising out of the use of an auto because that is more appropriately covered on the auto policy. The same applies to personal property in your possession as it belongs on the first party section of your policy and not the liability section. Other exclusions are for losses that are expected or intended from the standpoint of the insured. If you do something to knowingly cause injury or damage to others, you really cannot expect the insurance policy to pay on your behalf.
Are umbrella policies the same as personal liability insurance?
In addition to your home insurance policy, you can find personal liability coverage on an umbrella policy. Umbrellas are policies that provide additional limits of liability and are generally used in conjunction with other policies. If you need more than the standard personal liability limits offered on your home insurance policy, you can purchase a separate umbrella policy. The umbrella policy will provide liability coverage in the event you have claims that exceed the $100,000 or $300,000 already provided. Additionally, the same umbrella policy can also provide limits above your automobile liability policy. It’s very common to purchase an umbrella policy for added limits given the litigious nature of our society today. Added limits will help you protect any assets that may be attached in a judgment against you. Sometimes the cost is also more advantageous than simply increasing the limits on your home insurance policy because the umbrella may offer limits at a lower price.
How much liability insurance do I need?
When considering how much liability insurance to purchase, you should think about the possible exposures that result in claims. Here are some of the more common examples of personal liability claims:
- Dogs – the most common source of personal liability claims is the family dog. If your dog bites someone, you will be held liable for the resulting injuries, medical expenses, and pain and suffering.
- Guests – injury to visitors in your home can result in expensive medical bills and a claim against you. If you regular host people in your home, your risk of liability claims increases, especially if you serve alcohol.
- Neighbors – property damage you might cause to your neighbors by way of falling trees and branches can cause significant damage to a neighbor’s home and may also result in injury or death at the same time.
If you reside in a multi-family building such as an apartment or condominium, you should pay particular attention to your potential personal liability. A water leak in a single-family house may normally be contained within your home and cause some flooring damage. In a multi-story building, an undetected water leak can result in significant damage to the units below you, resulting some very costly liability claims. It’s not uncommon for homeowners associations to require higher liability limits of all their residents to protect against claims for property damage.
What should I do when a claim is made against me?
In the event a claim is made against you, the first thing you should do is notify your insurance company. You must never consent to a settlement or resolution with the other party as that can negate coverage on your insurance policy. You do have an obligation to cooperate with your insurance company as they assign a claims adjuster to investigate the allegations. If they find that the claims are without merit, the insurance company may deny liability on your behalf. Frequently, a denial results in the other party filing a lawsuit to continue pursuing the claim. It’s important to understand the lawsuit will be filed against you and not the insurance company, but, it’s your insurance company’s obligation to hire an attorney on your behalf who will represent you in court.
The cost to defend you in litigation is another benefit of the personal liability coverage, and it does not reduce the limit of liability available. Therefore, even if the legal expenses are significant, the full liability limits are available to pay any settlement or judgment awarded by the court. This is sometimes an under-appreciated benefit of the liability policy as it can be very expensive and daunting for the average person to understand what to do when a claim is made or a lawsuit is filed.
Ultimately, most claims and lawsuits are settled by insurance companies without full-blown trials. If there is questionable liability against you, the insurance may reach a compromise with the other party to resolve the claim at a reduced amount. The same holds true even if you are liable, but the parties cannot agree on a reasonable figure to settle. Each party will need to evaluate the costs and risks associated with prolonging litigation and proceeding to a jury trial. Courts also place a lot of pressure on the parties to mediate and settle short of trials. The entire process can be costly and stressful, especially without proper liability insurance.
How to shop for personal liability insurance
When sourcing personal liability insurance, you should do some comparison-shopping before committing to a policy. Since it’s a good idea to consider umbrella liability policies in addition to the standard home insurance policy, add up the total cost of insurance to make a purchasing decision. Some umbrella insurers are willing to work with many home insurance companies while others may only offer coverage to those who purchase home insurance from the same company. By incorporating the cost of both policies, you can better understand the total cost of insurance before purchasing.
It’s also a good idea to ask about the difference in cost to add liability limits. You might find the cost difference to be very little for a lot more coverage. The added peace of mind might very well be worth the few extra premium dollars each year. You should also check with your mortgage bank and homeowners association, if applicable, to see if they have any requirements on the minimum amount of limits you need to maintain. If they do have a minimum, it’s usually acceptable to satisfy it based on adding your home insurance policy’s limit to your umbrella policy for a total.
Instead of looking at personal liability insurance as an extra or optional coverage, you should think of it as an integral part of your personal risk management strategy. USA Today published a great article about personal and umbrella liability policies that underscores the risk involved in not maintaining sufficient coverage. Just as you would never not have coverage for the possibility of a fire burning down your house, you should not skip liability insurance, as it’s equally risky and heartbreaking to lose your home in a lawsuit.