A set minimum amount of liability insurance is required by California law, and in many other states. The important question is whether merely buying the minimum amount is enough. A good attorney for car accidents will tell you the answer—absolutely not! California’s legally required bodily injury insurance limits of $15,000 (one claimant) and $30,000 (all claimants) are woefully inadequate to protect your financial assets or pay for the possible medical expenses of an injured party. These limits have gone unchanged for the past 30 years, while medical costs have grown exponentially.
Let’s say…
You run a stop sign and crash into another car. The driver is taken to the hospital for surgery where she stays for over a month. She undergoes rehabilitation and physical therapy, and is unable to work for two years. Even if the driver earns less than $50,000 a year, the total claim could easily hit $1,000,000. Now compare this to the $15,000 of liability insurance required by law.
This scenario may sound extreme, but it’s not. The above scenario, in fact, is a moderate one—the other driver survived and had no permanent disability. When imagining a car accident, the majority of people envision the kinds of minor fender benders that many of us have experienced and walked away from unscathed: no serious injuries, only mild damage to the vehicles—nothing that would entail hospital bills or lost wages. The reality, however, is often a great deal more severe.
The precise amount of liability insurance you should buy depends largely upon the extent of your assets. Those with extensive wealth are far more likely to be sued for large sums of money. Understanding car insurance means not only peering into the minds of insurance adjusters, but lawyers as well. Personal injury attorneys are far more likely to go after the assets of high net worth individuals, providing them with a greater payoff if they win on behalf of their client, rather than simply advising their clients to settle for the limit of the other driver’s insurance policy.
It is easy to see that the result could be financially catastrophic such an individual. But this result could be avoided with an adequate liability insurance policy. You may have heard that you should buy a liability policy with a limit that more or less equals your total assets, the idea being that you are “covering” your assets in doing so. If your insurance equals or exceeds your net worth, so the thinking goes, you’ll never have to worry about having to pay a lawsuit judgment out of your own pocket. This is nonsense, and it’s based on a complete misunderstanding of how insurance and personal injury law work. There’s nothing that says that someone couldn’t sue you for more than your policy limit, requiring you to pay the difference. Your liability insurance is the first line of defense, and a good one at that, but your personal assets remain vulnerable beyond your policy limits.
There is no secret formula to tell you how much liability coverage is enough, but there is a sound principle that can help you make an informed decision. And the principle is this: within reason, and within the confines of your budget, you want the highest possible ratio between your policy limit and your total assets. The smaller your assets look in comparison to your liability coverage, the more likely an attorney would advise her client to settle for your policy limit, leaving your personal assets untouched.