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When do I need liability insurance?

Liability insurance

Many people think of insurance as a means to protect themselves from situations that cause them harm, such as a tornado or burglary. But sometimes our actions or negligence can cause harm to others. Liability insurance protects us when those situations arise.

There are many instances when one may be found responsible for the financial loss of another. A driver may rear-end someone on a highway and cause damage to that person's car. A homeowner could have a loose plank in the basement, and a guest may trip over it and fall. A small-business owner may sell a defective product that causes harm to a customer.

Without liability insurance, you could be responsible for paying tens of thousands of dollars out of your pocket. In fact, in extreme cases, you could even be ordered by a court to pay part of your future salary to cover the financial losses of a person you've harmed, says Lolita Scesnaviciute Guarin, author of "Be Insurance Savvy."

If you want to avoid losing the shirt off your back due to someone else's misfortune, here's how to make sure you're covered.

Liability on the road

If you cause a car accident, liability insurance can cover both property damage and bodily injury. The amount of liability coverage you buy is expressed using three numbers. The first number indicates bodily injury liability limits for one person injured in an accident, the second number indicates bodily injury liability limits per accident, and the third number indicates property damage liability limits.

For example, if you bought $25,000 in bodily injury coverage per person, $50,000 in bodily injury coverage per accident, and $15,000 in property damage coverage, that would be expressed as 25/50/15.

In most states, laws require drivers to purchase some liability coverage. For example, in the state of Alabama, you must buy a minimum of $25,000 in bodily injury coverage per person, $50,000 in bodily injury coverage per accident, and $25,000 in property damage coverage.

However, many experts agree state liability requirements are generally not enough. The average auto liability claim in 2013 for damage caused to property was $3,231 and for bodily injury was $15,443, according to ISO, a division of risk-assessment company Verisk Analytics.

But if you caused damage or injury that exceeded your coverage limits, you would have to pay out of pocket for those costs. The Insurance Information Institute (III) recommends that drivers purchase $100,000 in coverage for bodily injury per person and $300,000 for bodily injury per accident.

Liability in the home

For homeowners, liability coverage pays for bodily injury and property damage to others that are caused by you or other members of your household. It even pays for damage inflicted by your pets, such as if your dog bites a neighborhood child. Dog-related injuries, in fact, were responsible for more than one-third of home insurance liability claims in 2014, according to the III and State Farm. Liability coverage also kicks in if your negligence leads to the injury of another person, such as if your failure to shovel the snow off your sidewalk causes someone to fall and break a leg.

The average home insurance liability claim between 2009 and 2013 was $14,412, according to ISO. Most home insurance policies provide at least $100,000 in liability coverage, according to Travelers Insurance. However, the III recommends that you carry between $300,000 and $500,000. If you think you need more than $500,000 in coverage, you can purchase an umbrella policy, which adds additional coverage to your standard policy.

Liability on the job

If you own a small business, liability insurance ensures that you have money for legal defense fees and damages if someone is injured on the business's premises or when using one of the business's products or services. Without liability insurance, a lawsuit could be devastating to your business. In fact, general liability claims for small-business owners when a lawsuit is involved average more than $75,000, according to property and casualty insurance company The Hartford.

The amount of liability coverage you'll need depends on the amount of risk you perceive your business to have, says Hunter Hoffman, a spokesman for Hiscox USA, a company that sells small-business insurance. For example, if you work from home and have no face-to-face interaction with customers, you may be less likely to cause damage or injury than if you are a trainer who works with clients in a gym.

The amount of liability coverage you need may also change over time, Hoffman says. For example, if you add a new service or product, "that could expose you to new risks," he adds.

Nobody likes to dwell on worst-case scenarios. With the right liability insurance policy in place, you can be prepared for the worst. 

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