You know that homeowners insurance protects you in case your home should be damaged or destroyed in a natural disaster, helping to pay for repairs or the complete reconstruction of your residence. You know, too, that your insurance policy will help pay to replace items inside your home that burglars might steal.
But what happens if someone visiting your home or walking outside your residence is injured? What if a ladder propped against your home falls and injures a passerby? What if someone walking down your home's front steps trips on a crumbling piece of concrete and falls, requiring a trip to the emergency room?
That's where your insurance policy's personal liability protection kicks in. This facet of your homeowners insurance policy covers the medical bills or legal fees you might face if someone is injured on your property.
When you purchase a homeowners' insurance policy — something you'll have to do, or had to do, when you apply for a mortgage to finance the purchase of your home — you'll automatically be granted personal liability coverage. It's part of a standard policy.
Basic liability insurance often not enough
The problem lies in determining whether you have enough of this coverage. And most insurance experts will tell you that the basic liability coverage that comes with standard policies isn't nearly enough to offer you full protection.
They advise that you purchase additional liability insurance, in the form of what is known as an umbrella policy, to better protect yourself.
Richard Best, personal finance expert at online coupon and shopping portal DontPayFull.com, says that most homeowners don't understand how much of a financial risk they face from possible injuries when guests visit their homes.
Best says that most owners worry about rebuilding their homes or repairing them after violent storms, fires or other natural disasters. Most homeowners' policies, though, provide enough coverage for this. Owners should worry more, though, about covering the medical bills when a visitor falls thanks to a loose bannister or trips over cracked concrete on the front walk.
Best points to dog bites as an example. The medical bills from a dog bite that occur at your home can soar to great heights. If your personal liability insurance doesn't provide enough coverage, you could face significant financial risk.
"Homeowners should not underestimate their personal liability risks, which can far exceed repair and replacement claims covered under typical homeowners' policies," Best says.
Liability insurance also covers you and your family members for any damage you might accidentally cause to others or to the property of others. If your minor son smacks a baseball that hits your neighbor in the head, liability insurance will kick in to cover any medical bills you are then responsible for.
This insurance is actually quite important. It can pay for everything from lost wages and property damage to medical bills and pain-and-suffering.
Best says that the standard liability coverage in homeowners' policies generally tops out at $300,000, a figure that wouldn't cover the average medical claim made by a seriously injured neighbor or friend.
That's why Best recommends that homeowners purchase umbrella insurance. This insurance provides extra liability protection to homeowners. Best says that for $200 to $300 a year, homeowners can buy an umbrella policy that can add $1 million of personal liability coverage. Best refers to this type of policy as the best bargain in insurance coverage.
Owners can boost their liability coverage in increments of $1 million to provide even more protection.
"Considering that we are all just one banana peel slip away from a major liability claim, it's really a no-brainer," Best says.
Stacey Giulianti, chief legal officer with Florida Peninsula Insurance Company in Sarasota, Florida, said that homeowners should always purchase the greatest amount of liability coverage possible.
"Since you can't guage the amount of damages you might cause to another person, purchasing the maximum you can afford makes sense," Giulianti says.
How liability insurance works
Your liability insurance might not cover all the bills you face from an accident on your property. But it's important to know how this coverage works. Say you do have personal liability protection that provides coverage of up to $300,000 an incident. Giulianti says that this $300,000 limit isn't for an entire year or policy term, but can be hit several times during the year.
If the delivery person slips on wax on your floor, you have up to $300,000 in coverage for any medical bills resulting from this accident. If two weeks later a plumber trips on a loose step, you again have up to $300,000 to cover any bills resulting from this accident.
Matthew Struck, cofounding partner at Treadstone Risk Management in Morriston, New Jersey, said that homeowners who want to protect their savings should add an umbrella policy to their homeowners' insurance.
If the medical bills resulting from an accident on your property exceed your liability coverage's limit, you'll have to cover the rest of the costs, and any legal fees you face, from your own pocket. This can be a huge financial burden.
Struck says that he always recommends that clients buy at least $1 million in umbrella coverage in addition to their personal liability insurance.
"In the present day, even suspect lawsuits can cost hundreds of thousands or even $1 million. And many times, the bulk of the expenses are legal bills."