This blog entry will tell you what you need to know about auto liability insurance coverage, how to avoid mistakes, and how to use it to get a lower price on your car insurance.

Your auto liability insurance coverage is what protects you from having to pay out of your own pocket when you are legally responsible for damage to other people’s property, or injury to other people, from the use of your car.

Auto liability is usually divided into 2 parts: Bodily Injury Liability, if you injure a person(s), and Property Damage Liability, if you damage someone’s property, such as another car, fence, house, telephone pole, street sign, etc.

Bodily Injury Liability usually has a per person dollar limit, and a per accident dollar limit. The insurance does not pay above the limits, and you are responsible for any additional amount owed the injured party beyond the policy limit.

For example, you may have Bodily Injury Liability at $25,000 per person, $50,000 per accident. If a car stops suddenly in front of you, you brake, but rear end the car anyway. You will be legally responsible for the injuries to the people in the other car. If the driver has an injury, you will be responsible for the driver’s medical costs, lost wages, physical therapy, compensation for pain & suffering, etc.

Say the other driver is a middle-aged electrician. His back injury from the car accident will not allow him to work for months. The driver has medical bills & physical therapy to treat & rehabilitate his injury. The driver may have back pain for the rest of the driver’s life, for which the driver will be due compensation. Even the driver’s health insurance company can hold you responsible for their cost of the benefits they provide the driver under his health insurance for the injury.

The total amount owed because of the injured driver might be $40,000. If you have a per person limit of $25,000, YOU will be responsible for the $15,000 not covered by your car insurance. Even if you have no assets, you may have your wages garnished to pay what is not covered by your auto insurance.

Now, imagine the same accident, but this time your brakes fail, and you hit the rear of the other car at 30 miles an hour. The injuries to the driver are more severe. Imagine the driver is a highly-paid surgeon, who will never be able to perform surgery again. You could be looking at a million dollar lawsuit, just for injury to one person in a car accident.

What if the driver’s entire family was in the car? What if more than one person was injured? Your Bodily Injury Liability pays no more than $50,000 per accident. When you try to get by with the state minimum coverage, even a minor accident can leave you on the hook for owing a lot of money, and a severe accident can bankrupt you.

The second part of auto insurance liability coverage is Property Damage Liability. This coverage has a per accident dollar limit.

Say your Property Damage Liability has a $15,000 limit. What if you hit another car, which is a newer model car worth $20,000, and total it? What if you are responsible for damaging more than one car?

As with Bodily Injury Liability, it is not hard to imagine a situation where you do not have enough coverage, if you try to save a few dollars by choosing a low dollar limit. I don’t need to imagine it, because I’ve seen it happen, and the financial burden it creates on people without enough liability coverage.

Some insurance companies offer auto insurance having a Combined Single Limit(CSL), including both bodily injury & property damage liability. You would have one dollar limit, say $100,000 per accident, which would include all injury & property damage you are legally responsible for from the use of your vehicle. Once the single dollar limit is reached, you are responsible for any amount owed beyond the  limit. So again, going with the minimum amount, or low amount of coverage, can ruin you financially if you are in an accident.

My Recommendation: Buy as much auto insurance liability coverage you can afford. If you are 25 years old or older, and have a clean driving record, it usually costs a few dollars more a month to have more liability coverage.

I don’t think ANYONE should be on the road in 2011, with less than $100,000 per person, $300,000 per accident, for Bodily Injury Liability, and $100,000 per accident for Property Damage Liability.

However, when you are young, or have only a few years driving experience, or have a bad driving record, it is harder to afford high auto insurance liability limits. This is unfortunate, because statistically, these are the people most likely to need it — which is why it costs more.

Even if you struggle to afford your auto insurance, have your agent show you the cost of the next higher liability limits. Try to make room in your budget to afford it. If you wisely decide to pay a little more for the next higher level of limits, have your agent quote you higher liability limits until you reach a level you can’t afford.

For example, if you have $25,000 per person, $50,000 per accident Bodily Injury, & $15,000 Property Damage liability(25/50/15). Get price quotes for 50/100/50, 100/300/100. & even 250/500/100. It never hurts to know the price, and buy what you can afford.

Auto insurance is expensive, but it is worth it to pay a little more to have more liability coverage, than to pay a lot for auto insurance which will not adequately protect you when you have an accident.

Get this auto insurance discount: Having higher liability limits puts you in a group of drivers less likely to have claims. When you shop your auto insurance, insurance companies ask you what your Bodily Injury Liability limits are. The higher your limits, the lower your price quote for auto insurance! When you change your insurance coverage, you change your risk profile, and this is an excellent time to shop your auto insurance to save lots of money.

If you can afford the 250/500/100 limit, or a $500,000 combined single limit, you may want to look at an additional Personal Liability Umbrella policy, which will pay 1 million dollars or more, above your auto insurance coverage. If you have a good-paying job, and you have, or are building financial assets, you need to at least consider an umbrella liability policy.

I will blog about Umbrella Liability policies in the future. In the mean time, ask your agent or insurance company about it, and shop with other insurance companies to find the best one meeting your needs, if you wish to buy an Umbrella Liability policy.

Here are two additional things to know about auto insurance liability coverage:

1. Auto insurance liability coverage does not cover you for you or your resident family member’s injuries in a car accident. It also does not cover damage to property owned by you and your resident family members. So, if you hit your wife’s car with your car, there is no coverage for the damage to you or your wife’s car, under your liability coverage.

2. Auto insurance liability does not cover you unless you are Legally liable for the injury or property damage.

For example, a deer may jump in front of your car while you are driving, and injuries to your friend, riding as a passenger in the car, will not be covered by your liability coverage, unless you as the driver or owner of the car, are somehow negligent.

There are other types of auto insurance coverage which can protect you in these situations. I will blog about these coverage options, and all other home insurance coverage & auto insurance coverage in the future.

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