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Liability Auto Insurance 101

Liability is the most important type of car insurance. But what does liability insurance cover? How does it work? And how much of it do you need, anyway?

We’ll cruise through the answers to all these questions—plus how much liability insurance costs in your state. So buckle up, and let’s get started!

What Is Liability Insurance?

Liability insurance is the most important type of car insurance. Here’s why.

Meet Travis. Travis gets in a car accident that’s found to be his fault. Now he’s liable for the damages he caused—meaning he has to pay for the other driver’s car repairs and medical bills.

Travis doesn’t have thousands of dollars to pay those costs. But he does have liability insurance. (Whew! Smart move, Travis.)

Liability insurance pays to replace or repair the other person’s damaged property after an accident you caused. Plus, it pays the medical bills for them and their passengers if they got injured.

Do You Need Liability Insurance?

Yes! We can’t say it enough: You need liability insurance for your car. That’s why it’s required by law in almost every U.S. state. (Except New Hampshire and parts of Alaska, but they’re just weird.)

Seriously, if 48 and a half states think liability insurance is so important they made laws about it, you might ought to pay attention. (In fact, if you own a car with a rebuilt title, it may be the only insurance you can get.) Plus there are major penalties for driving without liability insurance.

And if you get in an accident that’s your fault? You’ll face even harsher penalties—plus get stuck paying the other person’s repair and medical costs. That’s a fast track to financial ruin if we ever saw one.

So, yes, you need liability insurance. But how does it work? And how much should you get? Let’s take a look.

What Does Liability Insurance Cover?

Liability insurance covers two types of costs that come with a car accident: bodily injury and property damage. The catch is that it covers those costs for the other person. Here’s how it works.

Bodily Injury Coverage

Bodily injury coverage helps pay for the other person’s medical bills if they got hurt during an accident you caused. That includes other drivers, their passengers and pedestrians.

This part of your liability insurance also covers things like:

  • Lost wages if the other person can’t work because of their injuries
  • Legal fees if that person sues you
  • Funeral costs after a fatal accident

Property Damage Coverage

This part of your liability insurance covers the cost to repair or replace another driver’s vehicle after an accident. It also pays for damages to other property, like guardrails, buildings or telephone poles.

What Does Liability Insurance Not Cover?

Liability insurance covers the other person’s expenses—but not yours.

If your car is trashed or you got whiplash, your liability insurance won’t cover your repair or medical bills. That’s where other types of coverage—like your health insurance or auto collision insurance—come in.

(And that’s why it’s important to have the right types of insurance to protect yourself financially from a car accident.)   

Liability Insurance Coverage Limits

Here’s something else you should know about liability insurance: It won’t cover every single expense from now till forever. Like all insurance, liability policies come with coverage limits.

The coverage limit is the maximum amount the insurance company will pay after you pay your deductible. Anything over the coverage limit, you have to pay out of pocket.

There are two types of coverage limits for liability car insurance.

Split Coverage Limits

Most liability policies have separate (aka split) coverage limits for each type of damage. That means the insurance company will pay up to a certain amount for bodily injuries and up to a different amount for property damage.


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On your insurance policy, split coverage limits are usually written out as three numbers. For example: 25/50/15.

Here’s what each number means.

The first number is the bodily injury per person limit. In this case, your insurance would pay up to $25,000 to cover medical, legal, funeral or lost wage costs for one individual in the other vehicle—whether they were the driver or a passenger.

But what if multiple people got injured? That’s a lot of money for the insurance company to pay out. So insurers made the bodily injury per accident limit—which is the second number in your policy.

In our example, the bodily injury per accident limit is $50,000. That means the insurance company will pay for injuries to the other driver and their passengers up to $50,000. After that, you’re responsible for all costs.  

The third number is the property damage per accident limit. This is how much the insurance company will pay to repair or replace the other person’s vehicle or other property you damaged. With a 25/50/15 policy, the insurance company would pay up to $15,000 for repairs.

Single Coverage Limits

The downside to split coverage limits is that you can’t use leftover money from one category to help pay for the other. Here’s what we mean:

Amy carries a 25/50/15 policy. She causes an accident that results in $2,000 worth of medical bills and $20,000 in property damage. Her bodily injury liability will cover all the medical bills. But because her property damage limit is $15,000, she still has to pay $5,000 to fix the other driver’s car.

That’s why some drivers choose a single coverage limit (also called a combined coverage limit) policy. Instead of having three separate coverage limits of $25,000, $50,000 and $15,000, their policy would just have one coverage limit of $65,000. The insurance company would use that $65,000 to cover any liability costs for the wreck—no matter if they were injuries or property damage.

Single coverage limits give you more flexibility when paying for damages, so it can be worth asking your insurance agent about the costs of switching to this type of auto liability policy.  

How Much Liability Insurance Do You Need?

It’s tempting to just buy the minimum liability insurance your state requires. And we’ll be honest, sometimes that may be enough.

The average cost of property damage in a car accident is $4,600.1 And the cost of an injury accident ranges from about $23,000–28,000.2 So your bodily injury coverage might pay the other driver’s and passengers’ medical bills.

But here’s the thing . . . your accident might not be average. You might do major damage to a brand-new car—and a new car costs around $40,000.3 Your piddly state minimum insurance won’t be nearly enough to replace it.

And not all injuries heal. If you cause an accident that disables someone in the other vehicle, you’re looking at expenses of around $98,000.4 And if someone dies in a wreck? The costs rise over $1.7 million.5

Now, we hope that never happens to you. But the truth is, it can. The last thing you need is to face financial ruin on top of the emotional pain and stress of a bad car accident.

That’s why we recommend carrying at least $500,000 in liability insurance. (If you’ve got split coverage limits, that’s a 100/300/100 policy.) That may sound like a lot, but let’s look at how this coverage compares to a state minimum policy.

State Minimum Liability Coverage Example

Jake lives in Tennessee and has the state minimum 25/50/15 liability coverage.6 He hits a brand-new Toyota Camry worth $30,000. The Camry’s totaled . . . and Jake’s insurance only covers $15,000 worth of property damage. That means he’s on the hook for the other $15,000. Ouch!

To make matters worse, the Camry’s driver incurs $26,000 of medical costs and lost wages. Since Jake’s insurance policy only covers bodily injury up to $25,000 per person, now he owes another $1,000 for the rest of these bills.

Total costs for Jake to pay: $16,000.

$500,000 in Liability Coverage Example

Tammy also lives in Tennessee, but she has 100/300/100 auto liability insurance. She causes a terrible traffic accident and does $60,000 in property damage. Yikes! That’s expensive, but Tammy’s insurance will pay to replace the whole thing.

Additionally, the other driver and their three passengers all got injured. Their medical bills and lost wages add up to $85,000 . . . which Tammy’s insurance also covers.

Total costs for Tammy to pay: $0.

Even though her accident was way worse than Jake’s, her insurance will cover the costs—so she can focus on replacing her own car and healing from her own injuries. See why it’s so important to have all that coverage?

Okay, we’ve drilled on the importance of having plenty of liability coverage. But one more tip before we move on: If your net worth is over $500,000, you may want an umbrella insurance policy in addition to your liability auto insurance.

Umbrella insurance will give you additional protection in case the other driver finds out you’re wealthy and tries to sue you. (You may also want this extra coverage if you have an occupation that’s perceived as high-paying, like doctor, lawyer or dentist.)

How Much Does Liability Insurance Cost?

Surprisingly, a lot less than you think. Liability may be the only type of car insurance required by law, but fortunately it’s also the cheapest. It costs around $644 a year (that’s only $54 per month).7 Take a look at the average cost in your state:


Average Annual Cost

Average Monthly Cost
























































































New Hampshire



New Jersey



New Mexico



New York



North Carolina



North Dakota















Rhode Island



South Carolina



South Dakota





















West Virginia









Some states even offer programs for high-risk drivers to help reduce their insurance costs, so if that’s you, you can still get plenty of liability insurance to protect yourself on the roadways.

And if you’re just carrying the state minimum, raising your liability coverage to the recommended $500,000 actually won’t cost you that much more. (Seriously, it can add as little as $5 a month to your insurance. And that $5 now can save you tens of thousands later. That’s worth it!)

How to Update Your Liability Insurance

Getting the recommended liability insurance is super easy: Just talk to one of our Endorsed Local Providers (ELPs). Or independent insurance agents will shop around with multiple insurers to find the best liability coverage for your vehicle, and they’ll help you understand what’s in your policy. They can even check for other coverages you might need, like umbrella or collision insurance.

Ready to work with an auto insurance agent you can trust? Get started here.

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Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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