What is Liability Car Insurance?

Maybe you’re excited to hop behind the wheel for the first time—you’ve heard you need liability insurance, but you’re wondering, What is liability car insurance? Or maybe you just want to know more about what you could be liable for when driving.

While liability insurance isn’t as exciting as cruising down the road in an Aston Martin, if you get in an accident, what it does for you can be pretty great.

Buckle up and let’s navigate car liability insurance.

What Is Liability Car Insurance?
Understanding Liability Car Insurance
Example of Liability Car Insurance
What Are the Different Types of Liability Car Insurance?
What Does Liability Car Insurance Cover?
What Does Liability Car Insurance Not Cover?
Liability Car Insurance Limits
Liability Car Insurance Requirements
How Much Liability Car Insurance Do You Need?
How Much Does Liability Car Insurance Cost?
Considerations When Purchasing Liability Car Insurance
How to Update Your Liability Car 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’s on the hook 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. It can even protect you from costs such as pain and suffering claims from the injured folks.

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 really ought to pay attention. In fact, if you own a car with a rebuilt (aka R) 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 out of your own pocket. That’s a fast track to financial ruin if we ever saw one.

Bottom line: If you have enough financial responsibility to own a car, you should consider it a must to also buy liability insurance for it.

So, you need liability insurance. But how does it work? And how much should you get? Let’s find out!

Here’s a look at an example of liability car insurance in action:

Gabe is texting and driving (tsk tsk) and gets in an accident. He rams into the backside of a new Bronco. Gabe’s own car is smashed up, but his collision insurance will cover that. But what about the Bronco? Gabe’s liability insurance will pick up that tab.

Liability car insurance breaks down into two different kinds:

• Bodily injury liability: Covers any injuries caused to other drivers if you hit them
• Property damage liability: Covers the other driver’s car and possessions inside, as well as other things damaged by your car

Bodily injury and property damage liability are included under a regular auto liability policy. If you use your personal vehicle for business purposes (like if you have a cake business and you use your minivan for deliveries), you may have to purchase business liability coverage separately. If you use your personal vehicle for regular business use (think traveling salesman),  let your agent know and they can help you figure out whether you need extra business insurance.

Now we’re cruising. Let’s dig deeper into how standard liability covers bodily injury and property damage 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, mailboxes and telephone poles.

What is liability car insurance? It’s not coverage for you. Liability insurance covers the other person’s expenses when you’re at fault also known as third-party coverage.

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.)   

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

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

Reading Liability Car Insurance Limits

When you’re trying to read liability car insurance limits, understanding what you’re looking at can be a little tricky. Limits can be written in a few different ways. Let’s look at an example:

• $25,000 for injury or death per person
• $50,000 for injury or death per incident
• $10,000 for property damage

Sometimes this will be written out $25,000/$50,000/$10,000. Other times it’ll be shortened to 25/50/10. But it all means the same thing. If you’re in an accident, your insurance will pay up to $25,000 if someone is injured or dies, and if more than one other person is involved, they’ll pay up to $50,000 for everybody’s medical needs. Also, they’ll pay up to $10,000 for damaged property.

Almost every state’s laws require some sort of minimum liability insurance coverage—because liability ensures you have resources to pay for other people’s injuries and property if you damage them. But like with most things, states make up their own rules about how much liability car insurance you have to have.

Liability Car Insurance Coverage Requirements by State

Each state has different minimum limit requirements for liability car insurance. Check out our chart to figure out what your state’s requirements are.

States That Don’t Require Liability Car Insurance

If you just really don’t want to buy car insurance at all, you can move to New Hampshire or some parts of Alaska, because they don’t require you to carry any coverage—including liability. In New Hampshire, though, they do require you to carry proof of financial responsibility.⁵⁰ Basically, you have to prove you have enough moolah to pay if you get in an accident. In Alaska, it’s a bit like the Wild West when it comes to accidents and car insurance. Hi-yo, Silver!

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 $5,700.⁵¹ And the cost of an accident injury ranges from about $24,000–155,000.⁵² So your bodily injury coverage might be enough to 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 $48,000.⁵³ 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 $155,000.⁵⁴ And if someone dies in a wreck? The costs rise to $1.8 million.⁵⁵

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 25/50/25 liability coverage.⁵⁶ He hits a brand-new Toyota Highlander worth $40,000. The Highlander’s totaled . . . and Jake’s insurance only covers $25,000 worth of property damage. That means he’s on the hook for the other $15,000. Ouch!

To make matters worse, the Highlander’s driver ends up with $26,000 in 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—on top of his deductible.

$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 repair or 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, once she meets her deductible.

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?

Liability vs. Full-Coverage Car Insurance

So, if liability is only one part of your car insurance coverage, what are the other parts? To get full coverage, you buy all three of the following:

• Liability
• Collision
• Comprehensive

In most cases, we recommend carrying collision and comprehensive on your car in addition to liability. Unless you can afford to crash and replace your vehicle with cash, you should buy collision to cover that. Same goes for comprehensive. Are there trees in your area? Herds of deer roaming the highways? How about hoodlums or storms? With so many ways your car could get damaged, you can’t afford to skip collision. And if you have a lease or loan on your car (Avoid! Avoid!), you’ll probably be required to carry these!  

When Should You Have Liability-Only Insurance?

There is one scenario where you can safely carry only liability: if your car is worthless (or you have enough cash to replace it easily) and you don’t owe anything on it.

What Is Liability-Only Insurance?

If you choose to buy a liability-only policy, you’ll only be covered for damages you cause. Anything that happens to you or your car that’s your fault isn’t covered.

Do You Need Comprehensive Coverage and Liability Car Insurance?

Because the whole point of insurance is to transfer financial risks you can’t afford from you to the insurance company, it makes sense for most people to have full-coverage car insurance—that includes liability, comprehensive and collision. You should always have liability because that’s the law.

What to Do if You Need More Liability Car Insurance

Some folks need more liability protection than the standard car insurance policy offers. Once you’ve built up a net worth of $500,000 or more, you need to protect it in case you’re in an accident where the other driver could come after your nest egg with a lawsuit. (You may also want to increase your liability coverage if you have a job that’s perceived as high-paying, like doctor, lawyer or dentist.)

That’s where an umbrella policy comes in. Once you’ve bought the required amount of car liability, you can buy umbrella policies in $1 million limit increments that’ll help protect the wealth you’ve managed to build.

Surprisingly, liability insurance costs 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. On average, liability coverage costs around $683 a year (that’s only $57 per month), according to data from Quadrant Information Services.

Average Liability Car Insurance Costs by State

Take a look at the average cost for liability insurance in your state:

Data from Quadrant Information Services

While it’s legal, buying the bare minimum in liability isn’t usually a good idea—our earlier examples of Jake and Tammy make that pretty clear. But there’s another consideration to back that up: If you have a lot of wealth or assets, those are at risk if you don’t have enough liability.

All the hard work you put into your savings account can vanish after one unfortunate accident and a lawsuit.

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!)

Also, keep in mind that some states require you to have more than just liability before you can legally get behind the wheel. In states like Florida, Delaware and Hawaii, you’re required to purchase PIP, while in Maine you’re required to carry medical payments coverage.

Some states 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.

Hopefully, you’re no longer wondering, What is liability car insurance? and have moved on to wondering, How do I make sure I have enough liability coverage? Getting the recommended liability insurance is super easy: Just talk to one of our local RamseyTrusted insurance pros. They’ll help you understand what’s in your policy so you can decide whether you need to add more coverage.

Adam D. used a RamseyTrusted independent agent and saved over $700. While the savings is great, Adam was more blown away by how his agent took time to teach him the differences between the insurance he had and what he could get.

“Seriously, our guy gave a 20-minute video explaining line by line the coverage we have vs. the coverage he was proposing, and how it was cheaper and better,” Adam said on the Ramsey Baby Steps Facebook Community page. “I’m on a corner with a megaphone.”

Because RamseyTrusted pros are independent insurance agents, they can shop around with multiple insurers to find the best liability coverage for your vehicle at the best price. They can even check for other coverages you might need, like umbrella or collision insurance.