How does liability insurance work?

Liability insurance works by helping to cover costs incurred by other people in accidents that you cause. Most liability insurance plans cover bodily injuries and property damage for accidents in your home or business, or because of a vehicle collision. Liability insurance also helps to pay for your legal fees if you are sued because of such an incident.

The most common types of liability insurance are general liability insurance for businesses, the liability coverage provided by a homeowners insurance policy, and liability car insurance. Liability car insurance comes into play when the policyholder is found to be at fault for a car accident. The at-fault driver’s liability insurance provides coverage for the victim’s medical bills and property damage caused by the accident.  

Two Types of Liability Car Insurance

• Bodily injury liability insurance pays for the other person’s medical bills and lost wages when you cause an accident.

• Property damage liability insurance covers repair costs for the other person’s vehicle or certain stationary objects like their home or fence that you may have damaged in the accident.  

How Liability Insurance Limits Work

Liability insurance policies are often described as either a combined single-limit policy or a split-limit policy.

In a combined single-limit policy, your insurance plan offers a certain dollar amount of coverage per incident, and it is then portioned between bodily injury and property damage depending on what damage is done.  

For a split-limit policy, your insurance company will determine how much it will pay out for each type of liability coverage. These types of policies are often written out as something like 25,000/50,000/20,000 or 25/50/20.

In the event of an accident, the first number is the limit your insurer will pay per person for bodily injuries, the second is the bodily injury limit per accident, and the third describes the property damage limit. 

Example of How Liability Insurance Works 

Here’s an example of what might happen if your car insurance policy has liability limits of 25/50/20 and you cause a major accident on the highway, injuring two people:

• Person 1 has $65,000 in medical bills and their car is totaled, costing $20,000 in property damage.

• Person 2’s medical costs total $20,000, and their car has $5,000 in damage. 

• You would be responsible for $40,000 of Person 1’s medical bills but none of Person 2’s medical bills (since your per-person bodily injury limit is $25,000 and your per-accident limit is $50,000).

• You would be responsible for none of Person 1’s property damage, but you would have to pay Person 2’s $5,000 in property damage (since your policy covers a total of $20,000 in property damage). 

To learn more, check out WalletHub’s guide to liability car insurance.