Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.
What Is Liability Insurance?
In the city of Littleton, the residents are waiting for the verdict in the Scott v. Brown trial. Scott, a homeowner, invited Brown to his home, where Brown tripped over a water hose in Scott's front yard and broke his neck. The injury caused paralysis from the neck down and Brown is seeking $1 million from Scott. Scott's attorney contends that Brown should have seen the water hose; however, Brown's attorney argues Scott should have anticipated the water hose as a liability. A liability represents a legal responsibility.
Scott is worried that if Brown wins the lawsuit, he'll need to sell all of his personal property: home, furniture, car, jewelry, boat and other items to satisfy the lawsuit. Scott's attorney tells him he may not need to liquidate his personal property because his homeowner's policy has a liability component to protect against these types of lawsuits. For the rest of this lesson, we'll discuss four insurance policies that provide liability protection: homeowner's, renter's, automobile, and personal umbrella liability policies.
If you owned a $250,000 house and it was totally destroyed by fire, would you have the money to rebuild the home? Most would answer 'no,' hence the purpose of homeowner's insurance. Homeowner's insurance protects your home, personal property and detached structures against perils, which are the causes of losses. Perils could include fire, flood, hail, tornadoes, and much more.
The homeowner's policy includes a liability component. If someone becomes injured on the property, such as Brown in our example, the policy will pay for the loss up to a specified amount. The homeowner's insurance also protects the owner against defamation. If the homeowner legally insults another person, at the home or another location, the policy could also pay in the event of a lawsuit.
Do you live in an apartment? Is your personal property protected from perils? Similar to a homeowner's policy, renter's insurance provides coverage for the items in the apartment as well as liability coverage. However, it does not provide coverage for the structure itself. For example, let's pretend your apartment is struck by lightning and the roof catches on fire, destroying your personal items. Your renter's policy will cover your personal items, whereas the roof and any structural damage would be covered by the apartment owner's policy.
Automobile insurance generally offers four main types of coverage: liability, property damage, medical and uninsured motorist. Property damage, medical, and uninsured motorist coverage provides protection for the policy owner, while liability provides coverage to the other driver. Only liability is mandated by law, meaning most states have financial responsibility laws requiring drivers to purchase liability coverage. As such, basic automobile insurance often includes only liability coverage with the option to add other types of coverage.
Let's say driver A runs into driver B. Driver B is injured, his car is totaled and the accident caused damage to a nearby convenience store. Driver A's liability policy will provide coverage to prevent driver B from suing driver A.
Automobile liability policies are written in the following form: 30/60/50. In this example, 30 represents $30,000 of medical coverage per person, 60 means the insurance company will pay a total of $60,000 per accident and 50 represents $50,000 of coverage for property damage.
Each state has a minimum liability requirement, so it's important to insure to the minimum standard. Failure to purchase liability insurance could result in your car being towed, jail time or, in the event of an accident, you could be sued and your personal property liquidated to satisfy the lawsuit.
Let's look back at our Scott v. Brown example. Scott's attorney asks him if he has a PULP. Scott replies, 'No, what's a PULP?' Scott's attorney says, 'Of course, you know the purpose of an umbrella: It provides protection against the rain. Similarly, a PULP, or personal umbrella liability policy, protects against liability. If your homeowner's, automobile or renter's policy does not provide enough coverage in the event of a lawsuit, the PULP can provide the additional monies to cover the damages. Additionally, the PULP is also called a stand-alone policy, meaning you can purchase the coverage separately.'
Scott asks, 'In what situation would a person need a PULP?' Scott's attorney replies, 'There are a variety of instances where a PULP would be beneficial. Additional coverage may be good for a truck driver in the event of a horrific accident or a business owner who could be held personally liable for an incident that occurs in the course of business.' The attorney goes on to say it's best to seek the advice of a licensed insurance agent who can assess a person's liability exposure. The attorney receives a call that a verdict has been reached. As everyone settles in the courtroom, the jury reads the verdict that Scott is guilty. Scott looks at his attorney and whispers, 'I guess it's too late to buy a PULP?'
Liability insurance protects your personal property against lawsuits. It's important to note that financial responsibility law in most states require drivers to purchase liability insurance. Liability coverage in the homeowner's and renter's policies are generally included coverage. A PULP is a stand-alone policy that also provides liability and can be purchased separately as additional coverage.
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