[tagline style=”boxed” effect=”bg3″][modal id=”4530″ style=”body” classes=”button primary big right”footer=]Request a Quote[/modal]
Call 214-390-9944 for a Quote
By calling or clicking the button, you will be connected to an insurance agent.
[/tagline]
Quite frequently during insurance reviews, I am asked, “How much liability insurance should I carry on my auto policy?” Normally, the answer depends on you and your personal financial position. Since no two families are the same, understanding how your liability affects you in insurance underwriting and at the time of a claim will go a long way helping you choose the right coverages.
Underwriting limits of liability
Many years ago, underwriting auto insurance was simple. Looking at a risk involved verifying 3 year driving records, age of the driver, and the type of car. Therefore insurance companies had very little data to differentiate between a “potentially” good or bad driver.
To differentiate between drivers with similar driving records, insurance companies developed predictive modeling systems using data supplied by Fair Isaacs (FICO) and the insurance companies themselves. By analyzing client credit, driving, prior insurance, and other characteristics, similar trends emerged. Insurance companies began noticing that clients that carry high limits of liability tend to perform more profitably over the long term. On the other hand, drivers with lower liability limits tended and perform less profitably and have more accidents over the long term. As a result, insurance companies began offering rating discounts to applicants that carry higher limits of liability with their prior carrier. On the other hand, insurance applicants with lower auto liability receive slightly higher rates. By offering these discounts, insurance companies believe they attract better quality clients from top competitors. So, simply carrying higher limits of liablility on your auto and home insurance could help you get an even better rates (or classification) if you carry limits in excess of the Texas state minimum.
HINT: Go with companies and agents that offer higher limits of liability. It could save you money in the long run.
Stretching your auto insurance buying power
Outside of getting lower rates, carrying higher auto liability reduces your potential financial exposure at the time of a claim. As the insurance shopper, only you can determine how much coverage you could carry. However, carrying too little auto liability could hurt you financially during a major claim. While most insurance agents will tell you to carry more coverage just in case you hit an expensive car, the truth goes far beyond the value of replacing a Cadillac or a Lexus. If an insurance company has to settle claim on your behalf, carrying a small policy leaves the insurance very little wiggle room because your insurance contract defines the maximum an insurance company will pay on your behalf at the time of the claim. Simply put, your insurance policy determines the size of your check book if you cause an accident.
Imagine this. You have a household income of $100,000 or more, but you only have state minimum auto liability of 30,000 per person/ 60,000 per accident for bodily injury and $25,000 for property damage liability. In an accident that involves any type of damages, this person is potentially exposed to being sued personally. In the case, the insurance company will offer to settle any claim within the limits listed on the insurance policy, leaving the possibility for a personal lawsuit.
The previous scenario is common scenario with the lowest limits of liability contractually limits the amount of potential liability payout in an accident that you cause. As a result, you lose a large opportunity to show your insurance buying power. This could be financially devastating. Imagine a doctor being sued personally because he has more money than his insurance company. Ideally, a person choosing their auto insurance limits should want to stretch their dollars so far that any offer the insurance company makes would outpace any amount of any check they could personally write.
In the case of the $100,000 income family, how much insurance should they carry? Should they carry 100/300, 250/500, or should they carry a million? Only you can answer that question. If you have the potential to make a lot of money, your insurance should match that potential. That way, you don’t end up being the person sued personally after your insurance company made a ridiculously low settlement offer.